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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2003



Commission file number: 000-21731



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HIGHWOODS REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)



|North Carolina                                                 |  | 56-1864557                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



3100
Smoketree Court, Suite 600, Raleigh, N.C.

(Address of principal executive office)



27604

(Zip Code)



(919) 872-4924

(Registrants telephone number, including area code)



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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 ̈



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Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange
Act).    Yes ̈No  x



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2003



TABLE OF CONTENTS



|        |  |                                                                                          |  | Page
|------- |  | ---------------------------------------------------------------------------------------- |  | ----
|PART I  |  | FINANCIAL INFORMATION                                                                    |  |     
|       
|Item 1. |  | Financial Statements                                                                     |  | 3   
|       
|        |  | Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                   |  | 4   
|       
|        |  | Consolidated Statements of Income for the three months ended March 31, 2003 and 2002     |  | 5   
|       
|        |  | Consolidated Statements of Partners Capital for the three months ended March 31, 2003   |  | 6   
|       
|        |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 |  | 7   
|       
|        |  | Notes to Consolidated Financial Statements                                               |  | 9   
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 22  
|       
|        |  | Disclosure Regarding Forward-Looking Statements                                          |  | 22  
|       
|        |  | Overview                                                                                 |  | 22  
|       
|        |  | Critical Accounting Policies                                                             |  | 23  
|       
|        |  | Results of Operations                                                                    |  | 25  
|       
|        |  | Known Trends Affecting Results of Operations                                             |  | 28  
|       
|        |  | Liquidity and Capital Resources                                                          |  | 30  
|       
|        |  | Impact of Recently Issued Accounting Standards                                           |  | 38  
|       
|        |  | Funds From Operations and Cash Available for Distributions                               |  | 39  
|       
|        |  | Property Information                                                                     |  | 41  
|       
|        |  | Inflation                                                                                |  | 48  
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 48  
|       
|Item 4. |  | Controls and Procedures                                                                  |  | 48  
|       
|PART II |  | OTHER INFORMATION                                                                        |  |     
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                         |  | 50  
|       
|        |  | Certifications                                                                           |  | 52  



2



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##### Table of Contents

PART I
FINANCIAL INFORMATION



Item 1.
Financial Statements



We refer to (1) Highwoods Properties, Inc. as the Company, (2) Highwoods Realty Limited Partnership as the Operating Partnership, (3) the Companys common stock as Common Stock and (4) the
Operating Partnerships common partnership interests as Common Units.



The information furnished in the accompanying balance sheets, statements of income, statements of partners capital and statements of cash flows reflect all adjustments (consisting of normal
recurring accruals) that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period.



The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and
Managements Discussion and Analysis of Financial Condition and Results of Operations included herein and in our 2002 Annual Report on Form 10-K.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Balance Sheets



($ in thousands)



|                                                                                                                          |  | March 31, 2003 |           |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | -
|                                                                                                                          |  | (Unaudited)    |           |   |                   |  
|ASSETS:                                                                                                                   |  |                |           |   |                   |  
|Real estate assets, at cost:                                                                                              |  |                |           |   |                   |  
|Land and improvements                                                                                                     |  | $              | 391,025   |   |                   | $
|Buildings and tenant improvements                                                                                         |  |                | 2,875,874 |   |                   |  
|Development in process                                                                                                    |  |                | 7,797     |   |                   |  
|Land held for development                                                                                                 |  |                | 174,496   |   |                   |  
|Furniture, fixtures and equipment                                                                                         |  |                | 21,144    |   |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|                                                                                                                          |  |                | 3,470,336 |   |                   |  
|Lessaccumulated depreciation                                                                                             |  |                | (488,783  | ) |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Net real estate assets                                                                                                    |  |                | 2,981,553 |   |                   |  
|Property held for sale                                                                                                    |  |                | 116,762   |   |                   |  
|Cash and cash equivalents                                                                                                 |  |                | 18,308    |   |                   |  
|Restricted cash                                                                                                           |  |                | 2,943     |   |                   |  
|Accounts receivable, net of allowance                                                                                     |  |                | 12,595    |   |                   |  
|Notes receivable                                                                                                          |  |                | 9,687     |   |                   |  
|Accrued straight-line rents receivable                                                                                    |  |                | 50,462    |   |                   |  
|Investment in unconsolidated affiliates                                                                                   |  |                | 74,860    |   |                   |  
|Other assets:                                                                                                             |  |                |           |   |                   |  
|Deferred leasing costs                                                                                                    |  |                | 99,640    |   |                   |  
|Deferred financing costs                                                                                                  |  |                | 42,548    |   |                   |  
|Prepaid expenses and other                                                                                                |  |                | 16,351    |   |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|                                                                                                                          |  |                | 158,539   |   |                   |  
|Lessaccumulated amortization                                                                                             |  |                | (73,579   | ) |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Other assets, net                                                                                                         |  |                | 84,960    |   |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Total Assets                                                                                                              |  | $              | 3,352,130 |   |                   | $
|                                                                                                                          |  |                |           |   |                   |  
|                                                                                                                         
|LIABILITIES AND PARTNERS CAPITAL:                                                                                        |  |                |           |   |                   |  
|Mortgages and notes payable                                                                                               |  | $              | 1,538,835 |   |                   | $
|Accounts payable, accrued expenses and other liabilities                                                                  |  |                | 102,510   |   |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Total Liabilities                                                                                                         |  |                | 1,641,345 |   |                   |  
|Redeemable operating partnership units:                                                                                   |  |                |           |   |                   |  
|Class A Common Units, 6,847,816 and 6,974,524 outstanding at March 31, 2003 and December
31, 2002, respectively           |  |                | 139,969   |   |                   |  
|Series A Preferred Units, 104,945 outstanding at March 31, 2003 and December 31,
2002                                     |  |                | 103,308   |   |                   |  
|Series B Preferred Units, 6,900,000 outstanding at March 31, 2003 and December 31,
2002                                   |  |                | 166,346   |   |                   |  
|Series D Preferred Units, 400,000 outstanding at March 31, 2003 and December 31,
2002                                     |  |                | 96,842    |   |                   |  
|Partners Capital:                                                                                                        |  |                |           |   |                   |  
|Class A common units:                                                                                                     |  |                |           |   |                   |  
|General partner Common Units, 599,234 and 599,659 outstanding at March 31, 2003 and
December 31, 2002, respectively       |  |                | 12,182    |   |                   |  
|Limited partner Common Units, 52,476,365 and 52,391,727 outstanding at March 31, 2003
and December 31, 2002, respectively |  |                | 1,206,180 |   |                   |  
|Accumulated other comprehensive loss                                                                                      |  |                | (8,767    | ) |                   |  
|Deferred compensation                                                                                                     |  |                | (5,275    | ) |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Total Partners Capital                                                                                                   |  |                | 1,204,320 |   |                   |  
|                                                                                                                          |  |                |           |   |                   |  
|Total Liabilities and Partners Capital                                                                                   |  | $              | 3,352,130 |   |                   | $
|                                                                                                                          |  |                |           |   |                   |  



See
accompanying notes to consolidated financial statements



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Income



(Unaudited and $ in thousands, except per unit amounts)



|                                                                                                    |  | Three Months EndedMarch 31, |        
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                                    |  | 2003                        |        
|Rental revenue                                                                                      |  | $                           | 108,960
|Operating expenses:                                                                                 |  |                             |        
|Rental property                                                                                     |  |                             | 37,016 
|Depreciation and amortization                                                                       |  |                             | 33,286 
|Interest expense:                                                                                   |  |                             |        
|Contractual                                                                                         |  |                             | 27,549 
|Amortization of deferred financing costs                                                            |  |                             | 626    
|                                                                                                    |  |                             |        
|                                                                                                    |  |                             | 28,175 
|General and administrative                                                                          |  |                             | 5,215  
|                                                                                                    |  |                             |        
|Total operating expenses                                                                            |  |                             | 103,692
|                                                                                                    |  |                             |        
|Other income:                                                                                       |  |                             |        
|Interest and other income                                                                           |  |                             | 2,870  
|Equity in earnings of unconsolidated affiliates                                                     |  |                             | 1,714  
|                                                                                                    |  |                             |        
|                                                                                                    |  |                             | 4,584  
|                                                                                                    |  |                             |        
|Income before gain/(loss) on disposition of land and depreciable assets and discontinued
operations |  |                             | 9,852  
|Gain/(loss) on disposition of land                                                                  |  |                             | 863    
|Gain on disposition of depreciable assets                                                           |  |                             | 20     
|                                                                                                    |  |                             |        
|Income from continuing operations                                                                   |  |                             | 10,735 
|Discontinued operations:                                                                            |  |                             |        
|Income from discontinued operations                                                                 |  |                             | 2,648  
|Loss on sale of discontinued operations                                                             |  |                             | (325   
|                                                                                                    |  |                             |        
|                                                                                                    |  |                             | 2,323  
|                                                                                                    |  |                             |        
|Net income                                                                                          |  |                             | 13,058 
|Distributions on preferred units                                                                    |  |                             | (7,713 
|                                                                                                    |  |                             |        
|Net income available for unitholders                                                                |  | $                           | 5,345  
|                                                                                                    |  |                             |        
|Net income per common unitbasic:                                                                   |  |                             |        
|Income from continuing operations                                                                   |  | $                           | 0.05   
|Income from discontinued operations                                                                 |  |                             | 0.04   
|                                                                                                    |  |                             |        
|Net income                                                                                          |  | $                           | 0.09   
|                                                                                                    |  |                             |        
|Net income per common unitdiluted:                                                                 |  |                             |        
|Income from continuing operations                                                                   |  | $                           | 0.05   
|Income from discontinued operations                                                                 |  |                             | 0.04   
|                                                                                                    |  |                             |        
|Net income                                                                                          |  | $                           | 0.09   
|                                                                                                    |  |                             |        
|Weighted average common units outstandingbasic:                                                    |  |                             |        
|Class A common units:                                                                               |  |                             |        
|General Partner                                                                                     |  |                             | 599    
|Limited Partners                                                                                    |  |                             | 59,305 
|Class B common units:                                                                               |  |                             |        
|Limited Partners                                                                                    |  |                             |       
|                                                                                                    |  |                             |        
|Total                                                                                               |  |                             | 59,904 
|                                                                                                    |  |                             |        
|Weighted average common units outstandingdiluted:                                                  |  |                             |        
|Class A common units:                                                                               |  |                             |        
|General Partner                                                                                     |  |                             | 600    
|Limited Partners                                                                                    |  |                             | 59,352 
|Class B common units:                                                                               |  |                             |        
|Limited Partners                                                                                    |  |                             |       
|                                                                                                    |  |                             |        
|Total                                                                                               |  |                             | 59,952 
|                                                                                                    |  |                             |        



See
accompanying notes to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Partners Capital



For the Three Months Ended March 31, 2003



(Unaudited and $ in thousands)



|                                                     |  | Class A Common Unit       |        |   |                           |   |           |                                      |  |   |                       |  
|---------------------------------------------------- |  | ------------------------- | ------ | - | ------------------------- | - | --------- | ------------------------------------ |  | - | --------------------- | -
|                                                     |  | General Partners Capital |        |   | Limited Partners Capital |   |           | Accumulated Other Comprehensive Loss |  |   | Deferred Compensation |  
|Balance at December 31, 2002:                        |  | $                         | 12,332 |   |                           | $ | 1,220,902 |                                      |  | $ | (9,204                | )
|Issuance of common units                             |  |                           | 1      |   |                           |   | 127       |                                      |  |   |                      |  
|Redemption of common units                           |  |                           | (28    | ) |                           |   | (2,723    | )                                    |  |   |                      |  
|Distributions paid on common units                   |  |                           | (352   | ) |                           |   | (34,896   | )                                    |  |   |                      |  
|Preferred distributions paid on common units         |  |                           | (77    | ) |                           |   | (7,636    | )                                    |  |   |                      |  
|Net income                                           |  |                           | 130    |   |                           |   | 12,928    |                                      |  |   |                      |  
|Adjustments of redeemable common units to fair value |  |                           | 157    |   |                           |   | 15,549    |                                      |  |   |                      |  
|Other comprehensive income                           |  |                           |       |   |                           |   |          |                                      |  |   | 437                   |  
|Issuance of restricted stock                         |  |                           | 16     |   |                           |   | 1,623     |                                      |  |   |                      |  
|Fair value of options issued                         |  |                           | 3      |   |                           |   | 306       |                                      |  |   |                      |  
|Amortization of deferred compensation                |  |                           |       |   |                           |   |          |                                      |  |   |                      |  
|                                                     |  |                           |        |   |                           |   |           |                                      |  |   |                       |  
|Balance at March 31, 2003:                           |  | $                         | 12,182 |   |                           | $ | 1,206,180 |                                      |  | $ | (8,767                | )
|                                                     |  |                           |        |   |                           |   |           |                                      |  |   |                       |  









See accompanying notes to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Cash Flows



(Unaudited and $ in thousands)



|                                                                                                         |  | Three MonthsEnded March 31, |        
|-------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                                         |  | 2003                        |        
|Operating activities:                                                                                    |  |                             |        
|Income from continuing operations                                                                        |  | $                           | 10,735 
|Adjustments to reconcile income from continuing operations to net cash provided by
operating activities: |  |                             |        
|Depreciation and amortization                                                                            |  |                             | 33,286 
|Amortization of deferred compensation                                                                    |  |                             | 372    
|Amortization of deferred financing costs                                                                 |  |                             | 626    
|Amortization of accumulated other comprehensive loss                                                     |  |                             | 437    
|Equity in earnings of unconsolidated affiliates                                                          |  |                             | (1,714 
|Gain on disposition of land and depreciable assets                                                       |  |                             | (883   
|Discontinued operations                                                                                  |  |                             | 2,648  
|Changes in operating assets and liabilities                                                              |  |                             | (6,712 
|                                                                                                         |  |                             |        
|Net cash provided by operating activities                                                                |  |                             | 38,795 
|                                                                                                         |  |                             |        
|Investing activities:                                                                                    |  |                             |        
|Additions to real estate assets                                                                          |  |                             | (26,270
|Proceeds from disposition of real estate assets                                                          |  |                             | 2,083  
|Distributions from unconsolidated affiliates                                                             |  |                             | 4,443  
|Investments in notes receivable                                                                          |  |                             | 262    
|Other investing activities                                                                               |  |                             | (876   
|                                                                                                         |  |                             |        
|Net cash (used in)/provided by investing activities                                                      |  |                             | (20,358
|                                                                                                         |  |                             |        
|Financing activities:                                                                                    |  |                             |        
|Distributions paid on common units                                                                       |  |                             | (35,248
|Dividends paid on preferred units                                                                        |  |                             | (7,713 
|Net proceeds from the sale of common units                                                               |  |                             | 128    
|Redemption of common units                                                                               |  |                             | (2,751 
|Borrowings on revolving loans                                                                            |  |                             | 65,000 
|Repayment of revolving loans                                                                             |  |                             | (31,000
|Borrowings on mortgages and notes payable                                                                |  |                             | 2,190  
|Repayment of mortgages and notes payable                                                                 |  |                             | (4,385 
|Net change in deferred financing costs                                                                   |  |                             | 2,920  
|                                                                                                         |  |                             |        
|Net cash used in financing activities                                                                    |  |                             | (10,859
|                                                                                                         |  |                             |        
|Net increase in cash and cash equivalents                                                                |  |                             | 7,578  
|Cash and cash equivalents at beginning of the period                                                     |  |                             | 10,730 
|                                                                                                         |  |                             |        
|Cash and cash equivalents at end of the period                                                           |  | $                           | 18,308 
|                                                                                                         |  |                             |        
|Supplemental disclosure of cash flow information:                                                        |  |                             |        
|Cash paid for interest                                                                                   |  | $                           | 20,890 
|                                                                                                         |  |                             |        





See accompanying notes to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Cash Flows (Continued)



(Unaudited and $ in thousands)



Supplemental disclosure of non-cash investing and financing activities:



The following table summarizes the net
assets contributed by the holders of Common Units in the Operating Partnership (other than the Company), the net assets acquired subject to mortgage notes payable and other non-cash equity transactions:



|                                                         |  | Three MonthsEnded March 31,
|-------------------------------------------------------- |  | ---------------------------
|                                                         |  | 2003                       
|Assets:                                                  |  |                            
|Net real estate assets                                   |  | $                          
|Cash and cash equivalents                                |  |                            
|Notes receivable                                         |  |                            
|Investment in unconsolidated affiliates                  |  |                            
|Deferred financing costs                                 |  |                            
|                                                         |  |                            
|                                                         |  | $                          
|                                                         |  |                            
|Liabilities:                                             |  |                            
|Mortgages and notes payable                              |  | $                          
|Accounts payable, accrued expenses and other liabilities |  |                            
|                                                         |  |                            
|                                                         |  |                            
|                                                         |  |                            
|Equity:                                                  |  | $                          
|                                                         |  |                            









See accompanying notes to consolidated financial statements.



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HIGHWOODS
REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements



March 31, 2003



(Unaudited)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES



Description of Business



The Operating Partnership is managed by its
general partner, the Company, a self-administered and self-managed real estate investment trust (REIT) that operates in the southeastern and midwestern United States. The Operating Partnerships wholly owned assets include: 494
in-service office, industrial and retail properties; 1,341 acres of undeveloped land suitable for future development; and an additional three properties under development.



