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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

THE SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended September 30,
2004



Commission file number: 000-21731



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HIGHWOODS REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified
in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|North Carolina                                                 |  | 56-1869557                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



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

(Address of principal executive office)



27604

(Zip Code)



(919) 872-4924

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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 SEPTEMBER 30, 2004



TABLE OF CONTENTS



|        |  |                                                                                                |  |   
|------- |  | ---------------------------------------------------------------------------------------------- |  | --
|        |  | Page                                                                                          
|PART I  |  | FINANCIAL INFORMATION                                                                          |  |   
|        |  |                                                                                               
|Item 1. |  | Financial Statements                                                                           |  | 2 
|        |  |                                                                                               
|        |  | Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                     |  | 3 
|        |  |                                                                                               
|        |  | Consolidated Income Statements for the three and nine months ended September 30, 2004 and 2003 |  | 4 
|        |  |                                                                                               
|        |  | Consolidated Statement of Partners Capital for the nine months ended September 30, 2004       |  | 5 
|        |  |                                                                                               
|        |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003    |  | 6 
|        |  |                                                                                               
|        |  | Notes to Consolidated Financial Statements                                                     |  | 8 
|        |  |                                                                                               
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 24
|        |  |                                                                                               
|        |  | Disclosure Regarding Forward-Looking Statements                                                |  | 24
|        |  |                                                                                               
|        |  | Overview                                                                                       |  | 24
|        |  |                                                                                               
|        |  | Results of Operations                                                                          |  | 32
|        |  |                                                                                               
|        |  | Liquidity and Capital Resources                                                                |  | 39
|        |  |                                                                                               
|        |  | Critical Accounting Estimates                                                                  |  | 49
|        |  |                                                                                               
|        |  | Funds From Operations                                                                          |  | 49
|        |  |                                                                                               
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 51
|        |  |                                                                                               
|Item 4. |  | Controls and Procedures                                                                        |  | 51
|        |  |                                                                                               
|PART II |  | OTHER INFORMATION                                                                              |  |   
|        |  |                                                                                               
|Item 6. |  | Exhibits and Reports on Form 8-K                                                               |  | 54



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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, (4) the Companys preferred
stock as Preferred Stock, (5) the Operating Partnerships common partnership interests as Common Units, (6) the Operating Partnerships preferred partnership interests as Preferred Units and (7)
in-service properties (excluding apartment units) to which the Operating Partnership has title and 100.0% ownership rights as the Wholly Owned Properties.



The information furnished in the accompanying Consolidated Financial Statements 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 2003 amended Annual Report on Form 10-K.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Balance Sheets



(Unaudited and in
thousands, except per unit amounts)



