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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 June 30, 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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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 ̈



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 JUNE 30, 2003



TABLE OF CONTENTS



|        |  |                                                                                                         |  | Page
|------- |  | ------------------------------------------------------------------------------------------------------- |  | ----
|PART I  |  | FINANCIAL INFORMATION                                                                                   |  |     
|        |  |                                                                                                        
|Item 1. |  | Financial Statements                                                                                    |  | 2   
|        |  |                                                                                                        
|        |  | Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002                       |  | 3   
|        |  |                                                                                                        
|        |  | Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 (unaudited) |  | 4   
|        |  |                                                                                                        
|        |  | Consolidated Statement of Partners Capital for the six months ended June 30, 2003 (unaudited)          |  | 5   
|        |  |                                                                                                        
|        |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)       |  | 6   
|        |  |                                                                                                        
|        |  | Notes to Consolidated Financial Statements (unaudited)                                                  |  | 8   
|        |  |                                                                                                        
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 19  
|        |  |                                                                                                        
|        |  | Disclosure Regarding Forward-Looking Statements                                                         |  | 19  
|        |  |                                                                                                        
|        |  | Overview                                                                                                |  | 19  
|        |  |                                                                                                        
|        |  | Property Information                                                                                    |  | 20  
|        |  |                                                                                                        
|        |  | Customer Diversification                                                                                |  | 21  
|        |  |                                                                                                        
|        |  | Critical Accounting Policies                                                                            |  | 21  
|        |  |                                                                                                        
|        |  | Results of Operations                                                                                   |  | 23  
|        |  |                                                                                                        
|        |  | Liquidity and Capital Resources                                                                         |  | 29  
|        |  |                                                                                                        
|        |  | Impact of Recently Issued Accounting Standards                                                          |  | 37  
|        |  |                                                                                                        
|        |  | Funds From Operations and Cash Available for Distribution                                               |  | 39  
|        |  |                                                                                                        
|        |  | Inflation                                                                                               |  | 41  
|        |  |                                                                                                        
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                              |  | 42  
|        |  |                                                                                                        
|Item 4. |  | Controls and Procedures                                                                                 |  | 42  
|        |  |                                                                                                        
|PART II |  | OTHER INFORMATION                                                                                       |  |     
|        |  |                                                                                                        
|Item 5. |  | Exhibits and Reports on Form 8-K                                                                        |  | 44  
|        |  |                                                                                                        
|        |  | Certifications                                                                                          |  |     



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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, statement 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.



2



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Balance Sheets



($ in thousands)



|                                                                                                                         |  | June 30,2003 |           |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---------------- | -
|                                                                                                                         |  | (Unaudited)  |           |   |                  |  
|Assets:                                                                                                                  |  |              |           |   |                  |  
|Real estate assets, at cost:                                                                                             |  |              |           |   |                  |  
|Land and improvements                                                                                                    |  | $            | 383,491   |   |                  | $
|Buildings and tenant improvements                                                                                        |  |              | 2,807,275 |   |                  |  
|Development in process                                                                                                   |  |              | 9,499     |   |                  |  
|Land held for development                                                                                                |  |              | 171,282   |   |                  |  
|Furniture, fixtures and equipment                                                                                        |  |              | 21,217    |   |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|                                                                                                                         |  |              | 3,392,764 |   |                  |  
|Lessaccumulated depreciation                                                                                            |  |              | (502,954  | ) |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Net real estate assets                                                                                                   |  |              | 2,889,810 |   |                  |  
|Property held for sale                                                                                                   |  |              | 182,048   |   |                  |  
|Cash and cash equivalents                                                                                                |  |              | 12,829    |   |                  |  
|Restricted cash                                                                                                          |  |              | 3,163     |   |                  |  
|Accounts receivable, net of allowance                                                                                    |  |              | 13,828    |   |                  |  
|Notes receivable                                                                                                         |  |              | 11,846    |   |                  |  
|Accrued straight-line rents receivable                                                                                   |  |              | 51,703    |   |                  |  
|Investment in unconsolidated affiliates                                                                                  |  |              | 73,129    |   |                  |  
|Other assets:                                                                                                            |  |              |           |   |                  |  
|Deferred leasing costs                                                                                                   |  |              | 100,462   |   |                  |  
|Deferred financing costs                                                                                                 |  |              | 42,544    |   |                  |  
|Prepaid expenses and other                                                                                               |  |              | 16,840    |   |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|                                                                                                                         |  |              | 159,846   |   |                  |  
|Lessaccumulated amortization                                                                                            |  |              | (76,499   | ) |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Other assets, net                                                                                                        |  |              | 83,347    |   |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Total Assets                                                                                                             |  | $            | 3,321,703 |   |                  | $
|                                                                                                                         |  |              |           |   |                  |  
|Liabilities and Partners Capital:                                                                                       |  |              |           |   |                  |  
|Mortgages and notes payable                                                                                              |  | $            | 1,544,350 |   |                  | $
|Accounts payable, accrued expenses and other liabilities                                                                 |  |              | 96,964    |   |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Total Liabilities                                                                                                        |  |              | 1,641,314 |   |                  |  
|Redeemable operating partnership units:                                                                                  |  |              |           |   |                  |  
|Common Units, 6,625,424 and 6,974,524 outstanding at June 30, 2003 and December 31, 2002, respectively                   |  |              | 147,747   |   |                  |  
|Series A Preferred Units, 104,945 outstanding at June 30, 2003 and December 31, 2002                                     |  |              | 103,308   |   |                  |  
|Series B Preferred Units, 6,900,000 outstanding at June 30, 2003 and December 31, 2002                                   |  |              | 166,346   |   |                  |  
|Series D Preferred Units, 400,000 outstanding at June 30, 2003 and December 31, 2002                                     |  |              | 96,842    |   |                  |  
|Partners Capital:                                                                                                       |  |              |           |   |                  |  
|Common Units:                                                                                                            |  |              |           |   |                  |  
|General partner Common Units, 592,884 and 599,659 outstanding at June 30, 2003 and December 31, 2002, respectively       |  |              | 11,792    |   |                  |  
|Limited partner Common Units, 52,070,075 and 52,391,727 outstanding at June 30, 2003 and December 31, 2002,
respectively |  |              | 1,167,432 |   |                  |  
|Accumulated other comprehensive loss                                                                                     |  |              | (7,831    | ) |                  |  
|Deferred compensation                                                                                                    |  |              | (5,247    | ) |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Total Partners Capital                                                                                                  |  |              | 1,166,146 |   |                  |  
|                                                                                                                         |  |              |           |   |                  |  
|Total Liabilities and Partners Capital                                                                                  |  | $            | 3,321,703 |   |                  | $
|                                                                                                                         |  |              |           |   |                  |  



See accompanying notes
to consolidated financial statements



3



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Income



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



|                                                                                                                                                                            |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | -
|                                                                                                                                                                            |  | 2003                       |         |   | 2002                     |  
|Rental revenue                                                                                                                                                              |  | $                          | 105,596 |   |                          | $
|                                                                                                                                                                            |  |                            |         |  
|Operating expenses:                                                                                                                                                         |  |                            |         |   |                          |  
|Rental property                                                                                                                                                             |  |                            | 36,813  |   |                          |  
|Depreciation and amortization                                                                                                                                               |  |                            | 32,405  |   |                          |  
|Interest expense:                                                                                                                                                           |  |                            |         |   |                          |  
|Contractual                                                                                                                                                                 |  |                            | 27,711  |   |                          |  
|Amortization of deferred financing costs                                                                                                                                    |  |                            | 757     |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|                                                                                                                                                                            |  |                            | 28,468  |   |                          |  
|General and administrative includes $3,514 and $3,700 of nonrecurring compensation and management fee expense in the three and six
months ended June 30, 2002, respectively |  |                            | 6,409   |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Total operating expenses                                                                                                                                                    |  |                            | 104,095 |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Other income:                                                                                                                                                               |  |                            |         |   |                          |  
|Interest and other income                                                                                                                                                   |  |                            | 3,200   |   |                          |  
|Equity in (loss)/earnings of unconsolidated affiliates                                                                                                                      |  |                            | (526    | ) |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|                                                                                                                                                                            |  |                            | 2,674   |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Income before gain on disposition of land and depreciable assets and discontinued operations                                                                                |  |                            | 4,175   |   |                          |  
|Gain on disposition of land                                                                                                                                                 |  |                            | 1,412   |   |                          |  
|Gain on disposition of depreciable assets                                                                                                                                   |  |                            | 220     |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Income from continuing operations                                                                                                                                           |  |                            | 5,807   |   |                          |  
|Discontinued operations:                                                                                                                                                    |  |                            |         |   |                          |  
|Income from discontinued operations                                                                                                                                         |  |                            | 4,330   |   |                          |  
|Gain on sale of discontinued operations                                                                                                                                     |  |                            | 1,515   |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|                                                                                                                                                                            |  |                            | 5,845   |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income                                                                                                                                                                  |  |                            | 11,652  |   |                          |  
|Distributions on preferred units                                                                                                                                            |  |                            | (7,713  | ) |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income available for common unitholders                                                                                                                                 |  | $                          | 3,939   |   |                          | $
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income per common unitbasic:                                                                                                                                           |  |                            |         |   |                          |  
|(Loss)/income from continuing operations                                                                                                                                    |  | $                          | (0.03   | ) |                          | $
|Income from discontinued operations                                                                                                                                         |  |                            | 0.10    |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income                                                                                                                                                                  |  | $                          | 0.07    |   |                          | $
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income per common unitdiluted:                                                                                                                                         |  |                            |         |   |                          |  
|(Loss)/income from continuing operations                                                                                                                                    |  | $                          | (0.03   | ) |                          | $
|Income from discontinued operations                                                                                                                                         |  |                            | 0.10    |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Net income                                                                                                                                                                  |  | $                          | 0.07    |   |                          | $
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Weighted average common units outstandingbasic:                                                                                                                            |  |                            |         |   |                          |  
|Common Units:                                                                                                                                                               |  |                            |         |   |                          |  
|General Partner                                                                                                                                                             |  |                            | 596     |   |                          |  
|Limited Partners                                                                                                                                                            |  |                            | 58,978  |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Total                                                                                                                                                                       |  |                            | 59,574  |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Weighted average common units outstandingdiluted:                                                                                                                          |  |                            |         |   |                          |  
|Common Units:                                                                                                                                                               |  |                            |         |   |                          |  
|General Partner                                                                                                                                                             |  |                            | 596     |   |                          |  
|Limited Partners                                                                                                                                                            |  |                            | 59,023  |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  
|Total                                                                                                                                                                       |  |                            | 59,619  |   |                          |  
|                                                                                                                                                                            |  |                            |         |   |                          |  



See accompanying notes
to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statement of Partners Capital



For the Six Months Ended June 30, 2003



(Unaudited and $ in thousands)



|                                                     |  | Common Unit             |        |   | Accumulated OtherComprehensiveLoss |   |           | DeferredCompensation |  |   | TotalPartnersCapital |  
|---------------------------------------------------- |  | ----------------------- | ------ | - | ---------------------------------- | - | --------- | -------------------- |  | - | --------------------- | -
|                                                     |  | GeneralPartnersCapital |        |   | LimitedPartnersCapital            |   |           |                      | 
|Balance at December 31, 2002                         |  | $                       | 12,332 |   |                                    | $ | 1,220,902 |                      |  | $ | (9,204                | )
|Issuance of Common Units                             |  |                         | 4      |   |                                    |   | 403       |                      |  |   |                      |  
|Redemption of Common Units                           |  |                         | (74    | ) |                                    |   | (7,337    | )                    |  |   |                      |  
|Distributions paid on Common Units                   |  |                         | (608   | ) |                                    |   | (60,203   | )                    |  |   |                      |  
|Preferred distributions paid on Common Units         |  |                         | (154   | ) |                                    |   | (15,272   | )                    |  |   |                      |  
|Net income                                           |  |                         | 247    |   |                                    |   | 24,463    |                      |  |   |                      |  
|Adjustments of redeemable Common Units to fair value |  |                         | 114    |   |                                    |   | 11,292    |                      |  |   |                      |  
|Other comprehensive income                           |  |                         |       |   |                                    |   |          |                      |  |   | 1,373                 |  
|Issuance of restricted units                         |  |                         | 21     |   |                                    |   | 2,062     |                      |  |   |                      |  
|Repurchase of Common Units                           |  |                         | (93    | ) |                                    |   | (9,184    | )                    |  |   |                      |  
|Fair value of options issued                         |  |                         | 3      |   |                                    |   | 306       |                      |  |   |                      |  
|Amortization of deferred compensation                |  |                         |       |   |                                    |   |          |                      |  |   |                      |  
|                                                     |  |                         |        |   |                                    |   |           |                      |  |   |                       |  
|Balance at June 30, 2003                             |  | $                       | 11,792 |   |                                    | $ | 1,167,432 |                      |  | $ | (7,831                | )
|                                                     |  |                         |        |   |                                    |   |           |                      |  |   |                       |  