The Company conducts substantially all of its activities through, and substantially all of its interests in
the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At March 31, 2003, the Company owned 88.6% of the Common Units in the Operating Partnership. Limited
partners (including certain officers and directors of the Company) own the remaining Common Units. Holders of Common Units may redeem them for the cash value of one share of Common Stock, or, at the Companys option, one share of Common Stock.
When a Common Unit holder redeems a Common Unit for a share of Common Stock or cash, the Companys minority interest in the Operating Partnership will be reduced and its share in the Operating Partnership will be increased. The Common Units
owned by the Company are not redeemable for cash.



Basis of
Presentation



The consolidated financial
statements include the accounts of the Operating Partnership and its majority-controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.



The Operating Partnerships 104,945 Series A Preferred
Units are senior to the Class A and B Common Units and rank pari passu with the Series B and D Preferred Units. The Series A Preferred Units have a liquidation preference of $1,000 per unit. Distributions are payable on the Series A Preferred Units
at the rate of $86.25 per annum per unit.



The
Operating Partnerships 6,900,000 Series B Preferred Units are senior to the Class A and B Common Units and rank pari passu with the Series A and D Preferred Units. The Series B Preferred Units have a liquidation preference of $25 per unit.
Distributions are payable on the Series B Preferred Units at the rate of $2.00 per annum per unit.



The Operating Partnerships 400,000 Series D Preferred Units are senior to the Class A and B Common Units and rank pari passu with
the Series A and B Preferred Units. The Series D Preferred Units have a liquidation preference of $250 per unit. Distributions are payable on Series D Preferred Units at a rate of $20.00 per annum per unit.



The Class A Common Units are owned by the Company and by
certain limited partners of the Operating Partnership. The Class A Common Units owned by the Company are classified as general partners capital and limited partners capital. The Class B Common Units are owned by certain limited partners
(not the Company) and only differ from the Class A Common Units in that they are not eligible for allocation of income and distributions. The Class B Common Units will convert to Class A Common Units in 25% annual installments commencing one year
from the date of issuance. Prior to such conversion, such Class B Common Units will not be redeemable for cash or shares of the Companys Common Stock.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES  Continued





The
Operating Partnership is generally obligated to redeem each of the Class A Common Units not owned by the Company (the Redeemable Operating Partnership Units) at the request of the holder thereof for cash, provided that the Company at its
option may elect to acquire such unit for one share of Common Stock or the cash value thereof. The Companys Class A Common Units held by the Company are not redeemable for cash. The Redeemable Operating Partnership Units are classified outside
of the permanent partners capital in the accompanying balance sheet at their fair market value (equal to the fair market value of a share of Common Stock) at the balance sheet date.



Certain amounts in the March 31, 2002 and December 31, 2002 financial statements included in this Quarterly
Report have been reclassified to conform to the March 31, 2003 presentation. These reclassifications had no material effect on net income or partners capital as previously reported in the Operating Partnerships audited Consolidated
Financial Statements or Note 18 to the audited Consolidated Financial Statements included in the Operating Partnerships 2002 Annual Report on Form 10-K.



The accompanying financial information has not been audited, but in the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows have been made. For further information, refer to the financial statements and notes thereto included in our 2002 Annual Report on
Form 10-K.



Impairment of long-lived
assets.    Real estate and leasehold improvements are classified as long-lived assets held for sale or as long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Operating Partnership records assets held for sale at the lower of the carrying amount or fair value less cost to sell. The impairment loss is the amount by which the
carrying amount exceeds the fair value less cost to sell. With respect to assets classified as held and used, the Operating Partnership periodically reviews these assets to determine whether its carrying amount will be recovered from their
undiscounted future operating cash flows and the Operating Partnership recognizes an impairment loss to the extent it believes the carrying amount is not recoverable. The Operating Partnerships estimates of the undiscounted future operating
cash flows expected to be generated are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, and costs to operate
each property. As these factors are difficult to predict and are subject to future events that may alter the Operating Partnerships assumptions, the undiscounted future operating cash flows estimated by the Operating Partnership in its
impairment analyses may not be achieved and the Operating Partnership may be required to recognize future impairment losses on its properties.



Allowance for doubtful accounts.    Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The Operating Partnerships receivable balance is comprised primarily of rents and operating cost recoveries due from customers as well as accrued rental rate increases to be received over the life of the existing
leases. The Operating Partnership regularly evaluates the adequacy of the allowance for doubtful accounts considering such factors as the credit quality of its customers, delinquency of payment, historical trends and current economic conditions.
Actual results may differ from these estimates under different assumptions or conditions. If the Operating Partnerships assumptions regarding the collectibility of accounts receivables prove incorrect, the Operating Partnership could
experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of its allowance for doubtful accounts.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES  Continued





Capitalized costs.    Expenditures directly related to both the development of real estate assets and the leasing of properties are included in net real estate assets and are stated at cost in the
consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs, real estate taxes, salaries and other costs incurred during the
period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed
as incurred. If the Operating Partnerships assumptions regarding the successful efforts of development and leasing are incorrect, the resulting adjustments could impact earnings.



Fair value of derivative instruments.    In the normal course of business, the
Operating Partnership is exposed to the effect of interest rate changes. The Operating Partnership limits its exposure by following established risk management policies and procedures including the use of derivatives. To mitigate its exposure to
unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on the Operating Partnerships related debt. The Operating Partnership is required to recognize all derivatives as either assets or liabilities
in the consolidated balance sheets and to measure those instruments at fair value. Changes in fair value will affect either partners capital or net income depending on whether the derivative instrument qualifies as a hedge for accounting
purposes.



To determine the fair value of
derivative instruments, the Operating Partnership uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives,
standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of
value, and such value may never actually be realized.



Rental revenue.    Rental revenue is comprised of base rent, recoveries from customers which represent reimbursements for certain costs as provided in the lease agreements such as real estate taxes,
utilities, insurance, common area maintenance and other recoverable costs, parking and other income and termination fees which relate to specific customers, each of whom has paid a fee to terminate its lease obligation before the end of the
contracted term on the lease.



In accordance with
GAAP, base rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher
or lower than the amount of rental revenue recognized for the period. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.



Investments in joint
ventures.    The Operating Partnerships investments in unconsolidated affiliates consist of one corporation, eight limited liability companies, four limited partnerships and two general partnerships. The Operating
Partnership accounts for its investments in unconsolidated affiliates under the equity method of accounting as the Operating Partnership exercises significant influence, but does not control these entities. The Operating Partnerships
unconsolidated corporation is controlled by an unrelated third party that owns more than 50.0% of the outstanding voting stock. The Operating Partnership has a 50.0% or less ownership



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES  Continued



interest in the unconsolidated limited liability companies and, under the terms of the various operating agreements, does not have any
participating rights. The Operating Partnership has a 50.0% or less ownership interest in the unconsolidated limited partnerships and general partnerships. Although the Operating Partnership has an interest in two unconsolidated general partnerships
and is the general partner in three of the unconsolidated limited partnerships, under the terms of the various partnership agreements, the Operating Partnership does not have control of the major operating and financial policies of these
unconsolidated partnerships.



These investments
are initially recorded at cost, as investments in unconsolidated affiliates, and are subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the
Operating Partnerships balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated affiliates over the life of the property, generally 40 years.



From time to time, the Operating Partnership contributes real
estate assets to an unconsolidated joint venture in exchange for a combination of cash and an equity interest in the venture. The Operating Partnership records a partial gain on the contribution of the real estate assets to the extent of the third
party investors interest and records a deferred gain to the extent of its continuing interest in the unconsolidated joint venture.



Real Estate Assets



All capitalizable costs related to the improvement or replacement of commercial real estate properties are capitalized. Depreciation is
computed using the straight-line method over the estimated useful life of 40 years for buildings and improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized over the life of the respective
leases, using the straight-line method. Real estate assets are stated at the lower of cost or fair value, if impaired.



As of March 31, 2003, the Operating Partnership had 2.5 million square feet of office properties and 187.6 acres of land under contract
for sale in various transactions totaling $137.1 million. These real estate assets have a carrying value of $116.8 million and have been classified as assets held for sale in the accompanying financial statements.



Cash Equivalents



The Operating Partnership considers highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.



Restricted Cash



Restricted cash includes security deposits for the Operating Partnerships commercial properties and construction-related escrows. In addition, the Operating Partnership maintains escrow and reserve funds for debt service, real
estate taxes and property insurance established pursuant to certain mortgage financing arrangements.



Income Taxes



No provision has been made for income taxes because such taxes, if any, are the responsibility of the individual partners.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES  Continued





Concentration of Credit
Risk



Management of the Operating
Partnership performs ongoing credit evaluations of its customers. As of March 31, 2003, the wholly-owned properties were leased to 2,540 customers in 14 geographic locations. The Operating Partnerships customers engage in a wide variety of
businesses. There is no dependence upon any single customer.



Stock Compensation



The
Company, the general partner of the Operating Partnership, grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. As described in Note 7 included herein, the
Operating Partnership has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for the Companys stock options. During
2002, the Financial Accounting Standards Board issued SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which provides methods of transition to the fair value based method of accounting for stock-based
employee compensation. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. The Operating Partnership has elected the prospective method as defined by SFAS 148 in the first quarter of 2003.



Use of Estimates



The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES



During the past several years, the Operating Partnership has
formed various joint ventures with unrelated investors. The Operating Partnership has retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by General Accepted Accounting Principles (GAAP),
the Operating Partnership has accounted for its joint venture activity using the equity method of accounting, as the Operating Partnership does not control these joint ventures. As a result, the assets and liabilities of the Operating
Partnerships joint ventures are not included on its balance sheet.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES 
Continued





The
following tables set forth information regarding the Operating Partnerships joint venture activity as recorded on the respective joint ventures books at March 31, 2003 and December 31, 2002 and for the three months ended March 31, 2003
and 2002 ($ in thousands):



|                                                                              |  |               |   |  | March 31, 2003 |         | December 31, 2002
|----------------------------------------------------------------------------- |  | ------------- | - |  | -------------- | ------- | -----------------
|                                                                              |  | Percent Owned |   |  | Total Assets   |         | Debt             
|Balance Sheet Data:                                                           |  |               |   |  |                |         |                  
|Board of Trade Investment Company                                             |  | 49.00         | % |  | $              | 7,874   |                  
|Dallas County Partners                                                        |  | 50.00         | % |  |                | 41,821  |                  
|Dallas County Partners II                                                     |  | 50.00         | % |  |                | 18,469  |                  
|Fountain Three                                                                |  | 50.00         | % |  |                | 34,490  |                  
|RRHWoods, LLC                                                                 |  | 50.00         | % |  |                | 80,939  |                  
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker
Fink-KG |  | 22.81         | % |  |                | 140,189 |                  
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93         | % |  |                | 118,313 |                  
|Highwoods-Markel Associates, LLC                                              |  | 50.00         | % |  |                | 15,464  |                  
|MG-HIW, LLC                                                                   |  | 20.00         | % |  |                | 353,367 |                  
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00         | % |  |                | 5,041   |                  
|MG-HIW Rocky Point, LLC                                                       |  | 50.00         | % |  |                |        |                  
|MG-HIW Metrowest I, LLC                                                       |  | 50.00         | % |  |                | 1,601   |                  
|MG-HIW Metrowest II, LLC                                                      |  | 50.00         | % |  |                | 9,671   |                  
|Concourse Center Associates, LLC                                              |  | 50.00         | % |  |                | 14,623  |                  
|Plaza Colonnade, LLC                                                          |  | 50.00         | % |  |                | 6,309   |                  
|SF-HIW Harborview, LP                                                         |  | 20.00         | % |  |                | 40,609  |                  
|                                                                              |  |               |   |  |                |         |                  
|Total                                                                         |  |               |   |  | $              | 888,780 |                  
|                                                                              |  |               |   |  |                |         |                  

---

|(1) |  | Amount represents total draws at March 31, 2003 on a construction loan made to this joint venture by an affiliate of the Company with an interest rate of LIBOR plus
200 basis points due July 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In January of 2002, Metrowest II, LLC signed a $7.4 million construction loan to fund the development of this property of which $5.5 million is outstanding at March
31, 2003. The Operating Partnership has guaranteed 50.0% of this loan subject to a prorata indemnity from the Operating Partnerships joint venture partner.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On February 12, 2003, Plaza Colonnade, LLC signed a $61.4 million construction loan to fund the development of this property. The loan requires that the joint
venture invest $8.4 million, $4.2 million of which will be the Operating Partnerships share. The Operating Partnership and its partners in this joint venture have each guaranteed 50.0% of the loan (see note 7).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES 
Continued







|                                                                              |  |               |   |  | March 31, 2003 |        |                    | March 31, 2002 |         
|----------------------------------------------------------------------------- |  | ------------- | - |  | -------------- | ------ | ------------------ | -------------- | --------
|                                                                              |  | Percent Owned |   |  | Revenue        |        | Operating Expenses |                | Interest
|Income Statement Data:                                                        |  |               |   |  |                |        |                    |                |         
|Board of Trade Investment Company                                             |  | 49.00         | % |  | $              | 608    |                    | $              | 395     
|Dallas County Partners                                                        |  | 50.00         | % |  |                | 2,411  |                    |                | 1,410   
|Dallas County Partners II                                                     |  | 50.00         | % |  |                | 1,566  |                    |                | 689     
|Fountain Three                                                                |  | 50.00         | % |  |                | 1,763  |                    |                | 760     
|RRHWoods, LLC                                                                 |  | 50.00         | % |  |                | 3,507  |                    |                | 1,791   
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker
Fink-KG |  | 22.81         | % |  |                | 4,643  |                    |                | 1,348   
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93         | % |  |                | 4,182  |                    |                | 1,123   
|Highwoods-Markel Associates, LLC                                              |  | 50.00         | % |  |                | 812    |                    |                | 438     
|MG-HIW, LLC                                                                   |  | 20.00         | % |  |                | 12,292 |                    |                | 4,386   
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00         | % |  |                | 34     |                    |                | 25      
|MG-HIW Rocky Point, LLC                                                       |  | 50.00         | % |  |                |       |                    |                |        
|MG-HIW Metrowest I, LLC                                                       |  | 50.00         | % |  |                |       |                    |                | 8       
|MG-HIW Metrowest II, LLC                                                      |  | 50.00         | % |  |                | 123    |                    |                | 109     
|Concourse Center Associates, LLC                                              |  | 50.00         | % |  |                | 526    |                    |                | 138     
|Plaza Colonnade, LLC                                                          |  | 50.00         | % |  |                | 4      |                    |                |        
|SF-HIW Harborview, LLC                                                        |  | 20.00         | % |  |                | 1,419  |                    |                | 408     
|                                                                              |  |               |   |  |                |        |                    |                |         
|Total                                                                         |  |               |   |  | $              | 33,890 |                    | $              | 13,028  
|                                                                              |  |               |   |  |                |        |                    |                |         



3. RELATED PARTY
TRANSACTIONS



On December 8, 1998, the
Operating Partnership purchased a portion of the Bluegrass Valley office development project from a limited liability company controlled by an executive officer and director of the Company for approximately $2.5 million. On July 16, 1999, the
Operating Partnership purchased development land and an option to purchase other development land in the Bluegrass Valley office development project from the same limited liability company controlled by the same executive officer and director of the
Operating Partnership for approximately $4.6 million in Common Units. On October 31, 2002, the Operating Partnership exercised its option to purchase the additional development land in a staged takedown, and acquired 30.6 acres of the optioned
property from the same limited liability company for $4.6 million. As part of this transaction, the Operating Partnership also acquired 23.5 acres of other development land in the Bluegrass Valley office development project for $2.6 million. On
January 17, 2003, the Operating Partnership acquired 23.46 acres of the formerly optioned development land from the same limited liability company for $2.3 million. In December of 2003, in the final stage of the required takedown, the Operating
Partnership will acquire 24.9 acres of the formerly optioned development land from the same limited liability company for $4.7 million. The Operating Partnership believes that each purchase price approximates market value.



The Operating Partnership advanced $787,746 to an officer and
director related to certain expenses paid by the Operating Partnership on behalf of the officer and director. During 2002, this advance, along with accrued interest, was repaid by the officer and director.



During 2000, in connection with the formation of the MG-HIW
Peachtree Corners III, LLC, a construction loan was made by an affiliate of the Operating Partnership to this joint venture. Interest accrues at a rate of LIBOR plus 200 basis points and the loan is due July 2003. At March 31, 2003, $4.2 million was
outstanding on this loan.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued





4. DERIVATIVE FINANCIAL
INSTRUMENTS



SFAS 133 requires the Operating
Partnership to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value
of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in Accumulated Other Comprehensive Loss (AOCL) until the hedged item is
recognized in earnings. The ineffective portion of a derivatives change in fair value is recognized in earnings.



The Operating Partnerships interest rate risk management objective is to limit the impact of interest rate changes on earnings and
cashflows and to lower overall borrowing costs. To achieve these objectives, the Operating Partnership enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate its interest rate risk
with respect to various debt instruments. The Operating Partnership does not hold these derivatives for trading or speculative purposes.