|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                   |  | September 30,2004 |           |   | December 31,2003 |  
|                                                                                                                                   |  | (Unaudited)       |           |   |                  |  
|Assets:                                                                                                                            |  |                   |           |   |                  |   |           |  
|Real estate assets, at cost:                                                                                                       |  |                   |           |   |                  |   |           |  
|Land and improvements                                                                                                              |  | $                 | 402,446   |   |                  | $ | 424,672   |  
|Buildings and tenant improvements                                                                                                  |  |                   | 2,937,859 |   |                  |   | 3,084,030 |  
|Development in process                                                                                                             |  |                   | 14,051    |   |                  |   | 7,088     |  
|Land held for development                                                                                                          |  |                   | 181,954   |   |                  |   | 179,231   |  
|Furniture, fixtures and equipment                                                                                                  |  |                   | 22,134    |   |                  |   | 21,813    |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|                                                                                                                                   |  |                   | 3,558,444 |   |                  |   | 3,716,834 |  
|Less  accumulated depreciation                                                                                                    |  |                   | (584,187  | ) |                  |   | (539,562  | )
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Net real estate assets                                                                                                             |  |                   | 2,974,257 |   |                  |   | 3,177,272 |  
|Property held for sale                                                                                                             |  |                   | 69,011    |   |                  |   | 101,002   |  
|Cash and cash equivalents                                                                                                          |  |                   | 19,904    |   |                  |   | 21,329    |  
|Restricted cash                                                                                                                    |  |                   | 4,927     |   |                  |   | 4,602     |  
|Accounts receivable, net                                                                                                           |  |                   | 14,852    |   |                  |   | 18,131    |  
|Notes receivable                                                                                                                   |  |                   | 9,743     |   |                  |   | 10,026    |  
|Accrued straight-line rents receivable                                                                                             |  |                   | 60,873    |   |                  |   | 58,912    |  
|Investments in unconsolidated affiliates                                                                                           |  |                   | 75,460    |   |                  |   | 59,005    |  
|Other assets:                                                                                                                      |  |                   |           |   |                  |   |           |  
|Deferred leasing costs                                                                                                             |  |                   | 108,986   |   |                  |   | 102,661   |  
|Deferred financing costs                                                                                                           |  |                   | 16,972    |   |                  |   | 19,286    |  
|Prepaid expenses and other                                                                                                         |  |                   | 11,956    |   |                  |   | 10,131    |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|                                                                                                                                   |  |                   | 137,914   |   |                  |   | 132,078   |  
|Less  accumulated amortization                                                                                                    |  |                   | (63,484   | ) |                  |   | (55,299   | )
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Other assets net                                                                                                                   |  |                   | 74,430    |   |                  |   | 76,779    |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Assets                                                                                                                       |  | $                 | 3,303,457 |   |                  | $ | 3,527,058 |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Liabilities and Partners Capital:                                                                                                 |  |                   |           |   |                  |   |           |  
|Mortgages and notes payable                                                                                                        |  | $                 | 1,595,127 |   |                  | $ | 1,708,765 |  
|Accounts payable accrued expenses and other liabilities                                                                            |  |                   | 106,467   |   |                  |   | 95,845    |  
|Financing obligations                                                                                                              |  |                   | 62,992    |   |                  |   | 124,063   |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Liabilities                                                                                                                  |  |                   | 1,764,586 |   |                  |   | 1,928,673 |  
|Redeemable operating partnership units:                                                                                            |  |                   |           |   |                  |   |           |  
|Class A Common Units, 6,128,061 and 6,202,640 outstanding at September 30, 2004 and December 31, 2003, respectively                |  |                   | 150,812   |   |                  |   | 157,547   |  
|Series A Preferred Units (liquidation preference $1,000 per unit), 104,945 outstanding at September 30, 2004 and December 31,
2003 |  |                   | 104,945   |   |                  |   | 104,945   |  
|Series B Preferred Units (liquidation preference $25 per unit), 6,900,000 outstanding at September 30, 2004 and December 31,
2003  |  |                   | 172,500   |   |                  |   | 172,500   |  
|Series D Preferred Units (liquidation preference $250 per unit), 400,000 outstanding at September 30, 2004 and December 31,
2003   |  |                   | 100,000   |   |                  |   | 100,000   |  
|Partners Capital:                                                                                                                 |  |                   |           |   |                  |   |           |  
|Class A common units:                                                                                                              |  |                   |           |   |                  |   |           |  
|General partner Common Units, 594,324 and 592,682 outstanding at September 30, 2004 and December 31, 2003, respectively            |  |                   | 10,185    |   |                  |   | 10,715    |  
|Limited partner Common Units, 52,710,048 and 52,472,912 outstanding at September 30, 2004 and December 31, 2003, respectively      |  |                   | 1,008,193 |   |                  |   | 1,060,797 |  
|Accumulated other comprehensive loss                                                                                               |  |                   | (3,003    | ) |                  |   | (3,650    | )
|Deferred compensation                                                                                                              |  |                   | (4,761    | ) |                  |   | (4,469    | )
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Partners Capital                                                                                                            |  |                   | 1,010,614 |   |                  |   | 1,063,393 |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Liabilities, Redeemable Operating Partnership Units and Partners Capital                                                    |  | $                 | 3,303,457 |   |                  | $ | 3,527,058 |  
|                                                                                                                                   |  |                   |           |   |                  |   |           |  