See accompanying notes
to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Cash Flows



(Unaudited and $ in thousands)



|                                                                                                        |  | Six Months EndedJune 30, |        
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                                        |  | 2003                     |        
|Operating activities:                                                                                   |  |                          |        
|Income from continuing operations                                                                       |  | $                        | 15,005 
|Adjustments to reconcile income from continuing operations to net cash providedby operating activities: |  |                          |        
|Depreciation and amortization                                                                           |  |                          | 64,841 
|Amortization of deferred compensation                                                                   |  |                          | 844    
|Amortization of deferred financing costs                                                                |  |                          | 1,383  
|Amortization of accumulated other comprehensive loss                                                    |  |                          | 898    
|Equity in earnings of unconsolidated affiliates                                                         |  |                          | (1,188 
|Gain on disposition of land and depreciable assets                                                      |  |                          | (2,515 
|Reserve for accrued straight-line rent receivable                                                       |  |                          |       
|Discontinued operations                                                                                 |  |                          | 9,734  
|Changes in operating assets and liabilities                                                             |  |                          | (14,611
|                                                                                                        |  |                          |        
|Net cash provided by operating activities                                                               |  |                          | 74,391 
|                                                                                                        |  |                          |        
|Investing activities:                                                                                   |  |                          |        
|Additions to real estate assets                                                                         |  |                          | (56,423
|Proceeds from disposition of real estate assets                                                         |  |                          | 30,334 
|Distributions from unconsolidated affiliates                                                            |  |                          | 6,533  
|Investments in notes receivable                                                                         |  |                          | (182   
|Other investing activities                                                                              |  |                          | (710   
|                                                                                                        |  |                          |        
|Net cash (used in)/provided by investing activities                                                     |  |                          | (20,448
|                                                                                                        |  |                          |        
|Financing activities:                                                                                   |  |                          |        
|Distributions paid on common units                                                                      |  |                          | (60,811
|Dividends paid on preferred units                                                                       |  |                          | (15,426
|Net proceeds from the sale of common units                                                              |  |                          | 407    
|Redemption/repurchase of common units                                                                   |  |                          | (16,688
|Borrowings on revolving loans                                                                           |  |                          | 126,500
|Repayment of revolving loans                                                                            |  |                          | (84,000
|Borrowings on mortgages and notes payable                                                               |  |                          | 2,190  
|Repayment of mortgages and notes payable                                                                |  |                          | (7,370 
|Net change in deferred financing costs                                                                  |  |                          | 3,354  
|                                                                                                        |  |                          |        
|Net cash used in financing activities                                                                   |  |                          | (51,844
|                                                                                                        |  |                          |        
|Net increase in cash and cash equivalents                                                               |  |                          | 2,099  
|Cash and cash equivalents at beginning of the period                                                    |  |                          | 10,730 
|                                                                                                        |  |                          |        
|Cash and cash equivalents at end of the period                                                          |  | $                        | 12,829 
|                                                                                                        |  |                          |        
|Supplemental disclosure of cash flow information:                                                       |  |                          |        
|Cash paid for interest                                                                                  |  | $                        | 58,012 
|                                                                                                        |  |                          |        



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 assets contributed by the holders of Common Units in the Operating Partnership, the assets acquired subject to
mortgage notes payable and other non-cash transactions:



|                                                         |  | Six Months EndedJune 30,
|-------------------------------------------------------- |  | ------------------------
|                                                         |  | 2003                    
|Assets:                                                  |  |                         
|Net real estate assets                                   |  | $                       
|Cash and cash equivalents                                |  |                         
|Accounts receivable                                      |  |                         
|Notes receivable                                         |  |                         
|Investments in unconsolidated affiliates                 |  |                         
|Deferred leasing costs                                   |  |                         
|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



June 30, 2003



(Unaudited)



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------



The consolidated financial statements include the accounts of Highwoods Realty Limited Partnership (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 is managed by its general partner, Highwoods
Properties, Inc. (the Company).



The Operating
Partnerships 104,945 Series A Preferred Units are senior to the 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 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 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 Common Units are owned by the Company and by certain limited partners of the Operating Partnership. The Common Units
owned by the Company are classified as general partners capital and limited partners capital.



The Operating Partnership is generally obligated to redeem each of the 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 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 June 30,
2002 and December 31, 2002 financial statements included in this Quarterly Report have been reclassified to conform to the June 30, 2003 presentation. These reclassifications had no material effect on net income or partners 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. We have condensed or omitted certain notes and other
information from the interim financial statements presented in the Quarterly Report on Form 10-Q. These financial statements should be read in conjunction with our 2002 Annual Report on Form 10-K.



Use of Estimates



The preparation of financial statements in accordance with Generally Accepted Accounting Principles (GAAP)
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.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|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 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.



The following table sets forth information regarding the
Operating Partnerships joint venture activity as recorded on the respective joint ventures books for the six months ended June 30, 2003 and 2002 ($ in thousands):



|                                                                              |  |              |      |  | June 30, 2003 |        |                   | June 30, 2002 |         
|----------------------------------------------------------------------------- |  | ------------ | ---- |  | ------------- | ------ | ----------------- | ------------- | --------
|                                                                              |  | PercentOwned |      |  | Revenue       |        | OperatingExpenses |               | Interest
|Income Statement Data:                                                        |  |              |      |  |               |        |                   |               |         
|Board of Trade Investment Company                                             |  | 49.00        | %    |  | $             | 1,215  |                   | $             | 791     
|Dallas County Partners                                                        |  | 50.00        | %    |  |               | 5,380  |                   |               | 2,757   
|Dallas County Partners II                                                     |  | 50.00        | %    |  |               | 3,123  |                   |               | 1,294   
|Fountain Three                                                                |  | 50.00        | %    |  |               | 3,562  |                   |               | 1,514   
|RRHWoods, LLC                                                                 |  | 50.00        | %    |  |               | 6,949  |                   |               | 3,606   
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG |  | 22.81        | %    |  |               | 9,673  |                   |               | 2,747   
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93        | %    |  |               | 8,106  |                   |               | 2,215   
|Highwoods-Markel Associates, LLC                                              |  | 50.00        | %    |  |               | 1,636  |                   |               | 861     
|MG-HIW, LLC                                                                   |  | 20.00        | %(1) |  |               | 24,573 |                   |               | 8,975   
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00        | %(3) |  |               | 175    |                   |               | 62      
|MG-HIW Rocky Point, LLC                                                       |  | 50.00        | %    |  |               |       |                   |               |        
|MG-HIW Metrowest I, LLC                                                       |  | 50.00        | %(3) |  |               |       |                   |               | 16      
|MG-HIW Metrowest II, LLC                                                      |  | 50.00        | %(3) |  |               | 266    |                   |               | 223     
|Concourse Center Associates, LLC                                              |  | 50.00        | %    |  |               | 1,028  |                   |               | 269     
|Plaza Colonnade, LLC                                                          |  | 50.00        | %    |  |               | 8      |                   |               |        
|SF-HIW Harborview, LP                                                         |  | 20.00        | %    |  |               | 2,806  |                   |               | 850     
|                                                                              |  |              |      |  |               |        |                   |               |         
|Total                                                                         |  |              |      |  | $             | 68,500 |                   | $             | 26,180  
|                                                                              |  |              |      |  |               |        |                   |               |         

---

|(1) |  | On July 29, 2003, the Operating Partnership acquired the assets and/or its partners 80.0% equity interests related to 15 properties encompassing 1.3 million square feet owned
by MG-HIW, LLC in Atlanta, Raleigh and Tampa. Additionally, the Operating Partnership has entered into an option agreement to acquire Miller Globals 80.0% interest in the remaining assets of MG-HIW, LLC located in Orlando. (See Note 11 for
further discussion).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net income excludes a $12.1 million impairment charge at the partnership level of which the Operating Partnerships share is $2.4 million. (See Note 11 for further discussion).
With the impairment charge, the joint venture had a net loss of $5,838.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On July 29, 2003, the Operating Partnership entered into an option agreement to acquire Miller Globals 50.0% interest for $3.2 million in the remaining assets encompassing
87,832 square feet of property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC and was assigned Miller Globals 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|3. |  | RELATED PARTY TRANSACTIONS
|-- |  | --------------------------



On July 16, 1999, the Operating Partnership acquired from a limited liability company (Bluegrass) controlled by
an executive officer and director of the Company an option to purchase development land (102.5 acres) in a staged takedown in the Bluegrass Valley office development project for approximately $4.6 million in Common Units. On October 31, 2002, the
Operating Partnership exercised its option and purchased 30.6 acres of the optioned property as part of the staged takedown for $4.6 million. In conjunction with the first stage of the takedown, the Operating Partnership also acquired from Bluegrass
23.5 acres of other development land for $2.6 million.



On
January 17, 2003, the Operating Partnership acquired an additional 23.5 acres of the contracted land from Bluegrass for $2.3 million. In May of 2003, 4.0 acres of the remaining 24.9 acres not yet taken down was taken by the local department of
transportation to develop a roadway interchange for consideration of $1.8 million. The department of transportation took possession and title of the property in June 2003. As part of the terms of the option contract between the Operating Partnership
and Bluegrass, the Operating Partnership is entitled to the proceeds from the condemnation of $1.8 million, less the contracted purchase price between the Operating Partnership and Bluegrass for the condemned property of $737,348. At June 30, 2003,
as a result of the condemnation, the Operating Partnership has recorded a receivable for the proceeds of $1.8 million, a related party payable of $737,348 to Bluegrass and a gain of $1.0 million related to the condemnation of the development land.
These amounts are included in accounts receivable and accounts payable, accrued expenses and other liabilities in the Operating Partnerships Consolidated Balance Sheets and gain on disposition of land in the Operating Partnerships
Consolidated Statements of Income.



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 accrued at a rate of LIBOR plus 200 basis points. This construction loan was
repaid in full on July 29, 2003 when the Operating Partnership was assigned its partners 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC.



|4. |  | DERIVATIVE FINANCIAL INSTRUMENTS
|-- |  | --------------------------------



Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, 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 cash flows 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.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|4. |  | DERIVATIVE FINANCIAL INSTRUMENTS - Continued
|-- |  | --------------------------------------------



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 current-period 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 six months ended June 30, 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 Operating Partnership. 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 six months ended June 30, 2003. (See Note 9 for further
discussion).



In addition, during the six months ended June 30,
2003, the Operating Partnership entered into three interest rate swap agreements related to an anticipated fixed rate financing, which effectively locked the LIBOR swap rate at 3.92%. These swap agreements are designated as cash flow hedges and the
effective portion of the cumulative gain on these derivative instruments was $481,327 at June 30, 2003 and is being reported as a component of AOCL in partners capital. These amounts will be recognized into earnings in the same period or
periods during which the hedged transaction affects earnings. The Operating Partnership also entered into two interest rate swaps related to a floating rate credit facility. The swaps effectively fix the LIBOR rate on $20.0 million of floating rate
debt at 0.99% from August 1, 2003 to January 1, 2004 and at 1.59% from January 2, 2004 until May 31, 2005. These swap agreements are designated as cash flow hedges and the effective portion of the cumulative loss on these derivative instruments was
$(6,212) at June 30, 2003. The Operating Partnership expects that the portion of the cumulative gain recorded in AOCL at June 30, 2003 associated with these derivative instruments which will be recognized within the next 12 months will be
approximately $29,633.



At June 30, 2003, approximately $8.3
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 June 30, 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. |  | 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 EndedJune 30, |        | Six Months EndedJune 30,
|--------------------------------------------------- |  | -------------------------- | ------ | ------------------------
|                                                    |  | 2003                       |        | 2002                    
|Net income                                          |  | $                          | 11,652 |                         
|Unrealized gains on cash flow and fair value hedges |  |                            | 475    |                         
|Amortization of past hedges                         |  |                            | 461    |                         
|                                                    |  |                            |        |                         
|Total other comprehensive income                    |  |                            | 936    |                         
|                                                    |  |                            |        |                         
|Total comprehensive income                          |  | $                          | 12,588 |                         
|                                                    |  |                            |        |                         



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



In
October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of and the accounting and reporting provisions for disposals of a segment of a business as addressed in APB 30, Reporting the Results of Operations-Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 is effective as of January 1, 2002 and extends the reporting requirements of discontinued operations to include those long-lived assets which:



| | (1) |  | are classified as held for sale at June 30, 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 on disposition of depreciable assets in the Operating Partnerships consolidated statements of income.