On the date that the Operating Partnership enters into a derivative contract, the Operating Partnership designates the derivative as (1) a
hedge of the variability of cash flows that are to be received or paid in connection with a recognized liability (a cash flow hedge), (2) a hedge of changes in the fair value of an asset or a liability attributable to a particular risk
(a fair value hedge), or (3) an instrument that is held as a non-hedge derivative. Changes in the fair value of highly effective cash flow hedges, to the extent that the hedge is effective, are recorded in AOCL, until earnings are
affected by the hedged transaction (i.e. until periodic settlements of a variable-rate liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the
variability in the cash flows of the transaction) is recorded in current-period earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in
earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings.



The Operating Partnership formally documents all relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) forecasted
transactions. The Operating Partnership also assesses and documents, both at the hedging instruments inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows associated with the hedged items. When the Operating Partnership determines that a derivative is not (or has ceased to be) highly effective as a hedge, the Operating Partnership discontinues hedge accounting prospectively.



During the first quarter of 2003, the Operating Partnership
entered into and terminated a treasury lock agreement to hedge the change in the fair market value of the MandatOry Par Put Remarketable Securities (MOPPRS) issued by the Operating Partnership. This treasury lock agreement was terminated
for a payment of $1.5 million to the Company. This gain was offset by an increase in the fair value of the MOPPRS of $1.5 million, thus no gain or loss was recognized during the three months ended March 31, 2003.



At March 31, 2003, approximately $8.8 million of deferred
financing costs from past cash flow hedging instruments remain in AOCL. These costs will be recognized into earnings as the underlying debt is repaid. The Operating Partnership expects that the portion of the cumulative loss recorded in AOCL at
March 31, 2003 associated with these derivative instruments, which will be recognized within the next 12 months, will be approximately $1.9 million.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued





5. ACCUMULATED OTHER
COMPREHENSIVE INCOME



Other comprehensive
income represents net income plus the results of certain non-partners capital changes not reflected in the Consolidated Statements of Income. The components of other comprehensive income are as follows ($ in thousands):



|                                               |  | Three Months Ended March 31,
|---------------------------------------------- |  | ----------------------------
|                                               |  | 2003                        
|Net income                                     |  | $                           
|Accumulated other comprehensive income:        |  |                             
|Unrealized derivative gains on cashflow hedges |  |                             
|Amortization of past hedging relationships     |  |                             
|                                               |  |                             
|Total other comprehensive income               |  |                             
|                                               |  |                             
|Total comprehensive income                     |  | $                           
|                                               |  |                             



6. DISCONTINUED
OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS



Discontinued operations include those long-lived assets which:



| | (1) |  | are classified as held for sale at March 31, 2003 as a result of disposal activities that were initiated subsequent to January 1, 2002; or
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | were sold during 2002 and 2003 as a result of disposal activities that were initiated subsequent to January 1, 2002.
| | --- |  | --------------------------------------------------------------------------------------------------------------------



Per SFAS 144, those long-lived assets which were sold during
2002 and resulted from disposal activities initiated prior to January 1, 2002 should be accounted for in accordance with SFAS 121 and APB 30. During 2002, the Operating Partnership sold certain properties which resulted from disposal activities
initiated prior to January 1, 2002, and the gain realized on the sale is appropriately included in the gain/(loss) on disposition of depreciable assets in the Operating Partnerships consolidated statements of income.



Below represents the net operating results and net carrying
value of 1.9 million square feet of property sold during 2002 and 2.5 million square feet of property and 88 apartment units held for sale at March 31, 2003. These were a result of disposal activities that were initiated subsequent to the effective
date of SFAS 144 and are classified as discontinued operations in the Operating Partnerships consolidated statements of income ($ in thousands):



|                                        |  | Three Months Ended March 31,
|--------------------------------------- |  | ----------------------------
|                                        |  | 2003                        
|Total revenue                           |  | $                           
|Rental operating expenses               |  |                             
|Depreciation and amortization           |  |                             
|                                        |  |                             
|Income from discontinued operations     |  |                             
|                                        |  |                             
|Loss on sale of discontinued operations |  |                             
|                                        |  |                             
|Total discontinued operations           |  | $                           
|                                        |  |                             
|Net carrying value                      |  | $                           
|                                        |  |                             





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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



6. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF
LONG-LIVED ASSETS  Continued



In addition, SFAS 144 requires that a long-lived asset classified as held for sale be
measured at the lower of the carrying value or fair value less cost to sell. At March 31, 2003, the Operating Partnership has determined that the carrying value of two office properties held for sale is less than their fair value less cost to sell
and has recognized a $325,290 impairment loss, which is included in loss on sale of discontinued operations in the consolidated statements of income for the three months ended March 31, 2003.



SFAS 144 also requires that the carrying value of a long-lived
asset classified as held and used be compared to the sum of its estimated future undiscounted cash flows. If the carrying value is greater than the sum of its undiscounted future cash flows, an impairment loss should be recognized. At March 31,
2003, there were no properties whereby the carrying value exceeded the sum of their undiscounted future cash flows, thus no impairment loss was recognized during the three months ended March 31, 2003.



7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS



In June 2001, the FASB issued SFAS No. 141, Business
Combinations, which provides that all business combinations in the scope of the Statement are to be accounted for under the purchase method. SFAS No. 141 requires companies to account for the value of in-place operating leases as favorable or
unfavorable relative to market prices and to account for the costs of acquiring such leases separately from the value of the real estate for all acquisitions. These intangibles are to be amortized over the related contractual lease terms as an
increase to or reduction of rental revenues. During 2003, in accordance with the guidance of SFAS No. 141, the Operating Partnership valued in-place leases of the property at the date of acquisition. As a result of an acquisition on January 21,
2003, the Operating Partnership recorded $472,080 of the purchase price as net intangible leases. This amount is included in other assets in the accompanying consolidated balance sheets. In addition, the Operating Partnership has recognized $43,107
in amortization of the net intangible leases. This amount was deducted from rental revenues in the accompanying consolidated income statement for the three months ended March 31, 2003.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which changes the accounting for, and disclosure of certain guarantees. Beginning with transactions entered into after December 31,
2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and reasonably estimable. In general, the change applies to contracts or
indemnification agreements that contingently require the Operating Partnership to make payments to a guaranteed third-party based on changes in underlying asset, liability, or an equity security of guaranteed party.



In accordance with FIN 45, the Operating Partnership has
included $1.7 million in other liabilities and adjusted the investment in unconsolidated affiliates by $1.7 million on its consolidated balance sheet at March 31, 2003 related to two separate guarantees of a construction loan agreement and a
construction completion agreement entered into by the Plaza Colonnade LLC joint venture, in which the Operating Partnership is a 50.0% owner. The term of the construction loan agreement is February 2003 through February 14, 2006, with two one year
options to extend the maturity date that are conditional on completion and lease-up of the project. The term of the construction completion agreement requires the core and shell of the building to be complete by December 15, 2005. Both guarantees
arose from the formation of the joint venture to construct an office building. If the joint venture was unable to repay the outstanding balance under the construction loan agreement or complete the construction of the office building, the Operating
Partnership would be required, under the terms of the agreements, to repay the outstanding balance under the construction loan and complete the construction of the office building. The maximum potential amount of future payments by the Operating
Partnership under these agreements is $33.4 million.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS 
Continued





In January
2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means
other than voting rights, and to determine when and which business enterprise should consolidate the variable interest entities (the primary beneficiary). This new model applies when either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without additional financial support. In addition, FIN 46 requires additional disclosures. The Operating Partnership is
assessing the impact of this interpretation on our accounting for investments in unconsolidated joint ventures.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, which
amends FASB No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used
on reported results. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, the Operating Partnership adopted the fair value recognition provision prospectively for all
awards granted after January 1, 2003. Under this provision, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option
vesting period. Prior to 2003, the Operating Partnership accounted for stock options under this plan under the recognition and measurement of provision of APB Option 25 Accounting for Stock Issued to Employees and Related
Interpretations.



In accordance with SFAS
148, the Operating Partnership has included in general and administrative expenses in its consolidated statement of income for the three months ended March 31, 2003, $6,437 of amortization related to the vesting of stock options granted during the
three months ended March 31, 2003. In addition, the Operating Partnership has included in partners capital in its consolidated balance sheet at March 31, 2003 the total grant value of $308,985 as deferred compensation. See below for the
amounts that would have been deducted from net income if the Operating Partnership had elected to expense the fair value of all stock option awards that had vested rather than those awards issued subsequent to January 1, 2003:



|                                                                                                 |  | Three Months Ended March 31, 2003         |        |   | Three Months Ended March 31, 2002 |  
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | - | --------------------------------- | -
|                                                                                                 |  | ($ in thousands, except per unit amounts) |       
|Net income, as reported                                                                          |  | $                                         | 13,058 |   |                                   | $
|Add: Stock option expense included in reported net income                                        |  |                                           | 6      |   |                                   |  
|Deduct: Total stock option expense determined under fair value recognition method for
all awards |  |                                           | (176   | ) |                                   |  
|                                                                                                 |  |                                           |        |   |                                   |  
|Pro forma net income                                                                             |  | $                                         | 12,888 |   |                                   | $
|                                                                                                 |  |                                           |        |   |                                   |  
|Basicas reported                                                                                |  | $                                         | 0.09   |   |                                   | $
|                                                                                                 |  |                                           |        |   |                                   |  
|Basicpro forma                                                                                  |  | $                                         | 0.09   |   |                                   | $
|                                                                                                 |  |                                           |        |   |                                   |  
|Dilutedas reported                                                                              |  | $                                         | 0.09   |   |                                   | $
|                                                                                                 |  |                                           |        |   |                                   |  
|Dilutedpro forma                                                                                |  | $                                         | 0.09   |   |                                   | $
|                                                                                                 |  |                                           |        |   |                                   |  



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued



8. SEGMENT INFORMATION



The sole business of the Operating Partnership is the acquisition, development and
operation of rental real estate properties. The Operating Partnership operates office, industrial and retail properties and apartment units. There are no material inter-segment transactions.



The Operating Partnerships chief operating decision
maker (CDM) assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the CDM evaluates operating results
and allocates resources on a property-by-property basis within the various property types.



The accounting policies of the segments are the same as those described in Note 1 included herein. Further, all operations are within the United States and no customer comprises more than 10% of
consolidated revenues. The following table summarizes the rental income, net operating income and assets for each reportable segment for the three months ended March 31, 2003 and 2002 ($ in thousands):



|                                                                                                                       |  | Three Months Ended March 31, |        
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                                                       |  | 2003                         |        
|Rental Revenue(A):                                                                                                     |  |                              |        
|Office segment                                                                                                         |  | $                            | 90,072 
|Industrial segment                                                                                                     |  |                              | 8,415  
|Retail segment                                                                                                         |  |                              | 10,189 
|Apartment segment                                                                                                      |  |                              | 284    
|                                                                                                                       |  |                              |        
|Total Rental Revenue                                                                                                   |  | $                            | 108,960
|                                                                                                                       |  |                              |        
|Net Operating Income(A):                                                                                               |  |                              |        
|Office segment                                                                                                         |  | $                            | 58,091 
|Industrial segment                                                                                                     |  |                              | 6,481  
|Retail segment                                                                                                         |  |                              | 7,222  
|Apartment segment                                                                                                      |  |                              | 150    
|                                                                                                                       |  |                              |        
|Total Net Operating Income                                                                                             |  | $                            | 71,944 
|                                                                                                                      
|Reconciliation to income before gain/(loss) on disposition of land and depreciable
assets and discontinued operations: |  |                              |        
|Depreciation and amortization                                                                                          |  |                              | (33,286
|Interest expense                                                                                                       |  |                              | (28,175
|General and administrative expenses                                                                                    |  |                              | (5,215 
|Interest and other income                                                                                              |  |                              | 2,870  
|Equity in earnings of unconsolidated affiliates                                                                        |  |                              | 1,714  
|                                                                                                                       |  |                              |        
|Income before gain/(loss) on disposition of land and depreciable assets, and
discontinued operations                   |  | $                            | 9,852  
|                                                                                                                       |  |                              |        



|                    |  | March 31,
|------------------- |  | ---------
|                    |  | 2003     
|Total Assets:       |  |          
|Office segment      |  | $        
|Industrial segment  |  |          
|Retail segment      |  |          
|Apartment segment   |  |          
|Corporate and other |  |          
|                    |  |          
|Total Assets        |  | $        
|                    |  |          

---

|(A) |  | Net of discontinued operations.
|--- |  | -------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Notes To Consolidated Financial Statements  Continued





9. SECURED NOTE



On February 2, 1998, the Operating
Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities (MOPPRS) due February 1, 2013. The MOPPRS bore an interest rate of 6.835% from the date of issuance through January 31, 2003. On January 31, 2003, the interest
rate was changed to 8.975% pursuant to the interest rate reset provisions of the MOPPRS. On February 3, 2003, the Operating Partnership repurchased 100.0% of the principal amount of the MOPPRS from the sole holder thereof in exchange for a secured
note in the principal amount of $142.8 million. The secured note bears interest at a fixed rate of 6.03% and has a maturity date of February 28, 2013.



10. COMMITMENTS AND CONTINGENCIES



In connection with several of the Operating Partnerships joint venture partners with unaffiliated parties, the Operating
Partnership has agreed to guarantee certain rent shortfalls and re-tenanting costs for certain properties contributed or sold to the joint ventures during 1999, 2000 and 2002. As of March 31, 2003, the Operating Partnership has $17.9 million accrued
for obligations related to these agreements. The Operating Partnership believes that its estimates related to these agreements are adequate. However, if the Operating Partnerships assumptions and estimates are incorrect future losses may
occur.



In addition, the Operating Partnership
guaranteed its 80.0% partner in MG-HIW, LLC joint venture, Miller Global, a minimum internal rate of return on $50.0 million of their equity investment in the joint ventures Orlando assets. If the minimum internal rate of return is not
achieved upon the sale of these assets or winding up of the joint venture, Miller Global would receive a disproportionate share of the cash proceeds related to the Orlando assets. Based upon the current and forecasted operating performance of these
assets and the Operating Partnerships estimate of their residual value, the estimated internal rate of return for Miller Global with respect to their Orlando equity is not less than the minimum required return. As a result, the Operating
Partnership does not currently expect that its interest in the joint venture will be adjusted upon the sale of the subject assets or the winding up of the joint venture as a result of the internal rate of return guarantee. However, if the operating
performance of the assets and/or the residual value were to be lower than the Operating Partnerships estimates, Miller Global could receive a disproportionately greater share of the cash proceeds from any such sale or winding up and the
Operating Partnerships share would be correspondingly lower.



Certain properties owned in joint ventures with unaffiliated parties have buy/sell options that may be exercised to acquire the other partners interest by either the Operating Partnership or its joint venture partner
if certain conditions are met as set forth in the respective joint venture agreement. The Operating Partnerships partner in SF-HIW Harborview, LP has the right to puts its 80.0% equity interest in the partnership to the Operating Partnership
in cash at anytime during the one-year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of SF-HIW Harborview, LP assets and liabilities.



In connection with the November 26, 2002 disposition of
225,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., the Operating Partnership agreed to guarantee any rent shortfalls and re-tenanting costs for a five year period of
time from the date of sale. The Operating Partnerships contingent liability as of March 31, 2003 is $19.5 million. Given this guarantee, the Operating Partnership deferred the gain of approximately $6.9 million, which will be recognized when
the contingency period is concluded.



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##### Table of Contents

Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report and is based
primarily on the consolidated financial statements of the Operating Partnership.



Disclosure Regarding Forward-looking Statements



Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under
this section and under the heading Business. You can identify forward-looking statements by our use of forward-looking terminology such as may, will, expect, anticipate,
estimate, continue or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any
forward-looking statement:



| |  |  | speculative development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative
to customer demand;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial condition of our customers could deteriorate;
| | - |  | -----------------------------------------------------------



| |  |  | we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to lease or release space quickly or on as favorable terms as old leases;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | an unexpected increase in interest rates would increase our debt service costs;
| | - |  | -------------------------------------------------------------------------------



| |  |  | we may not be able to continue to meet our long-term liquidity requirements on favorable terms;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | we could lose key executive officers; and
| | - |  | -----------------------------------------



| |  |  | our southeastern and midwestern markets may suffer additional declines in economic growth.
| | - |  | ------------------------------------------------------------------------------------------



This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the
cautionary statements we make in BusinessRisk Factors set forth in our 2002 Annual Report.



Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.