See accompanying notes to consolidated financial statements



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Income Statements



(Unaudited and
in thousands, except per unit amounts)



|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                              |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                              |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Rental and other revenues                                                                                     |  | $                               | 114,198 |   |                                | $ | 121,688 |      |  | $ | 350,905 |   |  | $ | 372,778 |  
|                                                                                                              |  |                                 |         |  
|Operating expenses:                                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Rental property and other expenses                                                                            |  |                                 | 41,556  |   |                                |   | 42,893  |      |  |   | 126,843 |   |  |   | 128,716 |  
|Depreciation and amortization                                                                                 |  |                                 | 33,411  |   |                                |   | 34,043  |      |  |   | 103,086 |   |  |   | 105,372 |  
|Impairment of assets held for use                                                                             |  |                                 | 500     |   |                                |   |        |      |  |   | 500     |   |  |   |        |  
|General and administrative                                                                                    |  |                                 | 10,069  |   |                                |   | 6,520   |      |  |   | 28,047  |   |  |   | 17,908  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                      |  |                                 | 85,536  |   |                                |   | 83,456  |      |  |   | 258,476 |   |  |   | 251,996 |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest expense:                                                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Contractual                                                                                                   |  |                                 | 25,596  |   |                                |   | 29,880  |      |  |   | 80,084  |   |  |   | 90,096  |  
|Amortization of deferred financing costs                                                                      |  |                                 | 782     |   |                                |   | 1,690   |      |  |   | 2,851   |   |  |   | 3,490   |  
|Financing obligations                                                                                         |  |                                 | 1,378   |   |                                |   | 4,478   |      |  |   | 7,497   |   |  |   | 13,516  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                              |  |                                 | 27,756  |   |                                |   | 36,048  |      |  |   | 90,432  |   |  |   | 107,102 |  
|Other income/(expense):                                                                                       |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest and other income                                                                                     |  |                                 | 1,760   |   |                                |   | 1,246   |      |  |   | 4,805   |   |  |   | 4,341   |  
|Settlement of bankruptcy claim                                                                                |  |                                 | 14,435  |   |                                |   |        |      |  |   | 14,435  |   |  |   |        |  
|Loss on debt extinguishment                                                                                   |  |                                 |        |   |                                |   |        |      |  |   | (12,457 | ) |  |   | (14,653 | )
|Gain on extinguishment of co-venture obligation                                                               |  |                                 |        |   |                                |   | 16,301  |      |  |   |        |   |  |   | 16,301  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                              |  |                                 | 16,195  |   |                                |   | 17,547  |      |  |   | 6,783   |   |  |   | 5,989   |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income before disposition of property, co-venture expense and equity in earnings of unconsolidated affiliates |  |                                 | 17,101  |   |                                |   | 19,731  |      |  |   | 8,780   |   |  |   | 19,669  |  
|                                                                                                              |  |                                 |         |  
|Gains on disposition of property, net                                                                         |  |                                 | 2,308   |   |                                |   | 5,556   |      |  |   | 17,783  |   |  |   | 7,971   |  
|Co-venture expense                                                                                            |  |                                 |        |   |                                |   | (333    | )    |  |   |        |   |  |   | (4,588  | )
|Equity in earnings of unconsolidated affiliates                                                               |  |                                 | 2,557   |   |                                |   | 1,020   |      |  |   | 5,279   |   |  |   | 3,466   |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                             |  |                                 | 21,966  |   |                                |   | 25,974  |      |  |   | 31,842  |   |  |   | 26,518  |  
|Discontinued operations:                                                                                      |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from discontinued operations                                                                           |  |                                 | 611     |   |                                |   | 844     |      |  |   | 1,302   |   |  |   | 3,432   |  
|Gain on sale of discontinued operations                                                                       |  |                                 | 703     |   |                                |   | 7,796   |      |  |   | 682     |   |  |   | 8,675   |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                              |  |                                 | 1,314   |   |                                |   | 8,640   |      |  |   | 1,984   |   |  |   | 12,107  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                    |  |                                 | 23,280  |   |                                |   | 34,614  |      |  |   | 33,826  |   |  |   | 38,625  |  
|Distributions on preferred units                                                                              |  |                                 | (7,713  | ) |                                |   | (7,713  | )    |  |   | (23,139 | ) |  |   | (23,139 | )
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income/(loss) available for/(attributable to) common unitholders                                          |  | $                               | 15,567  |   |                                | $ | 26,901  |      |  | $ | 10,687  |   |  | $ | 15,486  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income per common unit  basic:                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                             |  | $                               | 0.24    |   |                                | $ | 0.31    |      |  | $ | 0.15    |   |  | $ | 0.06    |  
|Income from discontinued operations                                                                           |  |                                 | 0.02    |   |                                |   | 0.15    |      |  |   | 0.03    |   |  |   | 0.20    |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                    |  | $                               | 0.26    |   |                                | $ | 0.46    |      |  | $ | 0.18    |   |  | $ | 0.26    |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common units outstanding                                                                     |  |                                 | 59,097  |   |                                |   | 58,894  |      |  |   | 59,016  |   |  |   | 59,243  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income per common unit  diluted:                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                             |  | $                               | 0.24    |   |                                | $ | 0.30    |      |  | $ | 0.15    |   |  | $ | 0.06    |  
|Income from discontinued operations                                                                           |  |                                 | 0.02    |   |                                |   | 0.15    |      |  |   | 0.03    |   |  |   | 0.20    |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                                                    |  | $                               | 0.26    |   |                                | $ | 0.45    |      |  | $ | 0.18    |   |  | $ | 0.26    |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common units outstanding                                                                     |  |                                 | 59,726  |   |                                |   | 59,518  |      |  |   | 59,747  |   |  |   | 59,750  |  
|                                                                                                              |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Partners Capital