The table below sets forth the net operating results and net carrying value
of 2.3 million square feet of property sold during 2002 and 2003 and 3.1 million square feet of property and 88 apartment units held for sale at June 30, 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 EndedJune 30, |         | Six Months Ended June 30,
|----------------------------------------------------- |  | -------------------------- | ------- | -------------------------
|                                                      |  | 2003                       |         | 2002                     
|Total revenue                                         |  | $                          | 6,135   |                          
|Rental operating expenses                             |  |                            | 1,436   |                          
|Depreciation and amortization                         |  |                            | 369     |                          
|                                                      |  |                            |         |                          
|Income before gain on sale of discontinued operations |  |                            | 4,330   |                          
|Gain on sale of discontinued operations               |  |                            | 1,515   |                          
|                                                      |  |                            |         |                          
|Total discontinued operations                         |  | $                          | 5,845   |                          
|                                                      |  |                            |         |                          
|Net carrying value                                    |  | $                          | 149,123 |                          
|                                                      |  |                            |         |                          



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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 June 30, 2003, no impairment loss was recognized during the six months ended June 30,
2003 because there were no properties held for sale with a carrying value greater than their fair value less cost to sell.



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 June 30, 2003, no impairment loss was recognized during the six months ended June 30, 2003
because there were no properties with a carrying value exceeding the sum of their undiscounted future cash flows.



|7. |  | ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
|-- |  | -----------------------------------------



In June 2001, the FASB issued Statement No. 141, Business
Combinations (SFAS 141), which provides that all business combinations in the scope of the Statement are to be accounted for under the purchase method. SFAS 141 requires companies to account for the value of in-place operating
leases as favorable or unfavorable relative to market rents 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 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, during the six months ended June 30,
2003, the Operating Partnership has recognized $86,214 in amortization of the net intangible leases. This amount was deducted from rental revenues in the Operating Partnerships consolidated income statement.



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 $1.9 million in other liabilities and adjusted the investment in unconsolidated affiliates by $1.9 million on its consolidated balance sheet at June 30, 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. (See Note 10 for further discussion).



In December 2002, the FASB issued Statement No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS 148), 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 related to 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 guidance of APB Option 25
Accounting for Stock Issued to Employees and Related Interpretations.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|7. |  | ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS - Continued
|-- |  | -----------------------------------------------------



In accordance with SFAS 148, the Operating Partnership has included in
general and administrative expenses in its consolidated statement of income, $25,748 of amortization related to the vesting of stock options granted during the six months ended June 30, 2003. In addition, the Operating Partnership has included in
partners capital in its consolidated balance sheet at June 30, 2003 the total grant value of $308,985. 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 EndedJune 30,                |        |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | - | ------------------------ | -
|                                                                                                 |  | 2003                                      |        |   | 2002                     |  
|                                                                                                 |  | ($ in thousands,except per share amounts) |       
|Net income, as reported                                                                          |  | $                                         | 11,652 |   |                          | $
|Add: Stock option expense included in reported net income                                        |  |                                           | 19     |   |                          |  
|Deduct: Total stock option expense determined under fair value recognition method for all awards |  |                                           | (196   | ) |                          |  
|                                                                                                 |  |                                           |        |   |                          |  
|Pro forma net income                                                                             |  | $                                         | 11,475 |   |                          | $
|                                                                                                 |  |                                           |        |   |                          |  
|Basic net income per common unit - as reported                                                   |  | $                                         | 0.07   |   |                          | $
|Basic net income per common unit - pro forma                                                     |  | $                                         | 0.06   |   |                          | $
|Diluted net income per common unit - as reported                                                 |  | $                                         | 0.07   |   |                          | $
|Diluted net income per common unit - pro forma                                                   |  | $                                         | 0.06   |   |                          | $



In January 2003, the
FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs) (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 VIEs. 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. For the Operating Partnerships interests in VIEs owned at January 31, 2003,
FIN 46 will be effective July 1, 2003. FIN 46 is in effect for interests in VIEs acquired subsequent to January 31, 2003. The Operating Partnership is assessing the impact of this interpretation on its accounting for investments in unconsolidated
joint ventures owned at January 31, 2003.



In April 2003, the
FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions, and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The provisions of SFAS 149 do not have a material impact on the Operating Partnerships financial condition or results of operations.



In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective July 1, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of this Statement and still existing at the
beginning of the interim period of adoption. The Operating Partnership is assessing the impact of SFAS 150 on its financial condition and results of operations.



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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 officer 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 chief operating officer 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
of the Operating Partnership. Further, all operations are within the United States and no customer comprises more than 10.0% of consolidated revenues. The following table summarizes the rental revenue and net operating income for the three and six
months ended June 30, 2003 and 2002 and total assets at June 30, 2003 and 2002 for each reportable segment ($ in thousands):



|                                                                                                                |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | -
|                                                                                                                |  | 2003                       |         |   | 2002                     |  
|Rental Revenue (1):                                                                                             |  |                            |         |   |                          |  
|Office segment                                                                                                  |  | $                          | 85,691  |   |                          | $
|Industrial segment                                                                                              |  |                            | 9,079   |   |                          |  
|Retail segment                                                                                                  |  |                            | 10,550  |   |                          |  
|Apartment segment                                                                                               |  |                            | 276     |   |                          |  
|                                                                                                                |  |                            |         |   |                          |  
|Total Rental Revenue                                                                                            |  | $                          | 105,596 |   |                          | $
|                                                                                                                |  |                            |         |   |                          |  
|Net Operating Income (1):                                                                                       |  |                            |         |   |                          |  
|Office segment                                                                                                  |  | $                          | 53,942  |   |                          | $
|Industrial segment                                                                                              |  |                            | 7,200   |   |                          |  
|Retail segment                                                                                                  |  |                            | 7,509   |   |                          |  
|Apartment segment                                                                                               |  |                            | 132     |   |                          |  
|                                                                                                                |  |                            |         |   |                          |  
|Total Net Operating Income                                                                                      |  | $                          | 68,783  |   |                          | $
|                                                                                                                |  |                            |         |   |                          |  
|Reconciliation to income before gain on disposition of land and depreciable assets and discontinued
operations: |  |                            |         |   |                          |  
|Depreciation and amortization                                                                                   |  | $                          | (32,405 | ) |                          | $
|Interest expense                                                                                                |  |                            | (28,468 | ) |                          |  
|General and administrative expenses                                                                             |  |                            | (6,409  | ) |                          |  
|Interest and other income                                                                                       |  |                            | 3,200   |   |                          |  
|Equity in (loss)/earnings of unconsolidated affiliates                                                          |  |                            | (526    | ) |                          |  
|                                                                                                                |  |                            |         |   |                          |  
|Income before gain on disposition of land and depreciable assets and discontinued operations                    |  | $                          | 4,175   |   |                          | $
|                                                                                                                |  |                            |         |   |                          |  
|                                                                                                                |  |                            |        
|                                                                                                                |  |                            |         |   |                          |  
|                                                                                                                |  |                            |         |   |                          |  
|Total Assets:                                                                                                   |  |                            |         |   |                          |  
|Office segment                                                                                                  |  |                            |         |   |                          |  
|Industrial segment                                                                                              |  |                            |         |   |                          |  
|Retail segment                                                                                                  |  |                            |         |   |                          |  
|Apartment segment                                                                                               |  |                            |         |   |                          |  
|Partnership and other                                                                                           |  |                            |         |   |                          |  
|                                                                                                                |  |                            |         |   |                          |  
|Total Assets                                                                                                    |  |                            |         |   |                          |  
|                                                                                                                |  |                            |         |   |                          |  

---

|(1) |  | 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
|--- |  | -----------------------------



Joint Ventures



In connection with several of our 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 June 30, 2003, the Operating Partnership has $16.5 million accrued for obligations related to these agreements. The
Operating Partnership believes that its estimates related to these agreements are adequate. However, if their assumptions and estimates prove to be incorrect future losses may occur.



In accordance with FIN 45, the Operating Partnership has included $1.9 million in other liabilities and adjusted the
investment in unconsolidated affiliates by $1.9 million on its consolidated balance sheet at June 30, 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 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 completed 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 $34.9 million.



In addition, the Operating Partnership has 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.



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 put 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.



Dispositions



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 June 30, 2003 is $18.5 million. Because of this guarantee, in accordance with GAAP, the Operating Partnership deferred the gain of
approximately $6.9 million, which will be recognized when the contingency period is concluded.



16



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|10. |  | COMMITMENTS AND CONTINGENCIES - Continued
|--- |  | -----------------------------------------



Litigation



The Operating Partnership is a party to a variety of legal proceedings arising in the ordinary course of its business. The Operating Partnership believes
that it is adequately covered by insurance. Accordingly, none of such proceedings are expected to have a material adverse effect on the Operating Partnerships business, financial condition and results of operations.



|11. |  | SUBSEQUENT EVENTS
|--- |  | -----------------



Acquisition of Joint Venture Assets and Equity Interests



On July 29, 2003, the Operating Partnership acquired the assets and/or its partners 80.0% equity interest related to 15 properties encompassing 1.3
million square feet owned by MG-HIW, LLC. The properties are located in Atlanta, the Research Triangle and Tampa and were 80.0% leased as of June 30, 2003. At the closing of the transaction, the Operating Partnership paid Miller Global $28.1
million, repaid $41.4 million of debt related to the properties and assumed $64.7 million of debt. The transaction implies a valuation (100.0% ownership) for the assets of $138.3 million and other net assets of approximately $2.9 million.



Additionally, the Operating Partnership has entered into an
option agreement to acquire Miller Globals 80.0% interest in the remaining assets of MG-HIW, LLC for between $62.5 to $65.0 million depending on the closing date and the distributions from MG-HIW, LLC prior to closing. The remaining assets of
MG-HIW, LLC are five properties encompassing 1.3 million square feet located in the central business district of Orlando. The properties were 83.0% leased as of June 30, 2003 and are encumbered by $132.8 million of debt. On July 29, 2003, the
Operating Partnership entered into a letter of credit in the amount of $7.5 million in favor of Miller Global which can be drawn by Miller Global in the event the Operating Partnership does not exercise the option by March 24, 2004.



The following unaudited pro forma information has been prepared assuming the
acquisition of the MG-HIW, LLC properties described above occurred January 1, 2002 ($ in thousands, except per unit amounts):



|                              |  | Pro Forma for theSix Months Ended
|----------------------------- |  | ---------------------------------
|                              |  | June 30, 2003                    
|Total revenue                 |  | $                                
|Net income                    |  | $                                
|Net income per unit - basic   |  | $                                
|Net income per unit - diluted |  | $                                



The pro forma
information is not necessarily indicative of what the Operating Partnerships results of operations would have been if the transaction had occurred at the beginning of the period presented. Additionally, the pro forma information does not
purport to be indicative of the Operating Partnerships results of operations for future periods.



For the three months ended June 30, 2003, an impairment charge of $12.1 million was recorded by the MG-HIW, LLC joint venture for assets being classified
as held for sale related to the acquisition by the Operating Partnership of these assets. The Operating Partnerships share of this charge of $2.4 million reduced the Operating Partnerships equity in earnings of unconsolidated affiliates
for the same period.



17



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



|11. |  | SUBSEQUENT EVENTS - Continued
|--- |  | -----------------------------



Amendment of Revolving Loan



On July 17, 2003, the Operating Partnership amended and restated its existing revolving loan. The amended and restated $250.0 million revolving loan (the
Revolving Loan) is from a group of ten lender banks, matures in July 2006 and replaces the Operating Partnerships previous $300.0 million revolving loan. The Revolving Loan carries an interest rate based upon the Operating
Partnerships senior unsecured credit ratings. As a result, interest currently accrues on borrowings under the Revolving Loan at an average rate of LIBOR plus 105 basis points. The terms of the Revolving Loan require the Operating Partnership
to pay an annual facility fee equal to .25% of the aggregate amount of the Revolving Loan and require compliance with certain financial covenants. Had the Revolving Loan been in place at June 30, 2003, the Operating Partnership would have been in
compliance with its covenants.