Overview



The
Operating Partnership is managed by its general partner, the Company, a self-administered and self-managed equity REIT that began operations through a predecessor in 1978. Since the Companys initial public offering in 1994, we have evolved
into one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At March 31, 2003, we:



| |  |  | owned 494 in-service office, industrial and retail properties, encompassing approximately 37.2 million rentable square feet;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | owned an interest (50.0% or less) in 78 in-service office and industrial properties, encompassing approximately 7.8 million rentable square feet and 418 apartment
units;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | owned 1,341 acres of undeveloped land suitable for future development;
| | - |  | ----------------------------------------------------------------------



| |  |  | were developing an additional four properties, which will encompass approximately 485,000 rentable square feet (including one property encompassing 285,000 rentable
square feet that we are developing with a 50.0% joint venture partner).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents



The following
summarizes our capital recycling program since the beginning of 2001:



|                                          |  | Three Months Ended March 31, 2003 |   |  | Year Ended 2002 |   |  | Year Ended 2001 |  
|----------------------------------------- |  | --------------------------------- | - |  | --------------- | - |  | --------------- | -
|Office, Industrial and Retail Properties: |  |                                   |   |  |                 |   |  |                 |  
|(rentable square feet in thousands)       |  |                                   |   |  |                 |   |  |                 |  
|Dispositions                              |  |                                  |   |  | (2,270          | ) |  | (268            | )
|Contributions to Joint Ventures           |  |                                  |   |  |                |   |  | (118            | )
|Developments Placed In-Service            |  | 131                               |   |  | 2,214           |   |  | 1,351           |  
|Redevelopment                             |  | (152                              | ) |  | (52             | ) |  |                |  
|Acquisitions                              |  | 66                                |   |  |                |   |  | 72              |  
|                                          |  |                                   |   |  |                 |   |  |                 |  
|Net Change                                |  | 45                                |   |  | (108            | ) |  | 1,037           |  
|                                          |  |                                   |   |  |                 |   |  |                 |  
|Apartment Properties:                     |  |                                   |   |  |                 |   |  |                 |  
|(in units)                                |  |                                   |   |  |                 |   |  |                 |  
|Dispositions                              |  |                                  |   |  |                |   |  | (1,672          | )
|                                          |  |                                   |   |  |                 |   |  |                 |  



In
addition to the above capital recycling activity during the three months ended March 31, 2003 and the years ended December 31, 2002 and 2001, the Company repurchased $2.8 million, $4.8 million and $148.8 million of Common Stock and Common
Units, and $18.5 million of Preferred Units during the year ended December 31, 2001. This represents aggregate repurchases of $174.9 million of Common Stock, Common Units and Preferred Units since January 1, 2001 through March 31, 2003.



The Company conducts substantially all of its
activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At March 31, 2003, the Company owned
88.6% of the Common Units in the Operating Partnership.



Critical Accounting Policies



Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements contained elsewhere in this Quarterly Report. Our Consolidated Financial Statements include the accounts
of the Operating Partnership and its majority-controlled affiliates. For a discussion of our accounting policies with respect to our investments in unconsolidated affiliates, see Investments in Joint Ventures. The preparation of
financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates.



The estimates used in the preparation of our Consolidated Financial Statements are described in Note 1 to our Consolidated Financial
Statements for the three months ended March 31, 2003. However, certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on
our Consolidated Financial Statements. Management has reviewed our critical accounting policies and estimates with the audit committee of the Companys board of directors and the Companys independent auditors.



We consider our critical accounting policies to be those used
in the determination of the reported amounts and disclosure related to the following:



| |  |  | Impairment of long-lived assets;
| | - |  | --------------------------------



| |  |  | Allowance for doubtful accounts;
| | - |  | --------------------------------



| |  |  | Capitalized costs;
| | - |  | ------------------



| |  |  | Fair value of derivative instruments;
| | - |  | -------------------------------------



| |  |  | Rental revenue; and
| | - |  | -------------------



| |  |  | Investments in joint ventures.
| | - |  | ------------------------------



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Impairment
of long-lived assets.    Real estate and leasehold improvements are classified as long-lived assets held for sale or as long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, we record assets held for sale at the lower of the carrying amount or fair value less cost to sell. The impairment loss is the amount by which the carrying amount
exceeds the fair value less cost to sell. With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered from their undiscounted future operating cash flows and we
recognize an impairment loss to the extent we believe the carrying amount is not recoverable. Our estimates of the undiscounted future operating cash flows expected to be generated are based on a number of assumptions that are subject to economic
and market uncertainties including, among others, demand for space, competition for customers, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may
alter our assumptions, the undiscounted future operating cash flows estimated by us in our impairment analyses may not be achieved and we may be required to recognize future impairment losses on our properties.



Allowance for doubtful
accounts.    Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is comprised primarily of rents and operating cost recoveries due from customers as
well as accrued rental rate increases to be received over the life of the existing leases. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as the credit quality of our customers, delinquent
payments, historical trends and current economic conditions. Actual results may differ from these estimates under different assumptions or conditions. If our assumptions regarding the collectibility of accounts receivables prove incorrect, we could
experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of our allowance for doubtful accounts.



Capitalized costs.    Expenditures directly related to both the development of real estate assets and the
leasing of properties are included in net real estate assets and are stated at cost in the consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and
construction costs, interest costs, real estate taxes, salaries and other costs incurred during the period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with
successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed as incurred. If our assumptions regarding the successful efforts of development and leasing are incorrect, the resulting adjustments could
impact earnings.



Fair value of derivative
instruments.    In the normal course of business, we are exposed to the effect of interest rate changes. We limit our exposure by following established risk management policies and procedures including the use of derivatives.
To mitigate our exposure to unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on our related debt. We are required to recognize all derivatives as either assets or liabilities in the consolidated
balance sheets and to measure those instruments at fair value. Changes in fair value will affect either partners capital or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes.



To determine the fair value of derivative instruments, we use
a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives, standard market conventions and techniques such as
discounted cash flow analysis, option pricing modes, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be
realized.



Rental
revenue.    Rental revenue is comprised of base rent; recoveries from customers which represent reimbursements for certain costs as provided in the lease agreements such as real estate taxes, utilities, insurance, common area
maintenance and other recoverable costs, parking and other income and termination fees which relate to specific customers, each of whom has paid a fee to terminate its lease obligation before the end of the contracted term on the lease.



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##### Table of Contents



In accordance
with GAAP, base rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be
higher or lower than the amount of rental revenue recognized for the period. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.



Investments in joint
ventures.    As of March 31, 2003, our investments in unconsolidated affiliates consist of one corporation, eight limited liability companies, four limited partnerships and two general partnerships. We account for our
investments in unconsolidated affiliates under the equity method of accounting as we exercise significant influence, but do not control these entities. Our unconsolidated corporation is controlled by an unrelated third party that owns more than
50.0% of the outstanding voting stock. We have a 50.0% or less ownership interest in the unconsolidated limited liability companies and, under the terms of the various operating agreements, do not have any participating rights. We have a 50.0% or
less ownership interest in the unconsolidated limited partnerships and general partnerships. Although we have an interest in two unconsolidated general partnerships and are the general partner in three of the unconsolidated limited partnerships,
under the terms of the various partnership agreements, we do not have control of the major operating and financial policies of these unconsolidated partnerships.



These investments are initially recorded at cost, as investments in unconsolidated affiliates, and are
subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to
equity in earnings of unconsolidated affiliates over the life of the property, which is generally 40 years.



From time to time, we contribute real estate assets to an unconsolidated joint venture in exchange for a combination of cash and an equity
interest in the venture. We record a partial gain on the contribution of the real estate assets to the extent of the third party investors interest and record a deferred gain to the extent of our continuing interest in the unconsolidated joint
venture.



Results of Operations



As described in Note 6 to the Consolidated Financial Statements, we reclassified the operations and/or gain/(loss) from disposal of certain properties to discontinued operations if the properties were either sold during 2002 and 2003
or were held for sale at March 31, 2003 and met certain conditions as stipulated by Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, (SFAS 144).
Accordingly, properties sold during 2002 that did not meet certain conditions as stipulated by SFAS 144 were not reclassified as discontinued operations.



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##### Table of Contents



The following
table sets forth information regarding our results of operations for the three months ended March 31, 2003 and 2002 ($ in millions):



|                                                                                                    |  | Three Months Ended March 31, |      
|--------------------------------------------------------------------------------------------------- |  | ---------------------------- | -----
|                                                                                                    |  | 2003                         |      
|Rental revenue                                                                                      |  | $                            | 109.0
|                                                                                                   
|Operating expenses:                                                                                 |  |                              |      
|Rental property                                                                                     |  |                              | 37.0 
|Depreciation and amortization                                                                       |  |                              | 33.3 
|Interest expense:                                                                                   |  |                              |      
|Contractual                                                                                         |  |                              | 27.6 
|Amortization of deferred financing costs                                                            |  |                              | 0.6  
|                                                                                                    |  |                              |      
|                                                                                                    |  |                              | 28.2 
|General and administrative                                                                          |  |                              | 5.2  
|                                                                                                    |  |                              |      
|Total operating expenses                                                                            |  |                              | 103.7
|                                                                                                    |  |                              |      
|                                                                                                   
|Other income:                                                                                       |  |                              |      
|Interest and other income                                                                           |  |                              | 2.9  
|Equity in earnings of unconsolidated affiliates                                                     |  |                              | 1.7  
|                                                                                                    |  |                              |      
|                                                                                                    |  |                              | 4.6  
|                                                                                                    |  |                              |      
|Income before gain/(loss) on disposition of land and depreciable assets and discontinued
operations |  |                              | 9.9  
|Gain/(loss) on disposition of land                                                                  |  |                              | 0.8  
|Gain on disposition of depreciable assets                                                           |  |                              |     
|                                                                                                    |  |                              |      
|Income from continuing operations                                                                   |  |                              | 10.7 
|                                                                                                   
|Discontinued operations:                                                                            |  |                              |      
|Income from discontinued operations                                                                 |  |                              | 2.6  
|Gain on sale of discontinued operations                                                             |  |                              | (0.3 
|                                                                                                    |  |                              |      
|                                                                                                    |  |                              | 2.3  
|                                                                                                    |  |                              |      
|Net income                                                                                          |  |                              | 13.0 
|Distributions on preferred units                                                                    |  |                              | (7.7 
|                                                                                                    |  |                              |      
|Net income available for unitholders                                                                |  | $                            | 5.3  
|                                                                                                    |  |                              |      



Three
Months Ended March 31, 2003.    Rental revenue from continuing operations decreased $7.1 million, or 6.1%, from $116.1 million for the three months ended March 31, 2002 to $109.0 million for the three months ended March 31,
2003. The decrease was primarily a result of a decrease in average occupancy rates from 87.5% for the three months ended March 31, 2002 to 81.7% for the three months ended March 31, 2003. These decreases are primarily a result of the rejection of
two leases at December 31, 2002 by WorldCom in connection with its bankruptcy filing in 2002, encompassing 819,653 rentable square feet, resulting in a decrease in rental revenues of approximately $4.2 million, and a decrease in average occupancy of
2.2%. In addition, rental revenues from continuing operations decreased as a result of tenant rollover and early lease terminations at various properties where vacant space was not re-leased due to the lack of demand for office space coupled with an
increasing supply of competitive space. During 2002 and the three months ended March 31, 2003, approximately 2.1 million square feet of development properties were placed in-service which have leased-up slower than expected and, as a result, have
also adversely affected the occupancy of our overall portfolio. In addition, lease termination fees decreased $1.6 million for the three months ended March 31, 2002 to the three months ended March 31, 2003.



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Same property
rental revenue, generated from the 35.0 million square feet of 472 wholly-owned in-service properties on January 1, 2002, decreased $9.4 million or 8.1% for the three months ended March 31, 2003 compared to the three months ended March 31, 2002.
This decrease is primarily a result of lower same property average occupancy, which decreased from 89.5% in 2002 to 80.6% in 2003, and the rejection of two leases at December 31, 2002 by WorldCom encompassing 819,653 rentable square feet, resulting
in a decrease in same property rental revenues of approximately $4.2 million.



During the three months ended March 31, 2003, 211 second generation leases representing 2.0 million square feet of office, industrial and retail space were executed at an average rate per square foot
which was 7.0% lower than the average rate per square foot on the expired leases.



Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $1.1 million, or 3.1%, from $35.9
million for the three months ended March 31, 2002 to $37.0 million for the three months ended March 31, 2003. Rental operating expenses as a percentage of rental revenue increased from 30.9% for the three months ended March 31, 2002 to 33.9% for the
three months ended March 31, 2003. The increase in these expenses as a percentage of revenue was a result of the decrease in rental revenue, primarily due to lower average occupancy and the rejection of two leases at December 31, 2002 by WorldCom
encompassing 819,653 rentable square feet. These rejections resulted in a $4.2 million decrease in rental revenues for the three months ended March 31, 2003. In addition, those operating expenses that would have been paid by WorldCom if the leases
were not rejected were paid by the Company and included in operating expenses during the three months ended March 31, 2003. In addition to the decrease of rental revenues, lower average occupancy and the impact of the rejection of WorldCom of two
leases, in the three months ended March 31, 2003, increases in utilities, snow removal, repairs and maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy percentage resulted in an increase in same
property rental property expenses as a percentage of rental revenue from the three months ended March 31, 2002 to the three months ended March 31, 2003.



Same property rental property expenses, which are the expenses of the 472 wholly-owned in-service properties on January 1, 2002, increased
$1.8 million, or 5.3%, for the three months ended March 31, 2003, compared to the three months ended March 31, 2002. Same property rental property expenses as a percentage of related revenue increased 4.3% from 29.1% for the three months ended March
31, 2002 to 33.4% for the three months ended March 31, 2003. The increase in these expenses as a percentage of revenue was a result of the decrease in same property rental revenue, primarily due to lower average occupancy and the rejection of two
leases as of December 31, 2002 by WorldCom encompassing 819,653 rentable square feet. These rejections resulted in a $4.2 million decrease in same property rental revenues for the three months ended March 31, 2003. In addition, those operating
expenses that would have been paid by WorldCom if the leases were not rejected were paid by the Company and included in same property operating expenses during the three months ended March 31, 2003. In addition to the decrease of same property
rental revenues, lower average occupancy and the impact of the rejection of WorldCom of two leases, in the three months ended March 31, 2003, increases in utilities, snow removal, repairs and maintenance and certain fixed operating expenses that do
not vary with net changes in our occupancy percentage resulted in an increase in the same property rental property expenses from the three months ended March 31, 2002 to the three months ended March 31, 2003.



Depreciation and amortization from continuing operations for
the three months ended March 31, 2003 and 2002 was $33.3 million and $29.4 million, respectively. The increase of $3.9 million, or 13.3%, was due to an increase in amortization related to leasing commissions and tenant improvement expenditures for
properties placed in-service during 2002 and the three months ended March 31, 2003 and the write-off of deferred leasing costs for customers that vacate their space prior to lease expiration. These increases were partially offset by a decrease in
depreciation for properties disposed of during 2002 that are not classified as discontinued operations in accordance with SFAS 144.



Interest expense from continuing operations increased $2.5 million, or 9.7%, from $25.7 million for the three months ended March 31, 2002
to $28.2 million for the three months ended March 31, 2003. The increase



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was primarily attributable to the decrease in capitalized interest for the three months ended March 31, 2003 and 2002, which was $365,880 and
$4.0 million, respectively, and an increase in average interest rates from 6.9% in the first quarter of 2002 to 7.1% in the first quarter of 2003. Partly offsetting these increases was a decrease in the average outstanding debt balance from the
first quarter of 2002 to the first quarter of 2003. Interest expense for the three months ended March 31, 2003 and 2002 included $625,897 and $338,950, respectively, of amortization of deferred financing costs.



General and administrative expenses as a percentage of total
revenue, which includes rental revenue and interest and other income from both continuing and discontinued operations and equity in earnings of unconsolidated affiliates was 4.5% for the three months ended March 31, 2003 and 4.0% for the three
months ended March 31, 2002. The increase of 0.5% was a result of the decrease in rental revenue from the three months ended March 31, 2002 to the three months ended March 31, 2003. In addition, included in this increase, was a nonrecurring
compensation charge of $186,000 recorded during the three months ended March 31, 2002, which was related to the exercise of options.



Interest and other income from continuing operations decreased $331,849, or 9.4%, from $3.2 million for the three months ended March 31,
2002 to $2.9 million for the three months ended March 31, 2003. The decrease primarily resulted from a decrease in leasing and development fee income in the three months ended March 31, 2003.



Equity in earnings of unconsolidated affiliates decreased
$775,268 from $2.5 million for the three months ended March 31, 2002 to $1.7 million for the three months ended March 31, 2003. The decrease was primarily a result of the decline in average occupancy rates for certain joint ventures from 94.7% in
the three months ended March 31, 2002 to 90.4% in the three months ended March 31, 2003.



Gain/(loss) on disposition of land and depreciable assets decreased $60,611, or 6.5%, to $883,376 for the three months ended March 31, 2003 from $943,987 for the three months ended March 31, 2002. In
the first quarter of 2003, the majority of the gain was comprised of a gain related to the disposition of 6.7 acres of land. In the first quarter of 2002, the majority of the gain was comprised of a gain related to the disposition of 128,000 square
feet of office properties that did not meet certain conditions to be classified as discontinued operations as described in Note 6 of the Consolidated Financial Statements, offset by a loss related to the disposition of 50.8 acres of land.



In accordance with SFAS 144, we classified net
income of $2.6 million and $4.4 million as discontinued operations for the three months ended March 31, 2003 and 2002, respectively, which pertained to 1.9 million square feet of property sold in 2002 and 2.5 million square feet of property held for
sale at March 31, 2003. We also classified as discontinued operations for the three months ended March 31, 2003 a loss of $325,290 related to an impairment charge on two properties held for sale at March 31, 2003.