For the Nine Months Ended September 30, 2004



(Unaudited and in thousands)



|                                                    |                         |             |        |                         |                      |   |           |                                   |  |   |                       |   |  |   |        |   |  |   |           |  
|--------------------------------------------------- | ----------------------- | ----------- | ------ | ----------------------- | -------------------- | - | --------- | --------------------------------- |  | - | --------------------- | - |  | - | ------ | - |  | - | --------- | -
|                                                    |                         | Common Unit |        |                         | DeferredCompensation |   |           | AccumulatedOtherComprehensiveLoss |  |   | TotalPartnersCapital |  
|                                                    | GeneralPartnersCapital |             |        | LimitedPartnersCapital |                      |   |           |                                  
|Balance at December 31, 2003                        |                         | $           | 10,715 |                         |                      | $ | 1,060,797 |                                   |  | $ | (4,469                | ) |  | $ | (3,650 | ) |  | $ | 1,063,393 |  
|Issuance of Common Units                            |                         |             | 14     |                         |                      |   | 1,425     |                                   |  |   |                      |   |  |   |       |   |  |   | 1,439     |  
|Redemption of Common Units                          |                         |             | (4     | )                       |                      |   | (479      | )                                 |  |   |                      |   |  |   |       |   |  |   | (483      | )
|Distributions paid on Common Units                  |                         |             | (762   | )                       |                      |   | (75,453   | )                                 |  |   |                      |   |  |   |       |   |  |   | (76,215   | )
|Distributions paid on Preferred Units               |                         |             | (231   | )                       |                      |   | (22,908   | )                                 |  |   |                      |   |  |   |       |   |  |   | (23,139   | )
|Net income                                          |                         |             | 338    |                         |                      |   | 33,488    |                                   |  |   |                      |   |  |   |       |   |  |   | 33,826    |  
|Adjustment of redeemable Common Units to fair value |                         |             | 71     |                         |                      |   | 7,027     |                                   |  |   |                      |   |  |   |       |   |  |   | 7,098     |  
|Other comprehensive loss                            |                         |             |       |                         |                      |   |          |                                   |  |   |                      |   |  |   | 647    |   |  |   | 647       |  
|Issuance of deferred compensation                   |                         |             | 31     |                         |                      |   | 3,053     |                                   |  |   | (3,084                | ) |  |   |       |   |  |   |          |  
|Fair value of stock options issued (see Note 10)    |                         |             | 13     |                         |                      |   | 1,243     |                                   |  |   | (1,256                | ) |  |   |       |   |  |   |          |  
|Amortization of deferred compensation               |                         |             |       |                         |                      |   |          |                                   |  |   | 4,048                 |   |  |   |       |   |  |   | 4,048     |  
|                                                    |                         |             |        |                         |                      |   |           |                                   |  |   |                       |   |  |   |        |   |  |   |           |  
|Balance at September 30, 2004                       |                         | $           | 10,185 |                         |                      | $ | 1,008,193 |                                   |  | $ | (4,761                | ) |  | $ | (3,003 | ) |  | $ | 1,010,614 |  
|                                                    |                         |             |        |                         |                      |   |           |                                   |  |   |                       |   |  |   |        |   |  |   |           |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Cash Flows