18



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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 and completed its initial public offering in 1994. The Company is one of the largest
owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At June 30, 2003, we:



| |  |  | owned 486 in-service office, industrial and retail properties, encompassing approximately 36.8 million rentable square feet;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | owned an interest (50.0% or less) in 76 in-service office and industrial properties, encompassing approximately 7.3 million rentable square feet and 418 apartment units;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | owned 1,360 acres of undeveloped land suitable for future development;
| | - |  | ----------------------------------------------------------------------



| |  |  | are 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).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

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 June 30, 2003, the Company owned 88.8% of the Common Units in the Operating Partnership.



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 June 30, 2003 and 2002:



|                         |  | June 30, 2003       |  |                          | June 30, 2002 | 
|------------------------ |  | ------------------- |  | ------------------------ | ------------- | 
|                         |  | RentableSquare Feet |  | PercentLeased/Pre-Leased |               | 
|In-Service:              |  |                     |  |                          |               | 
|Office                   |  | 25,052,000          |  | 80.5                     | %             | 
|Industrial               |  | 10,243,000          |  | 88.7                     | %             | 
|Retail (1)               |  | 1,527,000           |  | 96.8                     | %             | 
|                         |  |                     |  |                          |               | 
|Total                    |  | 36,822,000          |  | 83.4                     | %             | 
|                         |  |                     |  |                          |               | 
|Development:             |  |                     |  |                          |               | 
|CompletedNot Stabilized |  |                     |  |                          |               | 
|Office                   |  | 140,000             |  | 30.0                     | %             | 
|Industrial               |  | 60,000              |  | 50.0                     | %             | 
|Retail                   |  |                    |  |                         |               | 
|                         |  |                     |  |                          |               | 
|Total                    |  | 200,000             |  | 36.0                     | %             | 
|                         |  |                     |  |                          |               | 
|In Process               |  |                     |  |                          |               | 
|Office                   |  |                    |  |                         |               | 
|Industrial               |  |                    |  |                         |               | 
|                         |  |                     |  |                          |               | 
|Total                    |  |                    |  |                         |               | 
|                         |  |                     |  |                          |               | 
|Total:                   |  |                     |  |                          |               | 
|Office                   |  | 25,192,000          |  |                          |               | 
|Industrial               |  | 10,303,000          |  |                          |               | 
|Retail                   |  | 1,527,000           |  |                          |               | 
|                         |  |                     |  |                          |               | 
|Total                    |  | 37,022,000          |  |                          |               | 
|                         |  |                     |  |                          |               | 

---

|(1) |  | Excludes basement space of 527,000 square feet.
|--- |  | -----------------------------------------------



The following summarizes our capital recycling program since the beginning of 2002:



|                                                                             |  | Six MonthsEndedJune 30, 2003 |   |  | Year Ended2002 |  
|---------------------------------------------------------------------------- |  | ---------------------------- | - |  | -------------- | -
|Office, Industrial and Retail Properties (rentable square feet in thousands) |  |                              |   |  |                |  
|Dispositions                                                                 |  | (342                         | ) |  | (2,270         | )
|Developments Placed In-Service                                               |  | 131                          |   |  | 2,214          |  
|Redevelopments                                                               |  | (145                         | ) |  | (52            | )
|Acquisitions                                                                 |  | 66                           |   |  |               |  
|                                                                             |  |                              |   |  |                |  
|Net Change                                                                   |  | (290                         | ) |  | (108           | )
|                                                                             |  |                              |   |  |                |  



20



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##### Table of Contents

Customer Diversification



The
following table sets forth information concerning the 20 largest customers of our wholly-owned properties as of June 30, 2003 ($ in thousands):



|Customers               |  | Number ofLeases |  | RentalSquare Feet |  | AnnualizedRental Revenue (1) |        | Percent of TotalAnnualizedRental Revenue(1) |       |   | AverageRemaining LeaseTerm in Years
|----------------------- |  | --------------- |  | ----------------- |  | ---------------------------- | ------ | ------------------------------------------- | ----- | - | -----------------------------------
|Federal Government      |  | 58              |  | 607,026           |  | $                            | 12,478 |                                             | 2.96  | % |                                    
|AT&T                    |  | 8               |  | 617,477           |  |                              | 11,646 |                                             | 2.77  |   |                                    
|PricewaterhouseCoopers  |  | 6               |  | 297,795           |  |                              | 6,879  |                                             | 1.63  |   |                                    
|State of Georgia        |  | 9               |  | 349,690           |  |                              | 6,640  |                                             | 1.58  |   |                                    
|Capital One Services    |  | 6               |  | 361,968           |  |                              | 6,390  |                                             | 1.52  |   |                                    
|Sara Lee                |  | 10              |  | 1,230,534         |  |                              | 4,591  |                                             | 1.09  |   |                                    
|IBM                     |  | 7               |  | 215,737           |  |                              | 4,566  |                                             | 1.08  |   |                                    
|Bell South              |  | 9               |  | 176,960           |  |                              | 3,706  |                                             | 0.88  |   |                                    
|Northern Telecom        |  | 1               |  | 246,000           |  |                              | 3,651  |                                             | 0.87  |   |                                    
|Volvo                   |  | 7               |  | 264,717           |  |                              | 3,305  |                                             | 0.78  |   |                                    
|US Airways              |  | 5               |  | 295,046           |  |                              | 3,216  |                                             | 0.76  |   |                                    
|Lockton Companies       |  | 1               |  | 127,485           |  |                              | 3,159  |                                             | 0.75  |   |                                    
|Business Telecom        |  | 5               |  | 147,379           |  |                              | 2,945  |                                             | 0.70  |   |                                    
|Bank of America         |  | 22              |  | 145,668           |  |                              | 2,943  |                                             | 0.70  |   |                                    
|Hartford Insurance      |  | 6               |  | 134,021           |  |                              | 2,918  |                                             | 0.69  |   |                                    
|WorldCom and Affiliates |  | 14              |  | 145,063           |  |                              | 2,866  |                                             | 0.68  |   |                                    
|T-Mobile USA            |  | 3               |  | 120,561           |  |                              | 2,791  |                                             | 0.66  |   |                                    
|BB&T                    |  | 8               |  | 241,075           |  |                              | 2,618  |                                             | 0.62  |   |                                    
|Ikon                    |  | 7               |  | 181,361           |  |                              | 2,458  |                                             | 0.58  |   |                                    
|Carlton Fields          |  | 2               |  | 95,771            |  |                              | 2,429  |                                             | 0.58  |   |                                    
|                        |  |                 |  |                   |  |                              |        |                                             |       |   |                                    
|Total                   |  | 194             |  | 6,001,334         |  | $                            | 92,195 |                                             | 21.88 | % |                                    
|                        |  |                 |  |                   |  |                              |        |                                             |       |   |                                    

---

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



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 further 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
six months ended June 30, 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;
| | - |  | ------------------



21



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##### Table of Contents

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



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



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



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 analysis 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 the development and construction 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 and construction 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, construction 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 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.



22



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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 June 30, 2003, our investments in unconsolidated affiliates consisted 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



Known Trends



We expect net income and funds from operations to be
lower in the second half of 2003 as compared to the second half of 2002 due to the following factors:



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



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



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



| |  |  | the bankruptcies of WorldCom and US Airways in 2002; and
| | - |  | --------------------------------------------------------



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



During the remainder of 2003, we expect occupancy to be lower than in the second half of 2002 primarily due to the leases rejected by WorldCom and US
Airways and the general decline in employment rates in our markets which has led to a decrease in the demand for office and industrial space. During the last six months of 2003, the leases on approximately 3.2 million rentable square feet of space,
or 10.3% of our portfolio, will expire. This square footage represents approximately 10.0% of our annualized revenue in 2003. As of June 30, 2003, approximately 42.9% of this space had been re-leased. For the first six months of 2003, we have leased
3.6 million square feet, 76.5% with existing customers and 23.5% with new customers.



23



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##### Table of Contents

The following table sets forth scheduled lease expirations at our wholly-owned in-service properties as
of June 30, 2003, assuming no customer exercises renewal options.



|Lease Expiring        |  | Number ofLeasesExpiring |  | RentableSquare FeetSubject toExpiringLeases |  | Percentage ofLeasedSquare FootageRepresented byExpiringLeases |   |  | AnnualizedRental RevenueUnder ExpiringLeases (1) |         | AverageAnnualRental RatePer SquareFoot forExpirations |   | Percent ofAnnualizedRental RevenueRepresented byExpiringLeases | 
|--------------------- |  | ----------------------- |  | ------------------------------------------- |  | ------------------------------------------------------------- | - |  | ------------------------------------------------ | ------- | ----------------------------------------------------- | - | -------------------------------------------------------------- | 
|                      |  |                         |  |                                             |  |                                                               |   |  | ($ in thousands)                                 |         |                                                       |   |                                                                | 
|Remainder of 2003 (2) |  | 486                     |  | 3,184,121                                   |  | 10.3                                                          | % |  | $                                                | 42,902  |                                                       | $ | 13.47                                                          | 
|2004                  |  | 645                     |  | 5,434,655                                   |  | 17.8                                                          |   |  |                                                  | 60,657  |                                                       |   | 11.16                                                          | 
|2005                  |  | 693                     |  | 4,888,641                                   |  | 15.9                                                          |   |  |                                                  | 69,995  |                                                       |   | 14.32                                                          | 
|2006                  |  | 504                     |  | 4,034,504                                   |  | 13.1                                                          |   |  |                                                  | 60,962  |                                                       |   | 15.11                                                          | 
|2007                  |  | 317                     |  | 3,582,987                                   |  | 11.6                                                          |   |  |                                                  | 38,389  |                                                       |   | 10.71                                                          | 
|2008                  |  | 266                     |  | 3,123,689                                   |  | 10.1                                                          |   |  |                                                  | 43,765  |                                                       |   | 14.01                                                          | 
|2009                  |  | 93                      |  | 2,065,453                                   |  | 6.7                                                           |   |  |                                                  | 33,851  |                                                       |   | 16.39                                                          | 
|2010                  |  | 73                      |  | 1,147,543                                   |  | 3.7                                                           |   |  |                                                  | 22,694  |                                                       |   | 19.78                                                          | 
|2011                  |  | 61                      |  | 1,046,239                                   |  | 3.4                                                           |   |  |                                                  | 21,384  |                                                       |   | 20.44                                                          | 
|2012                  |  | 48                      |  | 833,095                                     |  | 2.7                                                           |   |  |                                                  | 14,539  |                                                       |   | 17.45                                                          | 
|Thereafter            |  | 161                     |  | 1,448,019                                   |  | 4.7                                                           |   |  |                                                  | 20,166  |                                                       |   | 13.93                                                          | 
|                      |  |                         |  |                                             |  |                                                               |   |  |                                                  |         |                                                       |   |                                                                | 
|                      |  | 3,347                   |  | 30,788,946                                  |  | 100.0                                                         | % |  | $                                                | 429,304 |                                                       | $ | 13.94                                                          | 
|                      |  |                         |  |                                             |  |                                                               |   |  |                                                  |         |                                                       |   |                                                                | 

---

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

|(2) |  | Includes 646,000 square feet of leases that are on a month to month basis or 1.3% of total annualized revenue
|--- |  | -------------------------------------------------------------------------------------------------------------



We do not anticipate that positive employment growth will lead to a
corresponding increase in demand for office space during the last six months of 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.



During the remainder of 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 and repurchase Common Stock, any net decrease in our property portfolio generally tends to result in lower net income. In addition, the majority of assets sold or held for sale generally have
occupancy levels above the average occupancy of our total portfolio and, as a result, the sale of these assets may lower the overall occupancy rate of our portfolio.



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 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 claims in connection with the rejected leases in the amount of $21.5 million. Actual amounts to be received in satisfaction of these claims
will be subject to WorldComs approved plan of reorganization and the availability of funds to pay creditors.



On August 11, 2002, US Airways filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States
Bankruptcy Code. 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. 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.



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



Three and Six Months Ended June 30, 2003



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 June 30, 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.