Known Trends Affecting Results of Operations



We expect our net income and funds from operations to be lower in 2003 than in 2002 due to the following factors:



| |  |  | lower occupancy;
| | - |  | ----------------



| |  |  | lower first year cash rents;
| | - |  | ----------------------------



| |  |  | additional asset sales;
| | - |  | -----------------------



| |  |  | the bankruptcy of two significant customers in 2002; and
| | - |  | --------------------------------------------------------



| |  |  | general economic conditions in each of our primary markets.
| | - |  | -----------------------------------------------------------



In 2003, we expect occupancy to be lower than in 2002 primarily due to the leases rejected by WorldCom and US Airways and the general
decline in employment rates in our markets. During the last nine months of 2003, the leases on approximately 4.4 million rentable square feet of space, or 14.2% of our portfolio, will expire. This square footage represented approximately 13.4% of
our annualized revenue in 2003. As of April 24,



28



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2003, approximately 31.8% of this space had been re-leased with existing customers or leased to new customers. Historically, we have renewed
approximately 60.0%-75.0% of expiring leases with existing customers. We expect this re-leasing percentage to be lower during the remainder of 2003. In addition, we expect the average rental rate for expiring leases that have been renewed or
released in the remainder of 2003 to be lower than in the previous twelve month period.



We do not anticipate that positive employment growth would lead to a corresponding increase in demand for office space in 2003. Improving employment in our markets will not necessarily result in
positive space absorption because of the significant amount of under-utilized space and space available for sublease in our markets. Customers have indicated that they are, for the most part, unwilling to commit to space expansion plans until they
have a better sense of the stability of the economic recovery in the U.S. and abroad.



In 2003, we expect to continue our capital recycling program of selectively disposing of non-core properties or other properties the sale of which can generate attractive returns. See Liquidity
and Capital Resources Capital Recycling Program. Although we intend to use the net proceeds from asset dispositions to repay debt, fund unitholder distributions and repurchase Common Units, any net decrease in our property portfolio
generally tends to result in lower net income.



On July 21, 2002, WorldCom filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. As of the bankruptcy filing date, we had 17 leases encompassing
986,522 square feet in fifteen locations with WorldCom and its affiliates. These leases represented $17.9 million of annualized revenue and approximately 3.8% of our total annualized revenue. As of December 31, 2002, WorldCom rejected two leases
encompassing 819,653 square feet with annualized revenue of approximately $14.9 million. In addition, effective May 1, 2003, WorldCom rejected an additional lease encompassing 21,806 square feet with annualized revenue of approximately $311,000.



We have filed a claim in connection with the
rejected leases in the amount of $20.8 million. An additional claim will be filed relating to the lease rejected May 1, 2003, once the damages have been determined. Actual amounts to be received in satisfaction of these claims will be subject to
WorldComs final plan of reorganization and the availability of funds to pay creditors.



In addition, there are 12 leases with WorldCom and its affiliates encompassing 38,624 square feet in our Miller Global (MG-HIW, LLC) joint venture. As of April 30, 2003, WorldCom rejected a
MG-HIW, LLC lease encompassing 233 square feet with annualized revenue of approximately $2,100. A claim will be filed relating to this lease once the damages have been determined.



On August 11, 2002, US Airways Group, Inc. filed a voluntary petition with the United States Bankruptcy Court
seeking relief under Chapter 11 of the United States Bankruptcy Code. As of the filing date, we had six leases with US Airways encompassing 414,059 square feet in Winston-Salem, North Carolina. These leases represented $6.9 million of annualized
revenue and approximately 1.47% of our total annualized revenue. We entered into an agreement with US Airways that was approved by the United States Bankruptcy Court on February 21, 2003, whereby they will continue to lease 293,007 square feet of
this space. Under this agreement, US Airways has rejected two leases encompassing 119,013 square feet with annualized revenue of approximately $3.1 million. One lease was rejected effective February 1, 2003 and the second was rejected effective
April 1, 2003. Additionally, we have agreed to a $600,000 reduction in annual rent on one lease, encompassing 81,220 square feet and expiring on December 31, 2007, for the remaining term of the lease.



On March 31, 2003, US Airways Group, Inc. announced that it
had satisfied the conditions needed to emerge from Chapter 11 bankruptcy protection. As a result of their emergence, the remaining 2,039 square foot retail lease was accepted.



We cannot provide any assurance that we will be able to re-lease rejected space quickly or on as favorable
terms.



29



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Liquidity and Capital Resources



Statement of Cash Flows.    The following table sets forth the changes in the Operating Partnerships cash flows from the first three months of 2003 as compared to the first three months of 2002 ($ in
thousands):



|                                                |  | Three Months Ended March 31, |        
|----------------------------------------------- |  | ---------------------------- | -------
|                                                |  | 2003                         |        
|Cash Provided By Operating Activities           |  | $                            | 38,795 
|Cash Provided By/(Used In) Investing Activities |  |                              | (20,358
|Cash Used in Financing Activities               |  |                              | (10,859
|                                                |  |                              |        
|Total Cash Flows                                |  | $                            | 7,578  
|                                                |  |                              |        



Cash
provided by operating activities was $38.8 million for the three months ended March 31, 2003 and $41.7 million for the three months ended March 31, 2002. The decrease of $2.9 million was primarily a result of a decrease in average occupancy rates
for our wholly-owned portfolio and a net decrease in our portfolio as a result of our capital recycling program. In addition, the level of net cash provided by operating activities is affected by the timing of receipt of revenue and payment of
expenses.



Cash used in investing activities was
$20.4 million for the three months ended March 31, 2003 and cash provided by investing activities was $8.5 million for the three months ended March 31, 2002. The decrease of $28.9 million was primarily a result of a decrease in proceeds from
dispositions of real estate assets of approximately $21.1 million for the three months ended March 31, 2003 and an increase in additions to real estate assets of approximately $13.3 million for the three months ended March 31, 2003, partly offset by
an increase in distributions and other investing activities of $5.9 million.



Cash used in financing activities was $10.9 million for the three months ended March 31, 2003 and $47.8 million for the three months ended March 31, 2002. The decrease was primarily a result of a
decrease of $33.8 million in net repayments on the unsecured revolving loan, mortgages and notes payable for the three months ended March 31, 2003.



Capitalization.    Our total indebtedness at March 31, 2003 was $1.5 billion and was comprised of $641.3
million of secured indebtedness with a weighted average interest rate of 7.5% and approximately $897.5 million of unsecured indebtedness with a weighted average interest rate of 6.9%. We do not intend to reserve funds to retire existing secured or
unsecured debt upon maturity. For a more complete discussion of our long-term liquidity needs, see Current and Future Cash Needs.



30



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The following
table sets forth the principal payments due on our mortgages and notes payable as of March 31, 2003 ($ in thousands):



|                            |  | Total |           | Within 1 Year |   | Within 2 Years |  | Within 3 Years |        | Within 4 Years |   | Within 5 Years |  | Thereafter
|--------------------------- |  | ----- | --------- | ------------- | - | -------------- |  | -------------- | ------ | -------------- | - | -------------- |  | ----------
|Fixed Rate Debt:            |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Unsecured:                  |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Put Option Notes (1)        |  | $     | 100,000   |               | $ |               |  | $              |       |                | $ |               |  | $         
|Notes                       |  |       | 706,500   |               |   | 246,500        |  |                |       |                |   |               |  |           
|Secured:                    |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Mortgages and loans payable |  |       | 637,095   |               |   | 12,163         |  |                | 54,142 |                |   | 40,300         |  |           
|                            |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Total Fixed RateDebt        |  |       | 1,443,595 |               |   | 258,663        |  |                | 54,142 |                |   | 40,300         |  |           
|                            |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Variable Rate Debt:         |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Unsecured:                  |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Term Loan                   |  |       | 20,000    |               |   |               |  |                |       |                |   | 20,000         |  |           
|Revolving Loan              |  |       | 71,000    |               |   | 71,000         |  |                |       |                |   |               |  |           
|Secured:                    |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Mortgage loan payable       |  |       | 4,240     |               |   | 244            |  |                | 269    |                |   | 281            |  |           
|                            |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Total Variable Rate Debt    |  |       | 95,240    |               |   | 71,244         |  |                | 269    |                |   | 20,281         |  |           
|                            |  |       |           |               |   |                |  |                |        |                |   |                |  |           
|Total Long Term Debt        |  | $     | 1,538,835 |               | $ | 329,907        |  | $              | 54,411 |                | $ | 60,581         |  | $         
|                            |  |       |           |               |   |                |  |                |        |                |   |                |  |           

---

|(1) |  | On June 24, 1997, a trust formed by the Operating Partnership sold $100.0 million of Exercisable Put Option Securities due June 15, 2004 (X-POS), which
represent fractional undivided beneficial interest in the trust. The assets of the trust consist of, among other things, $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the Put Option Notes), issued by the Operating
Partnership. The Put Option Notes bear an interest rate of 7.19% from the date of issuance through June 15, 2004. After June 15, 2004, the interest rate to maturity on such Put Option Notes will be 6.39% plus the applicable spread determined as of
June 15, 2004. In connection with the initial issuance of the Put Option Notes, a counter party was granted an option to purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount. If the counter party elects not
to exercise this option, the Operating Partnership would be required to repurchase the Put Option Notes from the Trust on June 15, 2004 at 100.0% of the principal amount plus accrued and unpaid interest.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Secured Indebtedness



The mortgage and loans payable and the secured revolving loan
were secured by real estate assets with an aggregate carrying value of approximately $1.1 billion at March 31, 2003.



On February 2, 1998, the Operating Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities (MOPPRS) due
February 1, 2013. The MOPPRS bore an interest rate of 6.835% from the date of issuance through January 31, 2003. On January 31, 2003, the interest rate was changed to 8.975% pursuant to the interest rate reset provisions of the MOPPRS. On February
3, 2003, the Operating Partnership repurchased 100.0% of the principal amount of the MOPPRS from the sole holder thereof in exchange for a secured note in the principal amount of $142.8 million. The secured note bears interest at a fixed rate of
6.03% and has a maturity date of February 28, 2013.



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Unsecured Indebtedness



The Operating Partnerships unsecured
notes of $806.5 million bear fixed interest rates ranging from 6.75% to 8.125%, with interest payable semi-annually in arrears. Any premium and discount related to the issuance of the unsecured notes is being amortized over the life of the
respective notes as an adjustment to interest expense. All of the unsecured notes, except for the Put Option Notes, are redeemable at any time prior to maturity at our option, subject to certain conditions including the payment of make-whole
amounts.



We currently have a $300.0 million
unsecured revolving loan (with $71.0 million outstanding for the Operating Partnership and an additional $22.5 million outstanding for the Company at March 31, 2003) that matures in December 2003. Our unsecured revolving loan also includes a $150.0
million competitive sub-facility. Depending upon the corporate credit ratings assigned to us from time to time by the various rating agencies, our unsecured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.70% to
1.55%. We currently have a credit rating of BBB- assigned by Standard & Poors, a credit rating of BBB- assigned by Fitch Inc. and a credit rating of Baa3 assigned by Moodys Investor Service. As a result, interest currently accrues on
borrowings under our unsecured revolving loan at an average rate of LIBOR plus 95 basis points. We cannot provide any assurances that these rating agencies will not change our credit ratings. If any of our credit ratings are lowered, the interest
rate on borrowings under our revolving loan would be automatically increased. In addition, we are currently required to pay an annual facility fee equal to 0.20% of the total commitment under the unsecured revolving loan.



The terms of the revolving loan and the indenture that governs
our outstanding notes require us to comply with certain operating and financial covenants and performance ratios. We are currently in compliance with all such requirements. Although we expect to remain in compliance with the covenants and ratios
under our revolving loans for at least the next several quarters, depending upon our future operating performance, we cannot assure you that we will continue to be in compliance. We are currently negotiating with our lenders a replacement of our
current unsecured revolving loan, which expires in December 2003, with a new unsecured revolving loan that would contain less-restrictive covenants. However, we cannot assure you that we will be able to obtain such new financing on acceptable terms,
if at all.



The following table sets forth more
detailed information about the Companys ratio and covenant compliance under the Companys unsecured revolving loan as of March 31, 2003. Certain of these definitions may differ from similar terms used in the consolidated financial
statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our revolving loan, including definitions of certain relevant terms, see the credit
agreement governing our revolving loan which is incorporated by reference in our 2002 Annual Report as Exhibit 10.13, and the various amendments to the credit agreement included in this Quarterly Report.



|                                                                                               |  | March 31, 2003 |  
|---------------------------------------------------------------------------------------------- |  | -------------- | -
|Total Liabilities Less Than or Equal to 55% of Total Assets                                    |  | 52.2           | %
|Unencumbered Assets Greater Than or Equal to 2 times Unsecured Debt                            |  | 2.28           |  
|Secured Debt Less Than or Equal to 30% of Total Assets                                         |  | 23.5           | %
|Adjusted EBDITA Greater Than 2.25 times Interest Expense                                       |  | 2.40           |  
|Adjusted EBDITA Greater Than 1.60 times Fixed Charges                                          |  | 1.79           |  
|Adjusted NOI Unencumbered assets Greater Than 2.25 times Interest on Unsecured
Debt            |  | 2.77           |  
|Tangible Net Worth Greater Than $1.625 Billion                                                 |  | $1.7 billion   |  
|Restricted payments, including distributions to shareholders, Less Than or Equal to 95%
of CAD |  | 51.2           | %



The
following table sets forth more detailed information about the Operating Partnerships ratio and covenant compliance under the Operating Partnerships indenture as of March 31, 2003. Certain of these definitions may differ from similar
terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the



32



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covenants in our indenture, including definitions of certain relevant terms, see the indenture governing our unsecured notes which is
incorporated by reference in our Annual Report as Exhibit 4.2.



|                                                                                |  | March 31, 2003 |  
|------------------------------------------------------------------------------- |  | -------------- | -
|Overall Debt Less Than or Equal to 60% of Adjusted Total Assets                 |  | 40.2           | %
|Secured Debt Less Than or Equal to 40% of Adjusted Total Assets                 |  | 16.8           | %
|Income Available for debt service Greater Than 1.50 times Annual Service
Charge |  | 3.0            |  
|Total Unencumbered Assets Greater Than 200% of Unsecured Debt                   |  | 307.0          | %



Current and Future Cash Needs.    Historically, rental revenue has been the principal source of funds to meet our short-term liquidity requirements, which primarily consist of operating expenses, debt
service, unitholder distributions, any guarantee obligations and ordinary course capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for
major capital improvements to the existing properties except for the $14 million renovation of Tampa Bay Park and the $9.1 million general and non-recurring renovations at Country Club Plaza. In addition, we could incur tenant improvements and lease
commissions related to any releasing of space previously leased by WorldCom and US Airways and the redevelopment of the EPA site in Research Commons.



In addition to the requirements discussed above, our short-term (within the next 12 months) liquidity requirements also include the
funding of our existing development activity and first generation tenant improvements and lease commissions on properties placed in-service that are not fully leased. We expect to fund our short-term liquidity requirements through a combination of
working capital, cash flows from operations and the following:



| |  |  | borrowings under our unsecured revolving loan (up to $204.9 million of availability as of April 14, 2003);
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the selective disposition of non-core assets or other assets the sale of which can generate attractive returns;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the sale or contribution of some of our wholly-owned properties, development projects and development land to strategic joint ventures to be formed with unrelated
investors, which will have the net effect of generating additional capital through such sale or contributions; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the issuance of secured debt (at March 31, 2003, we had $2.5 billion of unencumbered real estate assets at cost).
| | - |  | -----------------------------------------------------------------------------------------------------------------



Our long-term liquidity needs generally include the funding of
existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the two revolving loans and long-term unsecured debt. We remain committed to maintaining a flexible capital
structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company
and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings
under the unsecured revolving loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or
debt securities.



We anticipate that our
available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources
of funds are insufficient or unavailable, the Operating Partnerships ability to make distributions to unitholders and satisfy other cash payments may be adversely affected.



Commitments and Contingencies.    In connection with several of our joint venture
partners with unaffiliated parties, we have agreed to guarantee rent shortfalls and re-tenanting costs for certain properties



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contributed or sold to the joint ventures during 1999, 2000 and 2002. As of March 31, 2003, we have $17.9 million accrued for obligations
related to these agreements. We believe that our estimates related to these agreements are adequate. However, if our assumptions and estimates are incorrect future losses may occur.



In addition, we guaranteed our 80.0% partner in MG-HIW, LLC joint venture, Miller Global, a minimum internal
rate of return on $50.0 million of their equity investment in the joint ventures Orlando assets. If the minimum internal rate of return is not achieved upon the sale of these assets or winding up of the joint venture, Miller Global would
receive a disproportionate share of the cash proceeds related to the Orlando assets. Based upon the current and forecasted operating performance of these assets and our estimate of their residual value, the estimated internal rate of return for
Miller Global with respect to their Orlando equity is not less than the minimum required return. As a result, we do not currently expect that our interest in the joint venture will be adjusted upon the sale of the subject assets or the winding up of
the joint venture as a result of the internal rate of return guarantee. However, if the operating performance of the assets and/or the residual value were to be lower than our estimates, Miller Global could receive a disproportionately greater share
of the cash proceeds from any such sale of winding up and our share would be correspondingly lower.



Certain properties owned in joint ventures with unaffiliated parties have buy/sell options that may be exercised to acquire the other
partners interest by either the Operating Partnership or our joint venture partner if certain conditions are met as set forth in the respective joint venture agreement. Our partner in SF-HIW Harborview, LP has the right to put its 80.0% equity
interest in the partnership to us in cash at anytime during the one-year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of SF-HIW Harborview, LP assets and
liabilities.