The following table sets forth information regarding our results of operations for the three and six months ended June 30, 2003 and 2002 ($ in millions):



|                                                                                                                                                                               |  | Three Months EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30, |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ----- | - | ---- | - | ----- | ------------------------ |  | - | ----- | -
|                                                                                                                                                                               |  | 2003                       |       |   | 2002 |   |       | $ Change                 |  |   | 2003  |  
|Rental revenue                                                                                                                                                                 |  | $                          | 105.6 |   |      | $ | 107.8 |                          |  | $ | (2.2  | )
|Operating expenses:                                                                                                                                                            |  |                            |       |   |      |   |       |                          |  |   |       |  
|Rental property                                                                                                                                                                |  |                            | 36.8  |   |      |   | 34.0  |                          |  |   | 2.8   |  
|Depreciation and amortization                                                                                                                                                  |  |                            | 32.4  |   |      |   | 29.0  |                          |  |   | 3.4   |  
|Interest expense:                                                                                                                                                              |  |                            |       |   |      |   |       |                          |  |   |       |  
|Contractual                                                                                                                                                                    |  |                            | 27.7  |   |      |   | 26.5  |                          |  |   | 1.2   |  
|Amortization of deferred financing costs                                                                                                                                       |  |                            | 0.8   |   |      |   | 0.3   |                          |  |   | 0.5   |  
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|                                                                                                                                                                               |  |                            | 28.5  |   |      |   | 26.8  |                          |  |   | 1.7   |  
|General and administrative (includes $3,514 and $3,700 of nonrecurring compensation and management fee expense in the three and
six months ending June 30, 2002, respectively) |  |                            | 6.4   |   |      |   | 8.7   |                          |  |   | (2.3  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|Total operating expenses                                                                                                                                                       |  |                            | 104.1 |   |      |   | 98.5  |                          |  |   | 5.6   |  
|Other income:                                                                                                                                                                  |  |                            |       |   |      |   |       |                          |  |   |       |  
|Interest and other income                                                                                                                                                      |  |                            | 3.2   |   |      |   | 2.5   |                          |  |   | 0.7   |  
|Equity in (loss)/earnings of unconsolidated affiliates                                                                                                                         |  |                            | (0.5  | ) |      |   | 2.4   |                          |  |   | (2.9  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|                                                                                                                                                                               |  |                            | 2.7   |   |      |   | 4.9   |                          |  |   | (2.2  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|Income before gain on disposition of land and depreciable assets and discontinued operations                                                                                   |  |                            | 4.2   |   |      |   | 14.2  |                          |  |   | (10.0 | )
|Gain on disposition of land                                                                                                                                                    |  |                            | 1.4   |   |      |   | 6.0   |                          |  |   | (4.6  | )
|Gain on disposition of depreciable assets                                                                                                                                      |  |                            | 0.2   |   |      |   | 4.2   |                          |  |   | (4.0  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|Income from continuing operations                                                                                                                                              |  |                            | 5.8   |   |      |   | 24.4  |                          |  |   | (18.6 | )
|Discontinued operations:                                                                                                                                                       |  |                            |       |   |      |   |       |                          |  |   |       |  
|Income from discontinued operations                                                                                                                                            |  |                            | 4.3   |   |      |   | 5.5   |                          |  |   | (1.2  | )
|Gain on sale of discontinued operations                                                                                                                                        |  |                            | 1.5   |   |      |   | 2.1   |                          |  |   | (0.6  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|                                                                                                                                                                               |  |                            | 5.8   |   |      |   | 7.6   |                          |  |   | (1.8  | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|Net income                                                                                                                                                                     |  |                            | 11.6  |   |      |   | 32.0  |                          |  |   | (20.4 | )
|Distributions on preferred units                                                                                                                                               |  |                            | (7.7  | ) |      |   | (7.7  | )                        |  |   |      |  
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  
|Net income available for unitholders                                                                                                                                           |  | $                          | 3.9   |   |      | $ | 24.3  |                          |  | $ | (20.4 | )
|                                                                                                                                                                               |  |                            |       |   |      |   |       |                          |  |   |       |  



Three Months Ended
June 30, 2003.Rental revenue from continuing operations decreased $2.2 million, or 2.0%, from $107.8 million for the three months ended June 30, 2002 to $105.6 million for the three months ended June 30, 2003. The decrease was primarily a
result of a decrease in average occupancy rates from 86.4% for the three months ended June 30, 2002 to 82.4% for the three months ended June 30, 2003 and the bankruptcies of WorldCom and US Airways, which resulted in a 2.6% decrease in average
occupancy rates and a $4.3 million decrease in rental revenue for the three months ended June 30, 2003. In addition, during 2002 and the six months ended June 30, 2003, approximately 2.3 million square feet of development properties were placed
in-service which have leased-up slower than expected and, as a result, have decreased average occupancy rates by 1.2%. These decreases were offset by the write-off of $3.1 million of straight-line rent attributable to the WorldCom bankruptcy for the
three months ended June 30, 2002 and an increase in lease termination fees of $273,397 from the three months ended June 30, 2002 to the three months ended June 30, 2003.



Same property rental revenue, generated from the 34.7 million square feet of 464 wholly-owned in-service properties on
January 1, 2002, decreased $2.2 million, or 2.0 %, for the three months ended June 30, 2003 compared



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to the three months ended June 30, 2002. This decrease is primarily a result of lower same property average occupancy, which decreased from 88.2% in 2002 to
84.6% in 2003, and the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.4% decrease in same property average occupancy rates and a $1.2 million decrease in same property rental revenue for the three months ended June 30,
2003.



During the three months ended June 30, 2003, 266 second
generation leases representing 1.7 million square feet of office, industrial and retail space were executed. This was 6.7% lower than those of expired leases on an average rate per square foot. In addition, on a straight-line rent comparison basis,
the average rate per square foot over the lease term for leases executed in the three months ended June 30, 2003 was 0.4% higher than the rent paid by previous customers.



Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and
other property-related expenses) increased $2.8 million, or 8.2%, from $34.0 million for the three months ended June 30, 2002 to $36.8 million for the three months ended June 30, 2003. The increase was a result of increases in repairs and
maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy percentage. In addition, we placed 2.3 million square feet of development properties in-service during 2002 and 2003 which resulted in an increase in
rental operating expenses from continuing operations.



Rental
operating expenses as a percentage of rental revenue increased from 31.5% for the three months ended June 30, 2002 to 34.8% for the three months ended June 30, 2003. The increase in these expenses as a percentage of rental revenue was a result of
the increases in rental operating expenses as described above and a decrease in rental revenue, primarily due to lower average occupancy and the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.6% decrease in average
occupancy rates and a $1.2 million decrease in rental revenue for the three months ended June 30, 2003.



Same property rental operating expenses, which are the expenses of 464 wholly-owned in-service properties on January 1, 2002, increased $610,363, or 1.8%,
for the three months ended June 30, 2003, compared to the three months ended June 30, 2002. The increase was a result of increases in repairs and maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy
percentage.



Same property rental operating expenses as a
percentage of related revenue increased from 32.1% for the three months ended June 30, 2002 to 33.3% for the three months ended June 30, 2003. The increase in these expenses as a percentage of related revenue was a result of the increase in same
property rental operating expenses as described above and a decrease in same property rental revenue, primarily due to the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.4% decrease in same property average occupancy
rates and a $1.2 million decrease in same property rental revenue for the three months ended June 30, 2003.



Depreciation and amortization from continuing operations for the three months ended June 30, 2003 and 2002 was $32.4 million and $29.0 million,
respectively. The increase of $3.4 million, or 11.7%, was due to an increase in amortization related to leasing commissions and tenant improvement expenditures for properties placed in-service during 2002 and the six months ended June 30, 2003 and
the write-off of deferred leasing costs and tenant improvements for customers that vacate their space prior to lease expiration. This increase was 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 $1.7 million, or 6.3%, from $26.8 million for the three months ended June 30, 2002 to $28.5 million for the three months ended June 30, 2003. The increase was primarily attributable to
the decrease in capitalized interest from $2.6 million for the three months ended June 30, 2002 to $349,367 for the three months ended June 30, 2003. In addition, average interest rates increased from 6.9% in the second quarter of 2002 to 7.1% in
the second quarter of 2003. Partly offsetting these increases was a decrease in the average outstanding debt balance from the second quarter of 2002 to the second quarter of 2003. Interest expense for the three months ended June 30, 2003 and 2002
included $756,777 and $340,673, 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 for both continuing and discontinued operations and equity in earnings of
unconsolidated affiliates, was 5.6% for the three months ended June 30, 2003 and 7.0% for the three months ended June 30, 2002.



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The decrease was a result of a nonrecurring compensation and management fee expense of $3.5 million recorded during the three months ended June 30, 2002,
which was related to the exercise of stock options. Partly offsetting this decrease was an increase in general and administrative expenses as a result of the decrease of capitalization of these costs due to the decrease in development activity in
2003 and an increase in deferred compensation as a result of the issuance of restricted stock during 2002 and the three months ended June 30, 2003. In addition, rental revenue and equity in earnings of unconsolidated affiliates decreased from the
three months ended June 30, 2002 to the three months ended June 30, 2003.



Interest and other income from continuing operations increased $651,350, or 28.0%, from $2.5 million for the three months ended June 30, 2002 to $3.2 million for the three months ended June 30, 2003. The increase
primarily resulted from an increase in leasing and management fee income and a Tax Increment Financing refund received in the three months ended June 30, 2003. Partly offsetting these increases was a decrease in development fee income in the three
months ended June 30, 2003 and a decrease in interest income due to the collection of notes receivable during 2002.



Equity in earnings of unconsolidated affiliates decreased $2.9 million from $2.4 million for the three months ended June 30, 2002 to $(525,890) for the
three months ended June 30, 2003. The decrease was primarily a result of a charge of $2.4 million which represents our proportionate share of the impairment loss of $12.1 million recorded by the MG-HIW, LLC joint venture in the three months ended
June 30, 2003 for assets being classified as held for sale related to the acquisition of the assets of the MG-HIW, LLC joint venture (See Note 11 to the Consolidated Financial Statements for further discussion).



Gain on disposition of land and depreciable assets decreased $8.6 million, or
84.3%, to $1.6 million for the three months ended June 30, 2003 from $10.2 million for the three months ended June 30, 2002. In the second quarter of 2003, the majority of the gain was comprised of a gain of $691,525 related to the disposition of
5.78 acres of land and a gain of approximately $1.0 million related to the condemnation of 4.0 acres of Bluegrass land, which is discussed further in Note 3 to the Consolidated Financial Statements. Partly offsetting these gains was an impairment
loss of $295,587 related to two land parcels held for sale at June 30, 2003. In the second quarter of 2002, the majority of the gain was comprised of a gain related to the disposition of 396,212 square feet of office properties that did not meet
certain conditions to be classified as discontinued operations as described in Note 6 to the Consolidated Financial Statements and a gain on the disposition of two acres of land.



In accordance with SFAS 144, we classified net income of $4.3 million and $5.5 million as discontinued operations for the
three months ended June 30, 2003 and 2002, respectively, which pertained to 2.3 million square feet of property sold during 2002 and 2003 and 3.1 million square feet of property and 88 apartment units held for sale at June 30, 2003. We also
classified gains of $1.5 million and $2.1 million as discontinued operations for the three months ended June 30, 2003 and 2002, respectively.



Six Months Ended June 30, 2003.Rental revenue from continuing operations decreased $9.5 million, or 4.3%, from $221.0 million for the six months
ended June 30, 2002 to $211.5 million for the six months ended June 30, 2003. The decrease was primarily a result of a decrease in average occupancy rates from 87.0% for the six months ended June 30, 2002 to 82.0% for the six months ended June 30,
2003 and the bankruptcies of WorldCom and US Airways, which resulted in a 2.6% decrease in average occupancy rates and an $8.7 million decrease in rental revenue for the six months ended June 30, 2003. In addition, during 2002 and the six months
ended June 30, 2003, approximately 2.3 million square feet of development properties were placed in-service which have leased-up slower than expected and, as a result, have decreased average occupancy rates by 1.1%. In addition, lease termination
fees decreased $1.3 million for the six months ended June 30, 2003. These decreases were offset by the write-off of $3.1 million of straight-line rent attributable to the WorldCom bankruptcy for the six months ended June 30, 2002.



Same property rental revenue, generated from 34.7 million square feet of 464
wholly-owned in-service properties on January 1, 2002, decreased $11.5 million, or 5.2%, for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. This decrease is primarily a result of lower same property average
occupancy, which decreased from 88.9% in 2002 to 84.7% in 2003, and the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.5% decrease in same property average occupancy rates and a $5.6 million decrease in same property
rental revenue for the six months ended June 30, 2003.



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During the six months ended June 30, 2003, 477 second generation leases representing 3.6 million square
feet of office, industrial and retail space were executed. This was 7.0% lower than those of expired leases on an average rate per square foot. In addition, on a straight-line rent comparison basis, the average rate per square foot over the lease
term for leases executed in the first six months of 2003 was 0.7% higher than the rent paid by previous customers.



Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related
expenses) increased $3.9 million, or 5.6%, from $69.3 million for the six months ended June 30, 2002 to $73.2 million for the six months ended June 30, 2003. The increase was a result of increases in snow removal, repairs and maintenance and certain
fixed operating expenses that do not vary with net changes in our occupancy percentage. In addition, we placed 2.3 million square feet of development properties in-service during 2002 and 2003 which resulted in an increase in rental operating
expenses from continuing operations.



Rental operating expenses
as a percentage of rental revenue increased from 31.4% for the three months ended June 30, 2002 to 34.6% for the six months ended June 30, 2003. The increase in these expenses as a percentage of revenue was a result of the increases in rental
operating expenses as described above and a decrease in rental revenue, primarily due to lower average occupancy and the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.6% decrease in average occupancy rates and a $5.6
million decrease in rental revenue for the six months ended June 30, 2003.



Same property rental operating expenses, which are the expenses of 464 wholly-owned in-service properties on January 1, 2002, increased $2.2 million, or 3.2%, for the six months ended June 30, 2003, compared to the
six months ended June 30, 2002. The increase was a result of increases in snow removal, repairs and maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy percentage.



Same property rental operating expenses as a percentage of related revenue
increased from 30.5% for the six months ended June 30, 2002 to 33.2% for the six months ended June 30, 2003. The increase in these expenses as a percentage of revenue was a result of the increases described above and a decrease in same property
rental revenue, primarily due to lower average occupancy and the bankruptcies of WorldCom and US Airways. These bankruptcies resulted in a 2.5% decrease in same property average occupancy rates and a $5.6 million decrease in same property rental
revenue for the six months ended June 30, 2003. In addition, operating expenses of $487,609 that would have been paid by WorldCom if the leases were not rejected were paid by us and included in same property operating expenses during the six months
ended June 30, 2003.



Depreciation and amortization from
continuing operations for the six months ended June 30, 2003 and 2002 was $64.8 million and $57.7 million, respectively. The increase of $7.1 million, or 12.3%, was due to an increase in amortization related to leasing commissions and tenant
improvement expenditures for properties placed in-service during 2002 and the six months ended June 30, 2003 and the write-off of deferred leasing costs and tenant improvements for customers that vacate their space prior to lease expiration. This
increase was 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 $4.0 million, or 7.6%, from $52.6 million for the six months ended
June 30, 2002 to $56.6 million for the six months ended June 30, 2003. The increase was primarily attributable to the decrease in capitalized interest for the six months ended June 30, 2003 and 2002, which was $715,247 and $6.6 million,
respectively. In addition, average interest rates increased from 6.9% in the six months ended June 30, 2002 to 7.1% in the six months ended June 30, 2003. Partly offsetting these increases was a decrease in the average outstanding debt balance from
the six months ended June 30, 2002 to the six months ended June 30, 2003. Interest expense for the six months ended June 30, 2003 and 2002 included $1.4 million and $680,623, 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 for both continuing and discontinued operations and equity in earnings of unconsolidated affiliates, was 5.0% for the six months ended June 30, 2003 and 5.5% for the six months ended June 30,
2002. The decrease was a result of a nonrecurring compensation and management fee expense of $3.7 million recorded during the six months ended June 30, 2002, which was related to the exercise of stock options. Partly offsetting this decrease was an
increase in general and administrative expenses as a result of the decrease of capitalization of these



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costs due to the decrease in development activity in 2003 and an increase in deferred compensation as a result of the issuance of additional restricted stock
during 2002 and the six months ended June 30, 2003. In addition, rental revenue and equity in earnings of unconsolidated affiliates decreased from the six months ended June 30, 2002 to the six months ended June 30, 2003.



Interest and other income from continuing operations increased $320,450, or
5.3%, from $5.7 million for the six months ended June 30, 2002 to $6.0 million for the six months ended June 30, 2003. The increase primarily resulted from an increase in leasing and management fee income and a Tax Increment Financing refund in the
six months ended June 30, 2003. Partly offsetting these increases was a decrease in interest income in the six months ended June 30, 2003 due to the collection of notes receivable during 2002 and a decrease in development fee income.



Equity in earnings of unconsolidated affiliates decreased $3.7 million from
$4.9 million for the six months ended June 30, 2002 to $1.2 million for the six months ended June 30, 2003. The decrease was primarily a result of a charge of $2.4 million which represents our proportionate share of the impairment loss of $12.1
million recorded by the MG-HIW, LLC joint venture in the six months ended June 30, 2003 related to the acquisition of the assets of the MG-HIW, LLC joint venture (See Note 11 to the Consolidated Financial Statements for further discussion).



Gain on disposition of land and depreciable assets decreased
$8.7 million, or 77.7%, to $2.5 million for the six months ended June 30, 2003 from $11.2 million for the six months ended June 30, 2002. In the six months ended June 30, 2003, the majority of the gain was comprised of a gain of $1.6 million related
to the disposition of 12.43 acres of land and a gain of approximately $1.0 million related to the condemnation of 4.0 acres of Bluegrass land, which is discussed further in Note 3 to the Consolidated Financial Statements. Partly offsetting this gain
was an impairment loss of $295,587 related to two land parcels held for sale at June 30, 2003. In the six months ended June 30, 2002, the majority of the gain was comprised of a gain related to the disposition of 524,212 square feet of office
properties that did not meet certain conditions to be classified as discontinued operations as described in Note 6 to the Consolidated Financial Statements and a gain on the disposition of two acres of land, partly offset by a loss related to the
disposition of 50.81 acres of land.



In accordance with SFAS
144, we classified net income of $8.5 million and $11.6 million as discontinued operations for the six months ended June 30, 2003 and 2002, respectively, which pertained to 2.3 million square feet of property sold during 2002 and 2003 and 3.1
million square feet of property and 88 apartment units held for sale at June 30, 2003. We also classified gains of $1.2 million and $2.1 million as discontinued operations for the six months ended June 30, 2003 and 2002, respectively.



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 six months of 2003 as compared to the first six months of 2002 ($ in thousands):



|                                                |  | Six Months Ended June 30, |         |   |      |  
|----------------------------------------------- |  | ------------------------- | ------- | - | ---- | -
|                                                |  | 2003                      |         |   | 2002 |  
|Cash Provided By Operating Activities           |  | $                         | 74,391  |   |      | $
|Cash (Used In)/Provided By Investing Activities |  |                           | (20,448 | ) |      |  
|Cash Used in Financing Activities               |  |                           | (51,844 | ) |      |  
|                                                |  |                           |         |   |      |  
|Total Cash Flows                                |  | $                         | 2,099   |   |      | $
|                                                |  |                           |         |   |      |  



Cash provided by
operating activities was $74.4 million for the six months ended June 30, 2003 and $91.7 million for the six months ended June 30, 2002. The decrease of $17.3 million was primarily a result of a decrease in average occupancy rates for our
wholly-owned portfolio and the bankruptcies of WorldCom and US Airways. 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 six months ended
June 30, 2003 and cash provided by investing activities was $57.2 million for the six months ended June 30, 2002. The decrease of $77.7 million was primarily a result of a decrease in proceeds from dispositions of real estate assets of approximately
$89.9 million, a decrease in investments in notes receivable of $1.4 million, partly offset by a decrease in additions to real estate assets of approximately $7.5 million and an increase in distributions and other investing activities of $6.1
million for the six months ended June 30, 2003.



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Cash used in financing activities was $51.8 million for the six months ended June 30, 2003 and $135.9
million for the six months ended June 30, 2002. The decrease of $84.0 million was primarily a result of a decrease of $100.9 million in net repayments on the unsecured revolving loan, mortgages and notes payable and a decrease of $9.2 million in
distributions paid, partly offset by an increase of $13.9 million for the repurchase of common stock and units for the six months ended June 30, 2003.



Capitalization. Our total indebtedness at June 30, 2003 was $1.5 billion and was comprised of $638.4 million of secured indebtedness with a
weighted average interest rate of 7.5% and $906.0 million of unsecured indebtedness with a weighted average interest rate of 6.8%. 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.



The following table sets forth the principal payments due on our mortgages and notes payable as of June 30, 2003, adjusted for the July 17, 2003 amendment to the Revolving Loan ($ in thousands):



|                            |  | Total |           | Within1 year |   | Within2 years |  | Within3 years |        | Within4 years |   | Within5 years |  | Thereafter
|--------------------------- |  | ----- | --------- | ------------ | - | ------------- |  | ------------- | ------ | ------------- | - | ------------- |  | ----------
|Fixed Rate Debt:            |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Unsecured:                  |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Put Option Notes (1)        |  | $     | 100,000   |              | $ |              |  | $             |       |               | $ |              |  | $         
|Notes                       |  |       | 706,500   |              |   | 246,500       |  |               |       |               |   |              |  |           
|Secured:                    |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Mortgages and loans payable |  |       | 634,177   |              |   | 12,417        |  |               | 54,063 |               |   | 40,279        |  |           
|                            |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Total Fixed Rate Debt       |  |       | 1,440,677 |              |   | 258,917       |  |               | 54,063 |               |   | 40,279        |  |           
|                            |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Variable Rate Debt:         |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Unsecured:                  |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Term Loan                   |  |       | 20,000    |              |   |              |  |               |       |               |   | 20,000        |  |           
|Revolving Loan              |  |       | 79,500    |              |   |              |  |               |       |               |   |              |  |           
|Secured:                    |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Mortgage loan payable       |  |       | 4,173     |              |   | 242           |  |               | 272    |               |   | 285           |  |           
|                            |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Total Variable Rate Debt    |  |       | 103,673   |              |   | 242           |  |               | 272    |               |   | 20,285        |  |           
|                            |  |       |           |              |   |               |  |               |        |               |   |               |  |           
|Total Long Term Debt        |  | $     | 1,544,350 |              | $ | 259,159       |  | $             | 54,335 |               | $ | 60,564        |  | $         
|                            |  |       |           |              |   |               |  |               |        |               |   |               |  |           

---

|(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 June 30, 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.



30



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##### Table of Contents

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.



On July 17, 2003, we amended and restated our existing revolving loan. The amended and restated $250.0 million revolving loan (the Revolving
Loan) is from a group of ten lender banks, matures in July 2006 and replaces our previous $300.0 million revolving loan. The Revolving Loan carries an interest rate based upon our senior unsecured credit ratings. As a result, interest would
currently accrue on borrowings under the Revolving Loan at an average rate of LIBOR plus 105 basis points. The terms of the Revolving Loan require us to pay an annual facility fee equal to .25% of the aggregate amount of the Revolving Loan. 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. In April 2003, Moodys Investor Service placed
our credit ratings on review for potential downgrade. We cannot provide any assurances that this or the other 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.



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.



The following table sets forth more detailed information about our ratio and
covenant compliance under the revolving loan assuming the new Revolving Loan had been in effect at June 30, 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 attached as Exhibit 10.



|                                                                                              |  | June 30, 2003 Proforma |     
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ----
|Total Liabilities Less Than or Equal to 57.5% of Total Assets                                 |  |                        | 52.3
|Unencumbered Assets Greater Than or Equal to 2 times Unsecured Debt                           |  |                        | 2.21
|Secured Debt Less Than or Equal to 35% of Total Assets                                        |  |                        | 23.5
|Adjusted EBITDA Greater Than 2.10 times Interest Expense                                      |  |                        | 2.33
|Adjusted EBITDA Greater Than 1.55 times Fixed Charges                                         |  |                        | 1.74
|Adjusted NOI Unencumbered Assets Greater Than 2.25 times Interest onUnsecured Debt            |  |                        | 2.56
|Tangible Net Worth Greater Than $1.575 Billion                                                |  | $                      | 1.7 
|Restricted Payments, Including Distributions to Shareholders, Less Thanor Equal to 95% of CAD |  |                        | 67.0



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 June 30, 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 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.



|                                                                                |  | June 30, 2003 |  
|------------------------------------------------------------------------------- |  | ------------- | -
|Overall Debt Less Than or Equal to 60% of Adjusted Total Assets                 |  | 40.8          | %
|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 |  | 2.8           |  
|Total Unencumbered Assets Greater Than 200% of Unsecured Debt                   |  | 298.9         | %



31



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##### Table of Contents

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 $10.4 million in general and non-recurring renovations at certain
properties. In addition, we could incur tenant improvements and lease commissions related to any releasing of space previously leased by WorldCom and US Airways.



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, selective asset acqusitions 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 $198.0 million of availability as of July 17, 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 June 30, 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, our 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s with unaffiliated parties, we have agreed to guarantee rent
shortfalls and re-tenanting costs for certain properties contributed or sold to the joint ventures during 1999, 2000 and 2002. As of June 30, 2003, we had $16.5 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 prove to be incorrect future losses may occur.



In accordance with FIN 45, we have included $1.9 million in other liabilities and adjusted the investment in unconsolidated affiliates by $1.9 million on
its consolidated balance sheet at June 30, 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 we are a 50.0% owner. The
term of the construction loan agreement is February 2003 through February 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



32



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##### Table of Contents

construction loan agreement or complete the construction of the office building, we 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 us under these agreements is $34.9 million.



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.



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 us 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 June 30, 2003 is $18.5 million. Because of this guarantee, in accordance with GAAP, we deferred the gain of approximately $6.9 million, which will be recognized when the contingency period is concluded.



We are a party to a variety of legal proceedings arising in the ordinary
course of our business. We believe that we are adequately covered by insurance and indemnification agreements. Accordingly, none of such proceedings are expected to have a material adverse effect on our business, financial condition and results of
operations.



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.



33



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##### Table of Contents

The following table sets forth information regarding our joint venture activity as recorded on the
respective joint ventures books at June 30, 2003 and December 31, 2002 ($ in thousands):



|                                                                              |  |              |      |  | June 30, 2003 |         | December 31, 2002
|----------------------------------------------------------------------------- |  | ------------ | ---- |  | ------------- | ------- | -----------------
|                                                                              |  | PercentOwned |      |  | TotalAssets   |         | Debt             
|Balance Sheet Data:                                                           |  |              |      |  |               |         |                  
|Board of Trade Investment Company                                             |  | 49.00        | %    |  | $             | 8,117   |                  
|Dallas County Partners                                                        |  | 50.00        | %    |  |               | 42,597  |                  
|Dallas County Partners II                                                     |  | 50.00        | %    |  |               | 18,623  |                  
|Fountain Three                                                                |  | 50.00        | %    |  |               | 34,895  |                  
|RRHWoods, LLC                                                                 |  | 50.00        | %    |  |               | 81,285  |                  
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG |  | 22.81        | %    |  |               | 140,834 |                  
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93        | %    |  |               | 117,218 |                  
|Highwoods-Markel Associates, LLC                                              |  | 50.00        | %    |  |               | 14,822  |                  
|MG-HIW, LLC                                                                   |  | 20.00        | %(1) |  |               | 340,246 |                  
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00        | %(2) |  |               | 5,334   |                  
|MG-HIW Metrowest I, LLC                                                       |  | 50.00        | %(3) |  |               | 1,601   |                  
|MG-HIW Metrowest II, LLC                                                      |  | 50.00        | %(3) |  |               | 9,879   |                  
|Concourse Center Associates, LLC                                              |  | 50.00        | %    |  |               | 14,646  |                  
|Plaza Colonnade, LLC                                                          |  | 50.00        | %    |  |               | 11,236  |                  
|SF-HIW Harborview, LP                                                         |  | 20.00        | %    |  |               | 40,547  |                  
|                                                                              |  |              |      |  |               |         |                  
|Total                                                                         |  |              |      |  | $             | 881,880 |                  
|                                                                              |  |              |      |  |               |         |                  

---

|(1) |  | On July 29, 2003, we acquired the assets and/or our partners 80.0% equity interests related to 15 properties encompassing 1.3 million square feet owned by MG-HIW, LLC in
Atlanta, Raleigh and Tampa. Additionally, we have entered into an option agreement to acquire Miller Globals 80.0% interest in the remaining assets of MG-HIW, LLC located in Orlando. Total assets at June 30, 2003 include a $12.1 million
impairment charge at the partnership level related to this acquisition. (See Note 11 to the Consolidated Financial Statements for further discussion).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On July 29, 2003, Miller Global assigned to us their 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC. The
construction loan, which was made to this joint venture by an affiliate of the Operating Partnership had an interest rate of LIBOR plus 200 basis points and was paid in full on July 29, 2003 in connection with the assignment.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On July 29, 2003, we entered into an option agreement to acquire Miller Globals 50.0% interest for $3.2 million in the remaining assets encompassing 87,832 square feet of
property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC. The $7.4 million construction loan to fund the development of this property, of which $5.8 million is outstanding at June 30, 2003, will be either paid in full or assumed by us in
connection with the acquisition of the remaining assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | 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 our share. We and our partners in this joint venture have each guaranteed 50.0% of the loan. (See Note 10 to the Consolidated Financial Statements for further discussion on the guarantees).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



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##### Table of Contents

The following table sets forth information regarding our joint venture activity as recorded on the
respective joint ventures books during the six months ended June 30, 2003 and 2002 ($ in thousands):



|                                                                              |  |              |      |  | June 30, 2003 |        |                   | June 30, 2002 |         
|----------------------------------------------------------------------------- |  | ------------ | ---- |  | ------------- | ------ | ----------------- | ------------- | --------
|                                                                              |  | PercentOwned |      |  | Revenue       |        | OperatingExpenses |               | Interest
|Income Statement Data:                                                        |  |              |      |  |               |        |                   |               |         
|Board of Trade Investment Company                                             |  | 49.00        | %    |  | $             | 1,215  |                   | $             | 791     
|Dallas County Partners                                                        |  | 50.00        | %    |  |               | 5,380  |                   |               | 2,757   
|Dallas County Partners II                                                     |  | 50.00        | %    |  |               | 3,123  |                   |               | 1,294   
|Fountain Three                                                                |  | 50.00        | %    |  |               | 3,562  |                   |               | 1,514   
|RRHWoods, LLC                                                                 |  | 50.00        | %    |  |               | 6,949  |                   |               | 3,606   
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG |  | 22.81        | %    |  |               | 9,673  |                   |               | 2,747   
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93        | %    |  |               | 8,106  |                   |               | 2,215   
|Highwoods-Markel Associates, LLC                                              |  | 50.00        | %    |  |               | 1,636  |                   |               | 861     
|MG-HIW, LLC                                                                   |  | 20.00        | %(1) |  |               | 24,573 |                   |               | 8,975   
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00        | %(3) |  |               | 175    |                   |               | 62      
|MG-HIW Rocky Point, LLC                                                       |  | 50.00        | %    |  |               |       |                   |               |        
|MG-HIW Metrowest I, LLC                                                       |  | 50.00        | %(3) |  |               |       |                   |               | 16      
|MG-HIW Metrowest II, LLC                                                      |  | 50.00        | %(3) |  |               | 266    |                   |               | 223     
|Concourse Center Associates, LLC                                              |  | 50.00        | %    |  |               | 1,028  |                   |               | 269     
|Plaza Colonnade, LLC                                                          |  | 50.00        | %    |  |               | 8      |                   |               |        
|SF-HIW Harborview, LP                                                         |  | 20.00        | %    |  |               | 2,806  |                   |               | 850     
|                                                                              |  |              |      |  |               |        |                   |               |         
|Total                                                                         |  |              |      |  | $             | 68,500 |                   | $             | 26,180  
|                                                                              |  |              |      |  |               |        |                   |               |         

---

|(1) |  | On July 29, 2003, we acquired the assets and/or our partners 80.0% equity interests related to 15 properties encompassing 1.3 million square feet owned by MG-HIW, LLC in
Atlanta, Raleigh and Tampa. Additionally, we have entered into an option agreement to acquire Miller Globals 80.0% interest in the remaining assets of MG-HIW, LLC located in Orlando. (See Note 11 to the Consolidated Financial Statements for
further discussion).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net income excludes a $12.1 million impairment charge at the partnership level of which our share is $2.4 million. (See Note 11 to the Consolidated Financial Statements for further
discussion). With the impairment charge, the joint venture had a net loss of $5,838.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On July 29, 2003, we entered into an option agreement to acquire Miller Globals 50.0% interest for $3.2 million in the remaining assets encompassing 87,832 square feet of
property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC and was assigned Miller Globals 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

As of June 30, 2003, our joint ventures had approximately $585.7 million of outstanding debt and the
following table sets forth the principal payments due on that outstanding long-term debt as recorded on the respective joint ventures books at June 30, 2003 ($ in thousands):



|                                                                              |  | PercentOwned |      |  | Total |         |     | Within1 year |   | Within 2 years |  | Within 3 years |        | Within 4 years |   | Within 5 years |  | Thereafter
|----------------------------------------------------------------------------- |  | ------------ | ---- |  | ----- | ------- | --- | ------------ | - | -------------- |  | -------------- | ------ | -------------- | - | -------------- |  | ----------
|Board of Trade Investment Company                                             |  | 49.00        | %    |  | $     | 835     |     |              | $ | 177            |  | $              | 191    |                | $ | 206            |  | $         
|Dallas County Partners                                                        |  | 50.00        | %    |  |       | 38,461  |     |              |   | 853            |  |                | 999    |                |   | 1,635          |  |           
|Dallas County Partners II                                                     |  | 50.00        | %    |  |       | 23,040  |     |              |   | 1,180          |  |                | 1,307  |                |   | 1,446          |  |           
|Fountain Three                                                                |  | 50.00        | %    |  |       | 30,452  |     |              |   | 1,065          |  |                | 1,145  |                |   | 1,230          |  |           
|RRHWoods, LLC                                                                 |  | 50.00        | %    |  |       | 66,584  |     |              |   | 360            |  |                | 391    |                |   | 417            |  |           
|Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG |  | 22.81        | %    |  |       | 67,733  |     |              |   | 1,001          |  |                | 1,071  |                |   | 1,145          |  |           
|Dreilander-Fonds 97/26 and 99/32                                              |  | 42.93        | %    |  |       | 59,364  |     |              |   | 687            |  |                | 741    |                |   | 800            |  |           
|Highwoods-Markel Associates, LLC                                              |  | 50.00        | %    |  |       | 11,610  |     |              |   | 96             |  |                | 107    |                |   | 115            |  |           
|MG-HIW, LLC                                                                   |  | 20.00        | %(1) |  |       | 242,240 |     |              |   |               |  |                |       |                |   | 242,240        |  |           
|MG-HIW Peachtree Corners III, LLC                                             |  | 50.00        | %(2) |  |       | 4,286   | (2) |              |   | 4,286          |  |                |       |                |   |               |  |           
|MG-HIW Metrowest II, LLC                                                      |  | 50.00        | %(3) |  |       | 5,819   | (3) |              |   |               |  |                | 5,819  |                |   |               |  |           
|Concourse Center Associates, LLC                                              |  | 50.00        | %    |  |       | 9,778   |     |              |   | 170            |  |                | 182    |                |   | 195            |  |           
|Plaza Colonnade, LLC                                                          |  | 50.00        | %    |  |       | 2,727   | (4) |              |   |               |  |                |       |                |   |               |  |           
|SF-HIW Harborview, LP                                                         |  | 20.00        | %    |  |       | 22,800  |     |              |   |               |  |                |       |                |   |               |  |           
|                                                                              |  |              |      |  |       |         |     |              |   |                |  |                |        |                |   |                |  |           
|Total                                                                         |  |              |      |  | $     | 585,729 | (5) |              | $ | 9,875          |  | $              | 11,953 |                | $ | 249,429        |  | $         
|                                                                              |  |              |      |  |       |         |     |              |   |                |  |                |        |                |   |                |  |           

---

|(1) |  | On July 29, 2003, we acquired the assets and/or our partners 80.0% equity interests related to 15 properties encompassing 1.3 million square feet owned by MG-HIW, LLC in
Atlanta, Raleigh and Tampa. Additionally, we have entered into an option agreement to acquire Miller Globals 80.0% interest in the remaining assets of MG-HIW, LLC located in Orlando. (See Note 11 to the Consolidated Financial Statements for
further discussion).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On July 29, 2003, Miller Global assigned to us their 50.0% equity interest in the single property encompassing 53,896 square feet owned by MG-HIW Peachtree Corners III, LLC. The
construction loan, which was made to this joint venture by an affiliate of the Operating Partnership had an interest rate of LIBOR plus 200 basis points and was paid in full on July 29, 2003 in connection with the assignment.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | On July 29, 2003, we entered into an option agreement to acquire Miller Globals 50.0% interest for $3.2 million in the remaining assets encompassing 87,832 square feet of
property of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II, LLC. The $7.4 million construction loan to fund the development of this property, of which $5.8 million is outstanding at June 30, 2003, will be either paid in full or assumed by us in
connection with the acquisition of the remaining assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | 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 our share. We and our partners in this joint venture have each guaranteed 50.0% of the loan. As of June 30, 2003, Plaza Colonnade, LLC has borrowed $2.7 million under this loan. (See Note 10 to the Consolidated
Financial Statements for further discussion on the guarantees).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | 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 revolving loan bears 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.