In connection with the November 26,
2002 disposition of 225,000 square feet of property, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., we agreed to guarantee any rent shortfalls and re-tenanting cost for a five-year period of time
from date of sale. Our contingent liability as of March 31, 2003 is $19.5 million. Given this guarantee, we deferred the gain of approximately $6.9 million, which will be recognized when the contingency period is concluded.



Joint Ventures.    During the past
several years, in order to generate additional capital, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by GAAP, we have
accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet and the results of
operations of the ventures are not included on our income statement, other than as equity in earnings of unconsolidated affiliates.



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The following
tables set forth information regarding our joint venture activity as recorded on the respective joint ventures books at March 31, 2003 and December 31, 2002 ($ in thousands):



|                                                                            |  |               |   |  | March 31, 2003 |         | December 31, 2002
|--------------------------------------------------------------------------- |  | ------------- | - |  | -------------- | ------- | -----------------
|                                                                            |  | Percent Owned |   |  | Total Assets   |         | Debt             
|Balance Sheet Data:                                                         |  |               |   |  |                |         |                  
|Board of Trade Investment Company                                           |  | 49.00         | % |  | $              | 7,874   |                  
|Dallas County Partners                                                      |  | 50.00         | % |  |                | 41,821  |                  
|Dallas County Partners II                                                   |  | 50.00         | % |  |                | 18,469  |                  
|Fountain Three                                                              |  | 50.00         | % |  |                | 34,490  |                  
|RRHWoods, LLC                                                               |  | 50.00         | % |  |                | 80,939  |                  
|Schweiz-Deutschland-USA DreilanderBeteiligungObjekt DLF
98/29-WalkerFink-KG |  | 22.81         | % |  |                | 140,189 |                  
|Dreilander-Fonds 97/26 and 99/32                                            |  | 42.93         | % |  |                | 118,313 |                  
|Highwoods-Markel Associates, LLC                                            |  | 50.00         | % |  |                | 15,464  |                  
|MG-HIW, LLC                                                                 |  | 20.00         | % |  |                | 353,367 |                  
|MG-HIW Peachtree Corners III, LLC                                           |  | 50.00         | % |  |                | 5,041   |                  
|MG-HIW Rocky Point,LLC                                                      |  | 50.00         | % |  |                |        |                  
|MG-HIW Metrowest I,LLC                                                      |  | 50.00         | % |  |                | 1,601   |                  
|MG-HIW Metrowest II,LLC                                                     |  | 50.00         | % |  |                | 9,671   |                  
|Concourse Center Associates, LLC                                            |  | 50.00         | % |  |                | 14,623  |                  
|Plaza Colonnade, LLC                                                        |  | 50.00         | % |  |                | 6,309   |                  
|SF-HIW Harborview, LP                                                       |  | 20.00         | % |  |                | 40,609  |                  
|                                                                            |  |               |   |  |                |         |                  
|Total                                                                       |  |               |   |  | $              | 888,780 |                  
|                                                                            |  |               |   |  |                |         |                  

---

|(1) |  | Amount represents total draws at March 31, 2003 on a construction loan made to this joint venture by an affiliate of the Company with an interest rate of LIBOR plus
200 basis points due July 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In January of 2002, Metrowest II, LLC signed a $7.4 million construction loan to fund the development of this property of which $5.5 million is outstanding at March
31, 2003. The Operating Partnership has guaranteed 50.0% of this loan subject to a prorata indemnity from the Operating Partnerships joint venture partner.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On February 12, 2003, Plaza Colonnade, LLC signed a $61.4 million construction loan to fund the development of this property. The loan requires that the joint
venture invest $8.4 million, $4.2 million of which will be the Operating Partnerships share. The Operating Partnership and its partners in this joint venture have guaranteed 50.0% of the loan (see note 7).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following
table sets forth information regarding our joint venture activity as recorded on the respective joint ventures books during the three months ended March 31, 2003 and 2002 ($ in thousands):





|                                                                              |  |               |   |  | March 31, 2003 |        |                    | March 31, 2002 |         
|----------------------------------------------------------------------------- |  | ------------- | - |  | -------------- | ------ | ------------------ | -------------- | --------
|                                                                              |  | Percent Owned |   |  | Revenue        |        | Operating Expenses |                | Interest
|Income Statement Data:                                                        |  |               |   |  |                |        |                    |                |         
|Board of Trade Investment Company                                             |  | 49.00         | % |  | $              | 608    |                    | $              | 395     
|Dallas County Partners                                                        |  | 50.00         | % |  |                | 2,411  |                    |                | 1,410   
|Dallas County Partners II                                                     |  | 50.00         | % |  |                | 1,566  |                    |                | 689     
|Fountain Three                                                                |  | 50.00         | % |  |                | 1,763  |                    |                | 760     
|RRHWoods, LLC                                                                 |  | 50.00         | % |  |                | 3,507  |                    |                | 1,791   
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker
Fink-KG |  | 22.81         | % |  |                | 4,643  |                    |                | 1,348   
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93         | % |  |                | 4,182  |                    |                | 1,123   
|Highwoods-Markel Associates, LLC                                              |  | 50.00         | % |  |                | 812    |                    |                | 438     
|MG-HIW, LLC                                                                   |  | 20.00         | % |  |                | 12,292 |                    |                | 4,386   
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00         | % |  |                | 34     |                    |                | 25      
|MG-HIW Rocky Point, LLC                                                       |  | 50.00         | % |  |                |       |                    |                |        
|MG-HIW Metrowest I, LLC                                                       |  | 50.00         | % |  |                |       |                    |                | 8       
|MG-HIW Metrowest II, LLC                                                      |  | 50.00         | % |  |                | 123    |                    |                | 109     
|Concourse Center Associates, LLC                                              |  | 50.00         | % |  |                | 526    |                    |                | 138     
|Plaza Colonnade, LLC                                                          |  | 50.00         | % |  |                | 4      |                    |                |        
|SF-HIW Harborview, LLC                                                        |  | 20.00         | % |  |                | 1,419  |                    |                | 408     
|                                                                              |  |               |   |  |                |        |                    |                |         
|Total                                                                         |  |               |   |  | $              | 33,890 |                    | $              | 13,028  
|                                                                              |  |               |   |  |                |        |                    |                |         



As of
March 31, 2003, our joint ventures had approximately $584.5 million of outstanding debt. The following table sets forth the principal payments due on that outstanding long-term debt as recorded on the respective joint ventures books at March
31, 2003 ($ in thousands):



|                                                                              |  | Percent Owned |   |  | Total |         |     | Within 1 Year |   | Within 2 Years |  | Within 3 Years |        | Within 4 Years |   | Within 5 Years |  | Thereafter
|----------------------------------------------------------------------------- |  | ------------- | - |  | ----- | ------- | --- | ------------- | - | -------------- |  | -------------- | ------ | -------------- | - | -------------- |  | ----------
|Board of Trade Investment Company                                             |  | 49.00         | % |  | $     | 877     |     |               | $ | 129            |  | $              | 184    |                | $ | 198            |  | $         
|Dallas County Partners                                                        |  | 50.00         | % |  |       | 38,685  |     |               |   | 931            |  |                | 1,001  |                |   | 1,535          |  |           
|Dallas County Partners II                                                     |  | 50.00         | % |  |       | 23,317  |     |               |   | 1,151          |  |                | 1,274  |                |   | 1,410          |  |           
|Fountain Three                                                                |  | 50.00         | % |  |       | 30,706  |     |               |   | 1,052          |  |                | 1,129  |                |   | 1,213          |  |           
|RRHWoods, LLC                                                                 |  | 50.00         | % |  |       | 66,668  |     |               |   | 387            |  |                | 413    |                |   | 442            |  |           
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker
Fink-KG |  | 22.81         | % |  |       | 67,973  |     |               |   | 732            |  |                | 1,035  |                |   | 1,107          |  |           
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93         | % |  |       | 59,527  |     |               |   | 500            |  |                | 714    |                |   | 770            |  |           
|Highwoods-Markel Associates, LLC                                              |  | 50.00         | % |  |       | 11,625  |     |               |   | 62             |  |                | 100    |                |   | 111            |  |           
|MG-HIW, LLC                                                                   |  | 20.00         | % |  |       | 242,240 |     |               |   |               |  |                |       |                |   | 242,240        |  |           
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00         | % |  |       | 4,158   | (1) |               |   | 4,158          |  |                |       |                |   |               |  |           
|MG-HIW Metrowest I, LLC                                                       |  | 50.00         | % |  |       |        |     |               |   |               |  |                |       |                |   |               |  |           
|MG-HIW Metrowest II, LLC                                                      |  | 50.00         | % |  |       | 5,471   | (2) |               |   |               |  |                | 5,471  |                |   |               |  |           
|Concourse Center Associates, LLC                                              |  | 50.00         | % |  |       | 9,819   |     |               |   | 124            |  |                | 176    |                |   | 189            |  |           
|Plaza Colonnade, LLC                                                          |  | 50.00         | % |  |       | 626     | (3) |               |   |               |  |                |       |                |   |               |  |           
|SF-HIW Harborview, LP                                                         |  | 20.00         | % |  |       | 22,800  |     |               |   |               |  |                |       |                |   |               |  |           
|                                                                              |  |               |   |  |       |         |     |               |   |                |  |                |        |                |   |                |  |           
|Total                                                                         |  |               |   |  | $     | 584,492 | (4) |               | $ | 9,226          |  | $              | 11,497 |                | $ | 249,215        |  | $         
|                                                                              |  |               |   |  |       |         |     |               |   |                |  |                |        |                |   |                |  |           

---

|(1) |  | Amount represents total draws at March 31, 2003 on a construction loan made to this joint venture by an affiliate of the Operating Partnership with an interest rate
of LIBOR plus 200 basis points due July 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In January of 2002, Metrowest II, LLC signed a $7.4 million construction loan to fund the development of this property of which $5.5 million is outstanding at March
31, 2003. The Operating Partnership has guaranteed 50.0% of this loan subject to a prorata indemnity from the Operating Partnerships joint venture partner.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) |  | On February 12, 2003, Plaza Colonnade, LLC signed a $61.4 million construction loan to fund the development of a property. The loan requires that the joint venture
invest $8.4 million, $4.2 million of which will be the Operating Partnerships share. The Operating Partnership and its partners in this joint venture have each guaranteed 50.0% of the loan. As of March 31, 2003, Plaza Colonnade, LLC has
borrowed $625,682 under this loan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | All of this joint venture debt is non-recourse to us except in the case of customary exceptions pertaining to such matters as misuse of funds, environmental
conditions and material misrepresentations and those guarantees and loans described in the footnotes above.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest Rate Hedging Activities.    To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under our two revolving loans bear interest at variable rates. Our long-term debt, which consists of long-term financings and the unsecured issuance of debt securities, typically bears interest at
fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower
our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various
debt instruments.



The interest rate on all of
our variable rate debt is adjusted at one- to three- month intervals, subject to settlements under these contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with
respect to future debt offerings. No payments were received or made to counterparties under interest rate hedge contracts during the three months ended March 31, 2003.



Common Unit Repurchase Program.    As of April 25, 2003, we repurchased a total of
167,644 Common Units at a weighted average price of $21.57 per unit. Since commencement of our initial share repurchase program in December 1999, we have repurchased 11.6 million shares of common stock and common units at a weighted average price of
$24.18 per share/unit for a total purchase price of $281.6 million. On April 25, 2001, we announced that the Companys Board of Directors authorized the repurchase of up to an additional 5.0 million shares of Common Stock and Common Units. On
April 24, 2003, we announced that the Companys Board of Directors authorized the repurchase of up to an additional 2.5 million shares of Common Stock and Common Units. As a result, we have 5.9 million shares/units remaining under our
authorized share/unit repurchase program.



Capital Recycling Program.    In 2003, we expect to continue our capital recycling program of selectively disposing of non-core properties or other properties the sale of which can generate attractive
returns. At March 31, 2003, we had 2.5 million square feet of office properties and 187.6 acres of land under letter of intent or contract for sale in various transactions with a carrying value of $116.8 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and are expected to close during 2003. However, we can provide no assurance that all or parts of these transactions will be consummated.



We expect to use substantially all of the net proceeds from
our disposition activity for one or all of the following purposes:



| |  |  | reduce our outstanding debt;
| | - |  | ----------------------------



| |  |  | pay unitholder distributions; or
| | - |  | --------------------------------



| |  |  | repurchase Common Units subject to the factors discussed above under Common Unit Repurchase Program.
| | - |  | -------------------------------------------------------------------------------------------------------



37



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Impact of Recently Issued Accounting Standards



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which
changes the accounting for, and disclosure of, certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability
was recorded only when a loss was probable and reasonably estimable. In general, the change applies to contracts or indemnification agreements that contingently require us to make payments to a guaranteed third-party based on changes in underlying
asset, liability, or an equity security of guaranteed party.



In accordance with FIN 45, the Company has included $1.7 million in other liabilities and adjusted the investment in unconsolidated affiliates by $1.7 million on its consolidated balance sheet at March 31, 2003 related to two
separate guarantees of a construction loan agreement and a construction completion agreement entered into by the Plaza Colonnade LLC. joint venture, in which the Company is a 50.0% owner. The term of the construction loan agreement is February 2003
through February 14, 2006, with two one year options to extend the maturity date that are conditional on completion and lease-up of the project. The term of the construction completion agreement requires the core and shell of the building to be
complete by December 15, 2005. Both guarantees arose from the formation of the joint venture to construct an office building. If the joint venture was unable to repay the outstanding balance under the construction loan agreement or complete the
construction of the office building, the Company would be required, under the terms of the agreements, to repay the outstanding balance under the construction loan and complete the construction of the office building. The maximum potential amount of
future payments by the Company under these agreements is $33.4 million.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amends FASB No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements issued for
fiscal years beginning after December 15, 2002. On January 1, 2003, we adopted the fair value recognition provision prospectively for all awards granted after January 1, 2003. Under this provision, total compensation expense related to stock options
is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option vesting period. Prior to 2003, we accounted for stock options under this plan under the recognition and
measurement of provision of APB Option 25 Accounting for Stock Issued to Employees and Related Interpretations.



In accordance with SFAS 148, we have included in general and administrative expenses in our consolidated statement of income for the three
months ended March 31, 2003 $6,437 of amortization related to the vesting of stock options granted during the three months ended March 31, 2003. In addition, we have included in partners capital in our consolidated balance sheet at March 31,
2003 the total grant value of $308,985 as deferred compensation. See note 7 to our consolidated financial statements for further discussion on the accounting for our stock-based compensation costs.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights, and to determine
when and which business enterprise should consolidate the variable interest entities (the primary beneficiary). This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entitys activities without additional financial support. In addition, FIN 46 requires additional disclosures. We are assessing the impact of this interpretation on our accounting for
investments in unconsolidated joint ventures.



38



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Funds From Operations and Cash Available for Distributions



We consider funds from operations (FFO) and cash available for distributions (CAD) to be a useful financial performance measure of the operating performance of an equity REIT
because, together they provide investors with an additional basis to evaluate the ability of a REIT to incur and service debt, fund acquisitions and other capital expenditures and pay unitholder distributions. FFO and CAD do not represent net income
or cash flows from operating, investing or financing activities as defined by GAAP. They should not be considered as alternatives to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO and CAD do
not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to unitholders.



Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below.



Our calculation of FFO, as defined by the National Association
of Real Estate Investment Trusts (NAREIT), is as follows:



| |  |  | Net income (loss)computed in accordance with GAAP;
| | - |  | ---------------------------------------------------



| |  |  | Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plus depreciation and amortization of assets uniquely significant to the real estate industry; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



In addition, our calculation of FFO includes the add back of
the amortization of net intangible leases related to SFAS 141, as this amount does not impact the comparative measurement of our operating performance.



CAD is defined as funds from operations reduced by non-revenue enhancing capital expenditures for building improvements and tenant
improvements and lease commissions related to second generation space. In addition, CAD includes both recurring and nonrecurring operating results. As a result, nonrecurring items that are not defined as extraordinary under GAAP are
reflected in the calculation of CAD.