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The following table sets forth information regarding our interest rate hedge contracts as of June 30,
2003 ($ in thousands):



|Type of Hedge      |  | NotionalAmount |        | MaturityDate |           | Reference Rate |                       | FixedRate |       |   | Fair MarketValue |  
|------------------ |  | -------------- | ------ | ------------ | --------- | -------------- | --------------------- | --------- | ----- | - | ---------------- | -
|Interest Rate Swap |  | $              | 20,000 |              | 12/1/2013 |                | 3 month USD-LIBOR-BBA |           | 3.916 | % |                  | $
|Interest Rate Swap |  | $              | 15,000 |              | 12/1/2013 |                | 3 month USD-LIBOR-BBA |           | 3.925 | % |                  | $
|Interest Rate Swap |  | $              | 15,000 |              | 12/1/2013 |                | 3 month USD-LIBOR-BBA |           | 3.928 | % |                  | $
|Interest Rate Swap |  | $              | 20,000 |              | 1/2/2004  |                | 1 month USD-LIBOR-BBA |           | 0.990 | % |                  | $
|Interest Rate Swap |  | $              | 20,000 |              | 6/1/2005  |                | 1 month USD-LIBOR-BBA |           | 1.590 | % |                  | $
|                   |  |                |        |              |           |                |                       |           |       |   |                  |  
|                   |  |                |        |              |           |                |                       |           |       |   |                  | $
|                   |  |                |        |              |           |                |                       |           |       |   |                  |  



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 June 30, 2003.



Common Share and Unit Repurchase Program. During the quarter ended June 30, 2003, we repurchased a total of 648,264
shares of Common Stock and Common Units at a weighted average price of $20.84 per share/unit. Since commencement of our initial unit repurchase program in December 1999, we have repurchased 12.2 million shares of Common Stock and Common Units at a
weighted average price of $24.02 per share/unit for a total purchase price of $294.2 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. We have 5.3 million shares/units remaining under
our currently authorized repurchase programs.



Capital
Recycling Program. During the remainder of 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 June 30, 2003, we had
3.1 million square feet of office properties and 215.7 acres of land under letter of intent or contract for sale in various transactions with a carrying value of $182.0 million. These transactions are subject to customary closing conditions,
including zoning, due diligence and documentation, and are projected 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;
| | - |  | ----------------------------



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



| |  |  | acquire selective assets.
| | - |  | -------------------------



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 an underlying asset, liability, or equity security of the guaranteed party. In accordance with FIN 45, we have included $1.9 million in other liabilities and adjusted the investment in unconsolidated affiliates by $1.9 million on our
consolidated balance sheet at June 30, 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 we are a 50.0% owner. (See Note
10 to the Consolidated Financial Statements for further discussion).



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In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure (SFAS 148), 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 related to 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 guidance 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, $25,748 of amortization related to the vesting of stock options granted during the six months ended June 30, 2003. In addition, we have included in stockholders equity in our
consolidated balance sheet at June 30, 2003 the total grant value of $308,985. See below for the amounts that would have been deducted from net income if we 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 EndedJune 30,                |        |   | Six Months EndedJune 30, |  
|------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | - | ------------------------ | -
|                                                                                                 |  | 2003                                      |        |   | 2002                     |  
|                                                                                                 |  | ($ in thousands, except per unit amounts) |       
|Net income, as reported                                                                          |  | $                                         | 11,652 |   |                          | $
|Add: Stock option expense included in reported net income                                        |  |                                           | 19     |   |                          |  
|Deduct: Total stock option expense determined under fair value recognition method for all awards |  |                                           | (196   | ) |                          |  
|                                                                                                 |  |                                           |        |   |                          |  
|Pro forma net income                                                                             |  | $                                         | 11,475 |   |                          | $
|                                                                                                 |  |                                           |        |   |                          |  
|Basic net income per common unit  as reported                                                   |  | $                                         | 0.07   |   |                          | $
|Basic net income per common unit  pro forma                                                     |  | $                                         | 0.06   |   |                          | $
|Diluted net income per common unit  as reported                                                 |  | $                                         | 0.07   |   |                          | $
|Diluted net income per common unit  pro forma                                                   |  | $                                         | 0.06   |   |                          | $



In January 2003, the
FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs) (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 VIEs. 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. For our interest in VIEs owned at January 31, 2003, FIN 46 will be
effective July 1, 2003. FIN 46 is in effect for interests in VIEs acquired subsequent to January 31, 2003. We are assessing the impact of this interpretation on our accounting for investments in unconsolidated joint ventures owned at January 31,
2003.



In April 2003, the FASB issued Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions, and for hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively. The provisions of SFAS No. 149 do not have a material impact on our financial condition and results of operations.



In May of 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an



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issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance
date of this Statement and still existing at the beginning of the interim period of adoption. We are assessing the impact of SFAS 150 on our financial instruments on our financial condition and results of operations.



Funds From Operations and Cash Available for Distributions



We consider funds from operations (FFO) and cash available for distributions (CAD) to be useful financial performance measures of the operating performance of an equity REIT. Together with net
income and cash flows from operating, investing and financing activities, FFO and CAD provide an additional basis to evaluate the ability of a REIT to incur and service debt, fund acquisitions and other capital expenditures and pay 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) as follows:



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



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



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



| |  |  | Plus minority interest;
| | - |  | -----------------------



| |  |  | Less dividends to preferred unitholders;
| | - |  | ----------------------------------------



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



| |  |  | Plus or minus adjustments for depreciation and amortization, and gain/(loss) on sale related to discontinued operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



CAD is defined as FFO 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. In addition, nonrecurring items included in the calculation of CAD for periods ended after March 28, 2003 meet the requirements of Item 10(e) of Regulation S-K, as amended
January 22, 2003.



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FFO and CAD for the three and six months ended June 30, 2003 and 2002 are summarized in the following
table ($ in thousands):



|                                                         |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|-------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | -
|                                                         |  | 2003                       |         |   | 2002                     |  
|Funds from operations:                                   |  |                            |         |   |                          |  
|Net income                                               |  | $                          | 11,652  |   |                          | $
|Add/(Deduct):                                            |  |                            |         |   |                          |  
|Depreciation and amortization                            |  |                            | 32,405  |   |                          |  
|Gain on disposition of depreciable assets                |  |                            | (220    | ) |                          |  
|Dividends to preferred unitholders                       |  |                            | (7,713  | ) |                          |  
|Unconsolidated affiliates:                               |  |                            |         |   |                          |  
|Depreciation and amortization                            |  |                            | 2,383   |   |                          |  
|Loss on disposition of depreciable assets                |  |                            | 2,413   |   |                          |  
|Discontinued operations (1):                             |  |                            |         |   |                          |  
|Depreciation and amortization                            |  |                            | 369     |   |                          |  
|Gain on sale                                             |  |                            | (1,515  | ) |                          |  
|                                                         |  |                            |         |   |                          |  
|Funds from operations                                    |  |                            | 39,774  |   |                          |  
|                                                         |  |                            |         |  
|Cash available for distribution:                         |  |                            |         |   |                          |  
|Add/(Deduct):                                            |  |                            |         |   |                          |  
|Rental income from straight-line rents                   |  |                            | (1,680  | ) |                          |  
|Nonrecurring compensation and management fee expense     |  |                            |        |   |                          |  
|Amortization of deferred financing costs                 |  |                            | 757     |   |                          |  
|Non-incremental revenue generating capital expenditures: |  |                            |         |   |                          |  
|Building improvements paid                               |  |                            | (2,734  | ) |                          |  
|Second generation tenant improvements paid               |  |                            | (6,932  | ) |                          |  
|Second generation lease commissions paid                 |  |                            | (3,546  | ) |                          |  
|                                                         |  |                            |         |   |                          |  
|                                                         |  |                            | (13,212 | ) |                          |  
|                                                         |  |                            |         |   |                          |  
|Cash available for distribution                          |  | $                          | 25,639  |   |                          | $
|                                                         |  |                            |         |   |                          |  
|Per common unit-diluted:                                 |  |                            |         |   |                          |  
|Funds from operations                                    |  | $                          | 0.67    |   |                          | $
|                                                         |  |                            |         |   |                          |  
|Distributions paid                                       |  | $                          | 0.425   |   |                          | $
|                                                         |  |                            |         |   |                          |  
|Distribution payout ratios:                              |  |                            |         |   |                          |  
|Funds from operations                                    |  |                            | 63.7    | % |                          |  
|                                                         |  |                            |         |   |                          |  
|Cash available for distribution                          |  |                            | 98.8    | % |                          |  
|                                                         |  |                            |         |   |                          |  
|Weighted average units outstanding - basic               |  |                            | 59,574  |   |                          |  
|                                                         |  |                            |         |   |                          |  
|Weighted average units outstanding - diluted             |  |                            | 59,619  |   |                          |  
|                                                         |  |                            |         |   |                          |  
|Net cash provided by/(used in):                          |  |                            |         |   |                          |  
|Operating activities                                     |  | $                          | 35,596  |   |                          | $
|                                                         |  |                            |         |   |                          |  
|Investing activities                                     |  | $                          | (90     | ) |                          | $
|                                                         |  |                            |         |   |                          |  
|Financing activities                                     |  | $                          | (40,985 | ) |                          | $
|                                                         |  |                            |         |   |                          |  
|Net (decrease)/increase in cash and cash equivalents     |  | $                          | (5,479  | ) |                          | $
|                                                         |  |                            |         |   |                          |  

---

|(1) |  | For further discussion related to discontinued operations, see Note 6 of the Consolidated Financial Statements.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|(2) |  | Includes a $3.1 million write-off of straight-line rent receivables from WorldCom.
|--- |  | ----------------------------------------------------------------------------------



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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.



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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.



To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving loan
bears 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.



Certain
Variable Rate Debt. As of June 30, 2003, we had approximately $103.7 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 ending June 30, 2004, our interest expense would be increased or decreased approximately $1.0 million.



Interest Rate Hedge Contracts. For a discussion of our interest rate hedge contracts in effect at June 30, 2003, see Managements
Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - Interest Rate Hedging Activities. If interest rates increase by 100 basis points, the aggregate fair market value of these interest
rate hedging contracts as of June 30, 2003 would increase by approximately $4.8 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of June 30, 2003 would decrease by
approximately $4.3 million.



In addition, we are exposed to
certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to
default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contract.



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 the Companys internal audit department;
| | - |  | -----------------------------------------------------



| |  |  | other personnel in the Companys finance organization;
| | - |  | ------------------------------------------------------



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| |  |  | members of the Companys internal disclosure committee; and
| | - |  | -----------------------------------------------------------



| |  |  | members of the audit committee of the Companys Board of Directors.
| | - |  | -------------------------------------------------------------------



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.



Based on the most recent evaluation, which was completed within 90 days prior to the filing of this Quarterly Report, our CEO and CFO believe that our
disclosure controls and procedures are effective to ensure that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports
are being prepared, and that our disclosure controls and procedures are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with GAAP.



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.



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PART II - OTHER INFORMATION



Item 5. Exhibits and Reports On Form 8-K



|(a) |  | Exhibits
|--- |  | --------



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|10          |  | Amended and Restated Credit Agreement dated as of July 17, 2003 by and among Highwoods Realty Limited Partnership, Highwoods Properties, Inc., Highwoods Finance, LLC, Highwoods
Services, Inc., Highwoods/Tennessee Holdings, L.P., certain subsidiaries of Highwoods Properties Inc. and the Lenders named therein
|            | 
|31.1        |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                     
|            | 
|31.2        |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                     
|            | 
|32.1        |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                     
|            | 
|32.2        |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                     



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



The Company filed a current report on Form 8-K, dated August 1, 2003, furnishing under Item 12, the Companys press release announcing the results of
operations and financial condition of the Company for the three and six months ended June 30, 2003 and the Companys Supplemental Operating and Financial Information for the six months ended June 30, 2003.



The Company filed a current report on Form 8-K, dated April 25, 2003,
furnishing under Items 9 and 12 the Companys press release announcing the results of operations and financial condition of the Company for the three months ended March 31, 2003.



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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. GibsonPresident and Chief Executive OfficerBy:

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




Date: August 13, 2003



45