39



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##### Table of Contents



FFO and CAD
for the three months ended March 31, 2003 and 2002 are summarized in the following table ($ in thousands):



|                                                                                                        |  | Three Months Ended March 31, |        
|------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                                        |  | 2003                         |        
|Funds from Operations:                                                                                  |  |                              |        
|Income before gain/(loss) on disposition of land and depreciable assets and discontinued
operations (1) |  | $                            | 9,852  
|Add/(Deduct):                                                                                           |  |                              |        
|Distributions to preferred unitholders                                                                  |  |                              | (7,713 
|Gain/(loss) on disposition of land                                                                      |  |                              | 863    
|Depreciation and amortization                                                                           |  |                              | 33,286 
|Amortization of net intangible leases                                                                   |  |                              | 43     
|Unconsolidated affiliates:                                                                              |  |                              |        
|Depreciation                                                                                            |  |                              | 2,280  
|Discontinued operations (2):                                                                            |  |                              |        
|Depreciation and amortization                                                                           |  |                              |       
|Income                                                                                                  |  |                              | 2,323  
|                                                                                                        |  |                              |        
|Funds from operations                                                                                   |  | $                            | 40,934 
|Cash Available for Distribution:                                                                        |  |                              |        
|Add/(Deduct):                                                                                           |  |                              |        
|Rental income from straight-line rents                                                                  |  | $                            | (1,685 
|Nonrecurring compensation expense                                                                       |  |                              |       
|Amortization of deferred financing costs                                                                |  |                              | 626    
|Non-incremental revenue generating capital expenditures:                                                |  |                              |        
|Building improvements paid                                                                              |  |                              | (2,791 
|Second generation tenant improvements paid                                                              |  |                              | (4,488 
|Second generation lease commissions paid                                                                |  |                              | (3,368 
|                                                                                                        |  |                              |        
|                                                                                                        |  |                              | (10,647
|                                                                                                        |  |                              |        
|Cash available for distribution                                                                         |  | $                            | 29,228 
|                                                                                                        |  |                              |        
|Per common unit-diluted:                                                                                |  |                              |        
|Funds from operations                                                                                   |  | $                            | 0.68   
|                                                                                                        |  |                              |        
|Distributions paid                                                                                      |  | $                            | 0.585  
|                                                                                                        |  |                              |        
|Distributions payout ratios:                                                                            |  |                              |        
|Funds from operations                                                                                   |  |                              | 86.0   
|                                                                                                        |  |                              |        
|Cash available for distribution                                                                         |  |                              | 119.9  
|                                                                                                        |  |                              |        
|Weighted average common units outstandingbasic                                                         |  |                              | 59,904 
|                                                                                                        |  |                              |        
|Weighted average common units outstandingdiluted                                                       |  |                              | 59,952 
|                                                                                                        |  |                              |        

---

|(1) |  | Reconciliation of Net Income to Income before gain/(loss) on disposition of land and depreciable assets and discontinued operations:
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



|Net Income                                                                                          |  | $ | 13,058 |   |  | $ | 31,027 |  
|--------------------------------------------------------------------------------------------------- |  | - | ------ | - |  | - | ------ | -
|Add/Deduct (gain)/loss on disposition of land                                                       |  |   | (863   | ) |  |   | 232    |  
|Deduct gain on disposition of depreciable assets                                                    |  |   | (20    | ) |  |   | (1,176 | )
|Add back loss on sale of discontinued ops                                                           |  |   | 325    |   |  |   |       |  
|Deduct income from discontinued ops                                                                 |  |   | (2,648 | ) |  |   | (4,434 | )
|                                                                                                    |  |   |        |   |  |   |        |  
|Income before gain/(loss) on disposition of land and depreciable assets and discontinued
operations |  | $ | 9,852  |   |  | $ | 25,649 |  
|                                                                                                    |  |   |        |   |  |   |        |  



|(2) |  | For further discussion related to discontinued operations, see Note 6 of the Consolidated Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------



40



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Property Information



The following table sets forth certain information with respect to our wholly owned in-service and development properties (excluding apartment units) as of March 31, 2003 and 2002:



|                                     |  | March 31, 2003       |  |                            | March 31, 2002 | 
|------------------------------------ |  | -------------------- |  | -------------------------- | -------------- | 
|                                     |  | Rentable Square Feet |  | Percent Leased/ Pre-Leased |                | 
|In-Service                           |  |                      |  |                            |                | 
|Office                               |  | 25,387,000           |  | 80.9                       | %              | 
|Industrial                           |  | 10,243,000           |  | 86.8                       |                | 
|Retail (1)                           |  | 1,527,000            |  | 96.5                       |                | 
|                                     |  |                      |  |                            |                | 
|Total                                |  | 37,157,000           |  | 83.2                       | %              | 
|                                     |  |                      |  |                            |                | 
|Development CompletedNot Stabilized |  |                      |  |                            |                | 
|Office                               |  | 100,000              |  | 42.0                       | %              | 
|Industrial                           |  | 60,000               |  | 50.0                       |                | 
|Retail                               |  |                     |  |                           | %              | 
|                                     |  |                      |  |                            |                | 
|Total                                |  | 160,000              |  | 45.0                       | %              | 
|                                     |  |                      |  |                            |                | 
|In-Process                           |  |                      |  |                            |                | 
|Office                               |  | 40,000               |  | 0.0                        | %              | 
|                                     |  |                      |  |                            |                | 
|Total                                |  |                      |  |                            |                | 
|Office                               |  | 25,527,000           |  |                            |                | 
|Industrial                           |  | 10,303,000           |  |                            |                | 
|Retail                               |  | 1,527,000            |  |                            |                | 
|                                     |  |                      |  |                            |                | 
|Total                                |  | 37,357,000           |  |                            |                | 
|                                     |  |                      |  |                            |                | 

---

|(1) |  | Excludes basement space in the Country Club Plaza property of 527,000 square feet.
|--- |  | ----------------------------------------------------------------------------------



41



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The following
table sets forth information concerning the 20 largest customers of our wholly-owned properties as of March 31, 2003 ($ in thousands):



|Customers                |  | Number of Leases |  | Rentable Square Feet |  | Annualized Rental Revenue (1) |        | Percent of Annualized Rental Revenue (1) |       |   | Average Remaining Lease Term in Years
|------------------------ |  | ---------------- |  | -------------------- |  | ----------------------------- | ------ | ---------------------------------------- | ----- | - | -------------------------------------
|                         |  |                  |  |                      |  | ($ in thousands)              |        |                                          |       |   |                                      
|Federal Government       |  | 62               |  | 621,613              |  | $                             | 12,678 |                                          | 2.91  | % |                                      
|AT&T                     |  | 8                |  | 617,477              |  |                               | 11,536 |                                          | 2.65  |   |                                      
|Price Waterhouse Coopers |  | 6                |  | 297,795              |  |                               | 6,879  |                                          | 1.58  |   |                                      
|State of Georgia         |  | 10               |  | 356,993              |  |                               | 6,783  |                                          | 1.56  |   |                                      
|Capital One Services     |  | 6                |  | 361,968              |  |                               | 6,344  |                                          | 1.46  |   |                                      
|Sara Lee                 |  | 10               |  | 1,230,534            |  |                               | 4,605  |                                          | 1.06  |   |                                      
|IBM                      |  | 7                |  | 215,737              |  |                               | 4,574  |                                          | 1.05  |   |                                      
|Bell South               |  | 10               |  | 188,202              |  |                               | 3,939  |                                          | 0.90  |   |                                      
|Northern Telecom         |  | 1                |  | 246,000              |  |                               | 3,651  |                                          | 0.84  |   |                                      
|WorldCom and Affiliates  |  | 15               |  | 166,869              |  |                               | 3,257  |                                          | 0.75  |   |                                      
|US Airways               |  | 6                |  | 328,046              |  |                               | 3,215  |                                          | 0.74  |   |                                      
|Volvo                    |  | 6                |  | 252,717              |  |                               | 3,169  |                                          | 0.73  |   |                                      
|Lockton Companies        |  | 1                |  | 127,485              |  |                               | 3,159  |                                          | 0.73  |   |                                      
|Hartford Insurance       |  | 6                |  | 134,021              |  |                               | 2,904  |                                          | 0.67  |   |                                      
|Bank of America          |  | 22               |  | 145,668              |  |                               | 2,863  |                                          | 0.66  |   |                                      
|Business Telecom         |  | 4                |  | 147,379              |  |                               | 2,848  |                                          | 0.65  |   |                                      
|T-Mobile USA             |  | 3                |  | 120,561              |  |                               | 2,791  |                                          | 0.64  |   |                                      
|BB&T                     |  | 7                |  | 172,662              |  |                               | 2,484  |                                          | 0.57  |   |                                      
|Carlton Fields           |  | 2                |  | 95,771               |  |                               | 2,429  |                                          | 0.56  |   |                                      
|Ikon                     |  | 7                |  | 181,361              |  |                               | 2,409  |                                          | 0.55  |   |                                      
|                         |  |                  |  |                      |  |                               |        |                                          |       |   |                                      
|Total                    |  | 199              |  | 6,008,859            |  | $                             | 92,517 |                                          | 21.26 | % |                                      
|                         |  |                  |  |                      |  |                               |        |                                          |       |   |                                      

---

|(1) |  | Annualized Rental Revenue is March 2003 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



As of March 31, 2003, we were developing two suburban office
properties and one industrial property totaling 200,000 rentable square feet. The following table summarizes these development projects. In addition to the properties described in this table, we are developing with a joint venture partner one
additional property totaling 285,000 rentable square feet. At March 31, 2003, this one development project had an aggregate anticipated total investment of $69.7 million and was 59.0% pre-leased.



In-Process



|Name                             |  | Market            |  | Building Type (1) |  | Rentable Square Feet |  | Anticipated Total Investment |        | Investment at 3/31/03 |   | Pre-Leasing Percentage |  |    | Estimated Completion Date |  | Estimated Stabilization Date
|-------------------------------- |  | ----------------- |  | ----------------- |  | -------------------- |  | ---------------------------- | ------ | --------------------- | - | ---------------------- |  | -- | ------------------------- |  | ----------------------------
|                                 |  | ($ in thousands) 
|Office:                          |  |                   |  |                   |  |                      |  |                              |        |                       |   |                        |  |    |                           |  |                             
|Catawba (2)                      |  | Research Triangle |  | O                 |  | 40,000               |  | $                            | 4,030  |                       | $ | 3,322                  |  | 0  | %                         |  | 2Q03                        
|801 Raleigh Corporate Center (3) |  | Research Triangle |  | O                 |  | 100,000              |  |                              | 12,016 |                       |   | 10,180                 |  | 42 | %                         |  | 4Q02                        
|Tradeport V (3)                  |  | Atlanta           |  | I                 |  | 60,000               |  |                              | 2,913  |                       |   | 2,670                  |  | 50 | %                         |  | 4Q02                        
|                                 |  |                   |  |                   |  |                      |  |                              |        |                       |   |                        |  |    |                           |  |                             
|Total or Weighted Average        |  |                   |  |                   |  | 200,000              |  | $                            | 18,959 |                       | $ | 16,172                 |  | 36 | %                         |  |                             
|                                 |  |                   |  |                   |  |                      |  |                              |        |                       |   |                        |  |    |                           |  |                             

---

|(1) |  | O = Office
|--- |  | ----------

I = Industrial

|(2) |  | Redevelopment project in process.
|--- |  | ---------------------------------

|(3) |  | Completed but not stabilized properties, which contributed $186,000 in Net Operating Income (Property RevenueProperty Expenses) in the first quarter of 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following
table sets forth certain information about leasing activities at our wholly owned in-service properties for the three months ended March 31, 2003 and December 31, September 30, June 30 and March 31, 2002.



|                                                      |  | Office Lease Statistics Three Months Ended |          
|----------------------------------------------------- |  | ------------------------------------------ | ---------
|                                                      |  | 3/31/03                                    |          
|Net Effective Rents Related to Re-Leased Space:       |  |                                            |          
|Number of lease transactions (signed leases)          |  |                                            | 166      
|Rentable square footage leased                        |  |                                            | 1,081,692
|Average per rentable square foot over the lease term: |  |                                            |          
|Base rent                                             |  | $                                          | 16.08    
|Tenant improvements                                   |  |                                            | (0.85    
|Leasing commissions                                   |  |                                            | (0.54    
|Rent concessions                                      |  |                                            | (0.14    
|                                                      |  |                                            |          
|Effective rent                                        |  | $                                          | 14.55    
|Expense stop (1)                                      |  |                                            | (4.76    
|                                                      |  |                                            |          
|Equivalent effective net rent                         |  | $                                          | 9.79     
|                                                      |  |                                            |          
|Average term in years                                 |  |                                            | 3.5      
|                                                      |  |                                            |          
|Rental Rate Trends:                                   |  |                                            |          
|Average final rate with expense pass-throughs         |  | $                                          | 16.48    
|Average first year cash rental rate                   |  | $                                          | 15.24    
|                                                      |  |                                            |          
|Percentage (decrease)/increase                        |  |                                            | (7.5     
|                                                      |  |                                            |          
|Capital Expenditures Related to Re-leased Space:      |  |                                            |          
|Tenant Improvements:                                  |  |                                            |          
|Total dollars committed under signed leases           |  | $                                          | 4,474,184
|Rentable square feet                                  |  |                                            | 1,081,692
|                                                      |  |                                            |          
|Per rentable square foot                              |  | $                                          | 4.14     
|                                                      |  |                                            |          
|Leasing Commissions:                                  |  |                                            |          
|Total dollars committed under signed leases           |  | $                                          | 1,658,231
|Rentable square feet                                  |  |                                            | 1,081,692
|                                                      |  |                                            |          
|Per rentable square foot                              |  | $                                          | 1.53     
|                                                      |  |                                            |          
|Total:                                                |  |                                            |          
|Total dollars committed under signed leases           |  | $                                          | 6,132,415
|Rentable square feet                                  |  |                                            | 1,081,692
|                                                      |  |                                            |          
|Per rentable square foot                              |  | $                                          | 5.67     
|                                                      |  |                                            |          

---

|(1) |  | Expense stop represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will
not be reimbursed by our tenants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



---

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|                                                      |  | Industrial Lease Statistics Three Months Ended |        
|----------------------------------------------------- |  | ---------------------------------------------- | -------
|                                                      |  | 3/31/03                                        |        
|Net Effective Rents Related to Re-Leased Space:       |  |                                                |        
|Number of lease transactions (signed leases)          |  |                                                | 35     
|Rentable square footage leased                        |  |                                                | 857,482
|Average per rentable square foot over the lease term: |  |                                                |        
|Base rent                                             |  | $                                              | 3.70   
|Tenant improvements                                   |  |                                                | (0.32  
|Leasing commissions                                   |  |                                                | (0.11  
|Rent concessions                                      |  |                                                | (0.01  
|                                                      |  |                                                |        
|Effective rent                                        |  | $                                              | 3.26   
|Expense stop (1)                                      |  |                                                | (0.25  
|                                                      |  |                                                |        
|Equivalent effective net rent                         |  | $                                              | 3.01   
|                                                      |  |                                                |        
|Average term in years                                 |  |                                                | 2.6    
|                                                      |  |                                                |        
|Rental Rate Trends:                                   |  |                                                |        
|Average final rate with expense pass-throughs         |  | $                                              | 4.03   
|Average first year cash rental rate                   |  | $                                              | 3.66   
|                                                      |  |                                                |        
|Percentage (decrease)/increase                        |  |                                                | (9.3   
|                                                      |  |                                                |        
|Capital Expenditures Related to Re-leased Space:      |  |                                                |        
|Tenant Improvements:                                  |  |                                                |        
|Total dollars committed under signed leases           |  | $                                              | 791,737
|Rentable square feet                                  |  |                                                | 857,482
|                                                      |  |                                                |        
|Per rentable square foot                              |  | $                                              | 0.92   
|                                                      |  |                                                |        
|Leasing Commissions:                                  |  |                                                |        
|Total dollars committed under signed leases           |  | $                                              | 178,385
|Rentable square feet                                  |  |                                                | 857,482
|                                                      |  |                                                |        
|Per rentable square foot                              |  | $                                              | 0.21   
|                                                      |  |                                                |        
|Total:                                                |  |                                                |        
|Total dollars committed under signed leases           |  | $                                              | 970,122
|Rentable square feet                                  |  |                                                | 857,482
|                                                      |  |                                                |        
|Per rentable square foot                              |  | $                                              | 1.13   
|                                                      |  |                                                |        

---

|(1) |  | Expense stop represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will
not be reimbursed by our tenants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44



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##### Table of Contents



|                                                      |  | Retail Lease Statistics Three Months Ended |        
|----------------------------------------------------- |  | ------------------------------------------ | -------
|                                                      |  | 3/31/03                                    |        
|Net Effective Rents Related to Re-Leased Space:       |  |                                            |        
|Number of lease transactions (signed leases)          |  |                                            | 10     
|Rentable square footage leased                        |  |                                            | 22,774 
|Average per rentable square foot over the lease term: |  |                                            |        
|Base rent                                             |  | $                                          | 23.03  
|Tenant improvements                                   |  |                                            | (1.54  
|Leasing commissions                                   |  |                                            | (1.09  
|Rent concessions                                      |  |                                            |       
|                                                      |  |                                            |        
|Effective rent                                        |  | $                                          | 20.40  
|Expense stop (1)                                      |  |                                            |       
|                                                      |  |                                            |        
|Equivalent effective net rent                         |  | $                                          | 20.40  
|                                                      |  |                                            |        
|Average term in years                                 |  |                                            | 6.9    
|                                                      |  |                                            |        
|Rental Rate Trends:                                   |  |                                            |        
|Average final rate with expense pass-throughs         |  | $                                          | 16.92  
|Average first year cash rental rate                   |  | $                                          | 21.14  
|                                                      |  |                                            |        
|Percentage (decrease)/increase                        |  |                                            | 24.9   
|                                                      |  |                                            |        
|Capital Expenditures Related to Re-leased Space:      |  |                                            |        
|Tenant Improvements:                                  |  |                                            |        
|Total dollars committed under signed leases           |  | $                                          | 513,000
|Rentable square feet                                  |  |                                            | 22,774 
|                                                      |  |                                            |        
|Per rentable square foot                              |  | $                                          | 22.53  
|                                                      |  |                                            |        
|Leasing Commissions:                                  |  |                                            |        
|Total dollars committed under signed leases           |  | $                                          | 109,066
|Rentable square feet                                  |  |                                            | 22,774 
|                                                      |  |                                            |        
|Per rentable square foot                              |  | $                                          | 4.79   
|                                                      |  |                                            |        
|Total:                                                |  |                                            |        
|Total dollars committed under signed leases           |  | $                                          | 622,066
|Rentable square feet                                  |  |                                            | 22,774 
|                                                      |  |                                            |        
|Per rentable square foot                              |  | $                                          | 27.31  
|                                                      |  |                                            |        

---

|(1) |  | Expense stop represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will
not be reimbursed by our tenants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45



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The following
tables set forth scheduled lease expirations at our wholly owned in-service properties as of March 31, 2003, assuming no customer exercises renewal options.



Office Properties:



|Lease Expiring |  | Number of Leases Expiring |  | Rentable Square Feet Subject to Expiring Leases |  | Percentage of Leased Square Footage Represented By
Expiring Leases |   |  | Annualized Rental Revenue Under Expiring Leases(1) |         | Average Annual Rental Rate Per Square Foot for Expirations |   | Percent of Annualized Rental Revenue Represented By Expiring Leases(1) | 
|-------------- |  | ------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------------------------ | - |  | -------------------------------------------------- | ------- | ---------------------------------------------------------- | - | ---------------------------------------------------------------------- | 
|               |  |                           |  |                                                 |  |                                                                    |   |  | ($ in thousands)                                   |         |                                                            |   |                                                                        | 
|2003(2)        |  | 561                       |  | 2,938,186                                       |  | 14.3                                                               | % |  | $                                                  | 49,732  |                                                            | $ | 16.93                                                                  | 
|2004           |  | 498                       |  | 2,672,197                                       |  | 13.0                                                               |   |  |                                                    | 48,564  |                                                            |   | 18.17                                                                  | 
|2005           |  | 570                       |  | 3,429,823                                       |  | 16.6                                                               |   |  |                                                    | 60,632  |                                                            |   | 17.68                                                                  | 
|2006           |  | 377                       |  | 2,847,068                                       |  | 13.8                                                               |   |  |                                                    | 52,175  |                                                            |   | 18.33                                                                  | 
|2007           |  | 243                       |  | 1,655,931                                       |  | 8.0                                                                |   |  |                                                    | 27,958  |                                                            |   | 16.88                                                                  | 
|2008           |  | 173                       |  | 2,341,280                                       |  | 11.4                                                               |   |  |                                                    | 32,953  |                                                            |   | 14.07                                                                  | 
|2009           |  | 56                        |  | 1,499,707                                       |  | 7.3                                                                |   |  |                                                    | 24,860  |                                                            |   | 16.58                                                                  | 
|2010           |  | 51                        |  | 1,040,840                                       |  | 5.0                                                                |   |  |                                                    | 20,755  |                                                            |   | 19.94                                                                  | 
|2011           |  | 39                        |  | 919,936                                         |  | 4.5                                                                |   |  |                                                    | 18,432  |                                                            |   | 20.04                                                                  | 
|2012           |  | 32                        |  | 701,959                                         |  | 3.4                                                                |   |  |                                                    | 12,196  |                                                            |   | 17.37                                                                  | 
|Thereafter     |  | 110                       |  | 566,479                                         |  | 2.7                                                                |   |  |                                                    | 6,680   |                                                            |   | 11.79                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |         |                                                            |   |                                                                        | 
|               |  | 2,710                     |  | 20,613,406                                      |  | 100.0                                                              | % |  | $                                                  | 354,937 |                                                            | $ | 17.22                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |         |                                                            |   |                                                                        | 



Industrial
Properties:



|Lease Expiring |  | Number of Leases Expiring |  | Rentable Square Feet Subject to Expiring Leases |  | Percentage of Leased Square Footage Represented By
Expiring Leases |   |  | Annualized Rental Revenue Under Expiring Leases(1) |        | Average Annual Rental Rate Per Square Foot for Expirations |   | Percent of Annualized Rental Revenue Represented By Expiring Leases(1) | 
|-------------- |  | ------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------------------------ | - |  | -------------------------------------------------- | ------ | ---------------------------------------------------------- | - | ---------------------------------------------------------------------- | 
|               |  |                           |  |                                                 |  |                                                                    |   |  | ($ in thousands)                                   |        |                                                            |   |                                                                        | 
|2003(3)        |  | 91                        |  | 1,392,548                                       |  | 15.6                                                               | % |  | $                                                  | 6,778  |                                                            | $ | 4.87                                                                   | 
|2004           |  | 104                       |  | 2,594,740                                       |  | 29.0                                                               |   |  |                                                    | 10,443 |                                                            |   | 4.02                                                                   | 
|2005           |  | 77                        |  | 1,201,998                                       |  | 13.5                                                               |   |  |                                                    | 5,346  |                                                            |   | 4.45                                                                   | 
|2006           |  | 49                        |  | 720,575                                         |  | 8.1                                                                |   |  |                                                    | 4,000  |                                                            |   | 5.55                                                                   | 
|2007           |  | 43                        |  | 1,817,125                                       |  | 20.4                                                               |   |  |                                                    | 8,160  |                                                            |   | 4.49                                                                   | 
|2008           |  | 18                        |  | 422,128                                         |  | 4.7                                                                |   |  |                                                    | 1,774  |                                                            |   | 4.20                                                                   | 
|2009           |  | 8                         |  | 318,813                                         |  | 3.6                                                                |   |  |                                                    | 2,364  |                                                            |   | 7.42                                                                   | 
|2010           |  | 4                         |  | 71,708                                          |  | 0.8                                                                |   |  |                                                    | 502    |                                                            |   | 7.00                                                                   | 
|2011           |  | 2                         |  | 35,475                                          |  | 0.4                                                                |   |  |                                                    | 178    |                                                            |   | 5.02                                                                   | 
|2012           |  | 2                         |  | 44,447                                          |  | 0.5                                                                |   |  |                                                    | 255    |                                                            |   | 5.74                                                                   | 
|Thereafter     |  | 15                        |  | 299,619                                         |  | 3.4                                                                |   |  |                                                    | 1,279  |                                                            |   | 4.27                                                                   | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |        |                                                            |   |                                                                        | 
|               |  | 413                       |  | 8,919,176                                       |  | 100.0                                                              | % |  | $                                                  | 41,079 |                                                            | $ | 4.61                                                                   | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |        |                                                            |   |                                                                        | 

---

|(1) |  | Annualized Rental Revenue is March 2003 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 241,000 square feet of leases that are on a month-to-month basis or 0.8% of total annualized revenue.
|--- |  | --------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 157,000 square feet of leases that are on a month-to-month basis or 0.2% of total annualized revenue.
|--- |  | --------------------------------------------------------------------------------------------------------------



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Retail Properties:



|Lease Expiring |  | Number of Leases Expiring |  | Rentable Square Feet Subject to Expiring Leases |  | Percentage of Leased Square Footage Represented By Expiring Leases |   |  | Annualized Rental Revenue Under Expiring Leases(1) |        | Average Annual Rental Rate Per Square Foot for Expirations |   | Percent of Annualized Rental Revenue Represented By Expiring Leases(1) | 
|-------------- |  | ------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------------------------ | - |  | -------------------------------------------------- | ------ | ---------------------------------------------------------- | - | ---------------------------------------------------------------------- | 
|               |  |                           |  |                                                 |  |                                                                    |   |  | ($ in thousands)                                   |        |                                                            |   |                                                                        | 
|2003(2)        |  | 29                        |  | 97,928                                          |  | 6.6                                                                | % |  | $                                                  | 1,840  |                                                            | $ | 18.79                                                                  | 
|2004           |  | 35                        |  | 144,576                                         |  | 9.8                                                                |   |  |                                                    | 2,094  |                                                            |   | 14.48                                                                  | 
|2005           |  | 48                        |  | 160,189                                         |  | 10.9                                                               |   |  |                                                    | 3,531  |                                                            |   | 22.04                                                                  | 
|2006           |  | 30                        |  | 92,176                                          |  | 6.3                                                                |   |  |                                                    | 2,435  |                                                            |   | 26.42                                                                  | 
|2007           |  | 37                        |  | 119,001                                         |  | 8.1                                                                |   |  |                                                    | 2,744  |                                                            |   | 23.06                                                                  | 
|2008           |  | 34                        |  | 128,644                                         |  | 8.7                                                                |   |  |                                                    | 4,690  |                                                            |   | 36.46                                                                  | 
|2009           |  | 22                        |  | 155,890                                         |  | 10.6                                                               |   |  |                                                    | 3,840  |                                                            |   | 24.63                                                                  | 
|2010           |  | 17                        |  | 85,386                                          |  | 5.8                                                                |   |  |                                                    | 2,878  |                                                            |   | 33.71                                                                  | 
|2011           |  | 14                        |  | 52,920                                          |  | 3.6                                                                |   |  |                                                    | 2,024  |                                                            |   | 38.25                                                                  | 
|2012           |  | 13                        |  | 77,862                                          |  | 5.3                                                                |   |  |                                                    | 2,206  |                                                            |   | 28.33                                                                  | 
|Thereafter     |  | 26                        |  | 360,166                                         |  | 24.3                                                               |   |  |                                                    | 11,077 |                                                            |   | 30.76                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |        |                                                            |   |                                                                        | 
|               |  | 305                       |  | 1,474,738                                       |  | 100.0                                                              | % |  | $                                                  | 39,359 |                                                            | $ | 26.69                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |        |                                                            |   |                                                                        | 



Total:



|Lease Expiring |  | Number of Leases Expiring |  | Rentable Square Feet Subject to Expiring Leases |  | Percentage of Leased Square Footage Represented By Expiring Leases |   |  | Annualized Rental Revenue Under Expiring Leases(1) |         | Average Annual Rental Rate Per Square Foot for Expirations |   | Percent of Annualized Rental Revenue Represented By Expiring Leases(1) | 
|-------------- |  | ------------------------- |  | ----------------------------------------------- |  | ------------------------------------------------------------------ | - |  | -------------------------------------------------- | ------- | ---------------------------------------------------------- | - | ---------------------------------------------------------------------- | 
|               |  |                           |  |                                                 |  |                                                                    |   |  | ($ in thousands)                                   |         |                                                            |   |                                                                        | 
|2003(3)        |  | 681                       |  | 4,428,662                                       |  | 14.2                                                               | % |  | $                                                  | 58,350  |                                                            | $ | 13.18                                                                  | 
|2004           |  | 637                       |  | 5,411,513                                       |  | 17.4                                                               |   |  |                                                    | 61,101  |                                                            |   | 11.29                                                                  | 
|2005           |  | 695                       |  | 4,792,010                                       |  | 15.4                                                               |   |  |                                                    | 69,509  |                                                            |   | 14.51                                                                  | 
|2006           |  | 456                       |  | 3,659,819                                       |  | 11.8                                                               |   |  |                                                    | 58,610  |                                                            |   | 16.01                                                                  | 
|2007           |  | 323                       |  | 3,592,057                                       |  | 11.6                                                               |   |  |                                                    | 38,862  |                                                            |   | 10.82                                                                  | 
|2008           |  | 225                       |  | 2,892,052                                       |  | 9.3                                                                |   |  |                                                    | 39,417  |                                                            |   | 13.63                                                                  | 
|2009           |  | 86                        |  | 1,974,410                                       |  | 6.4                                                                |   |  |                                                    | 31,064  |                                                            |   | 15.73                                                                  | 
|2010           |  | 72                        |  | 1,197,934                                       |  | 3.9                                                                |   |  |                                                    | 24,135  |                                                            |   | 20.15                                                                  | 
|2011           |  | 55                        |  | 1,008,331                                       |  | 3.3                                                                |   |  |                                                    | 20,634  |                                                            |   | 20.46                                                                  | 
|2012           |  | 47                        |  | 824,268                                         |  | 2.7                                                                |   |  |                                                    | 14,657  |                                                            |   | 17.78                                                                  | 
|Thereafter     |  | 151                       |  | 1,226,264                                       |  | 4.0                                                                |   |  |                                                    | 19,036  |                                                            |   | 15.52                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |         |                                                            |   |                                                                        | 
|               |  | 3,428                     |  | 31,007,320                                      |  | 100.0                                                              | % |  | $                                                  | 435,375 |                                                            | $ | 14.04                                                                  | 
|               |  |                           |  |                                                 |  |                                                                    |   |  |                                                    |         |                                                            |   |                                                                        | 

---

|(1) |  | Annualized Rental Revenue is March 2003 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 32,000 square feet of leases that are on a month-to-month basis or 0.1% of total annualized revenue.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 430,000 square feet of leases that are on a month-to-month basis or 1.1% of total annualized revenue.
|--- |  | --------------------------------------------------------------------------------------------------------------



47



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Inflation



In the
last five years, inflation has not had a significant impact on us because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the customers to pay their share of increases in operating expenses,
including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to inflation.



Item 3.    
Quantitative and Qualitative Disclosures About Market Risk



The effects of potential changes in interest rates are discussed below. Our market risk discussion includes forward-looking statements and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future
results may differ materially from those presented. See Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for a description of our accounting policies and
other information related to these financial instruments.



To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our two revolving loans bear interest at variable rates. Our long-term debt, which consists of
secured and unsecured long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars,
swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes.



As of March 31, 2003, we had approximately $115.2 million of
variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ended March 31, 2004, our interest
expense would be increased or decreased approximately $1.2 million.



Item 4.    
Controls and Procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, to allow timely decisions regarding required disclosure. SEC rules require that we disclose the conclusions of our CEO and CFO about the effectiveness of our disclosure controls and procedures.



The CEO/CFO evaluation of our disclosure controls and
procedures included a review of the controls objectives and design, the controls implementation by the company and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the evaluation,
we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Our disclosure controls and procedures are also evaluated on an ongoing
basis by the following:



| |  |  | employees in our internal audit department;
| | - |  | -------------------------------------------



| |  |  | other personnel in our finance organization;
| | - |  | --------------------------------------------



48



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##### Table of Contents



| |  |  | members of our internal disclosure committee;
| | - |  | ---------------------------------------------



| |  |  | members of the audit committee of our Board of Directors; and
| | - |  | -------------------------------------------------------------



Among other matters, we sought in our evaluation to determine whether there were any significant deficiencies or
material weaknesses in our disclosure controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures. In the professional auditing
literature, significant deficiencies are referred to as reportable conditions, which are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in
the financial statements. A material weakness is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by
error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions.



Our management, including the CEO and CFO, does not expect
that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Operating Partnership have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Since the date of this most recent evaluation, there have been no significant changes in our internal controls or in other factors that
could significantly affect the internal controls subsequent to the date we completed our evaluation.



Based on the most recent evaluation, which was completed as of March 31, 2003, our chief executive officer and chief financial officer
believe that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our
evaluation.



49



---

##### Table of Contents

PART II
OTHER INFORMATION



Item 6.
Exhibits and Reports On Form 8-K



(a) Exhibits



|Exhibit No. |  | Description                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.1        |  | First Amendment to Credit Agreement, dated as of June 29, 2001, to Credit Agreement among Highwoods Realty Limited
Partnership, Highwoods Properties, Inc., the Subsidiaries named therein and the Lenders named therein, dated as of December 13, 2000.
|           
|10.2        |  | Second Amendment to Credit Agreement, dated as of December of 2002, to Credit Agreement among Highwoods Properties,
Inc., the Subsidiaries named therein and the Lenders named therein, dated as of December 13, 2000.                                  
|           
|10.3        |  | Third Amendment to Credit Agreement, dated as of March 27, 2003, to Credit Agreement among Highwoods Properties, Inc.,
the Subsidiaries named therein and the Lenders named therein, dated as of December 13, 2000.                                     
|           
|99.1        |  | Statement of Chief Executive Officer of Highwoods Properties, Inc., general partner
of the Operating Partnership                                                                                                                                        
|           
|99.2        |  | Statement of Chief Financial Officer of Highwoods Properties, Inc., general partner
of the Operating Partnership                                                                                                                                        



(b)
Reports on Form 8-K



We filed a current report
on Form 8-K, dated January 3, 2003, reporting under Item 5 certain matters related to the bankruptcy of WorldCom.



We filed a current report on Form 8-K, dated April 25, 2003, reporting under Item 9 the Companys press release announcing the
results of operations and financial condition of the Company for the three months ended March 31, 2003.



50



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##### Table of Contents

SIGNATURES



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



HIGHWOODS REALTY LIMITED PARTNERSHIPBy: Highwoods Properties Inc., its general partnerBy:

/s/    RONALD P. GIBSONRonald P. Gibson President and Chief Executive OfficerBy:

/s/    CARMAN J. LIUZZOCarman J. Liuzzo Chief Financial Officer (Principal Accounting
Officer)




Date:    May 7, 2003



51



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##### Table of Contents

CERTIFICATION



I, Ronald P. Gibson, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Highwoods Realty Limited Partnership;
| | -- |  | -------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The Registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee
of Registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process, summarize
and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The Registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date:    May 7, 2003
|                    



52



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##### Table of Contents

CERTIFICATION



I, Carman J. Liuzzo, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Highwoods Realty Limited Partnership;
| | -- |  | -------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The Registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee
of Registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process, summarize
and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The Registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date:    May 7, 2003
|                    



53