(Unaudited and in thousands)



|                                                                                                         |  |                                 |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                         |  | Nine Months Ended September 30, |         
|                                                                                                         |  | 2004                            |          |   | 2003 |  
|Operating activities:                                                                                    |  |                                 |          |   |      |   |          |  
|Income from continuing operations                                                                        |  | $                               | 31,842   |   |      | $ | 26,518   |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |  |                                 |          |   |      |   |          |  
|Depreciation and amortization                                                                            |  |                                 | 103,086  |   |      |   | 105,372  |  
|Amortization of deferred compensation                                                                    |  |                                 | 4,048    |   |      |   | 2,159    |  
|Amortization of deferred financing costs                                                                 |  |                                 | 2,851    |   |      |   | 3,490    |  
|Amortization of accumulated other comprehensive loss                                                     |  |                                 | 582      |   |      |   | 1,360    |  
|Equity in earnings of unconsolidated affiliates                                                          |  |                                 | (5,279   | ) |      |   | (3,466   | )
|Loss on debt extinguishments                                                                             |  |                                 | 12,457   |   |      |   | 14,653   |  
|Gain on extinguishment of co-venture obligation                                                          |  |                                 |         |   |      |   | (16,301  | )
|Gains on disposition of property, net                                                                    |  |                                 | (17,783  | ) |      |   | (7,971   | )
|Impairments of assets held for use                                                                       |  |                                 | 500      |   |      |   |         |  
|Discontinued operations                                                                                  |  |                                 | 2,407    |   |      |   | 6,256    |  
|Changes in financing obligations                                                                         |  |                                 | 1,429    |   |      |   | 4,675    |  
|Changes in co-venture obligation                                                                         |  |                                 |         |   |      |   | (987     | )
|Changes in operating assets and liabilities                                                              |  |                                 | (7,323   | ) |      |   | (1,458   | )
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                                                |  |                                 | 128,817  |   |      |   | 134,300  |  
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Investing activities:                                                                                    |  |                                 |          |   |      |   |          |  
|Additions to real estate assets                                                                          |  |                                 | (95,049  | ) |      |   | (98,227  | )
|Proceeds from disposition of real estate assets                                                          |  |                                 | 106,220  |   |      |   | 122,541  |  
|Distributions from unconsolidated affiliates                                                             |  |                                 | 6,884    |   |      |   | 4,715    |  
|Investments in notes receivable                                                                          |  |                                 | 985      |   |      |   | (472     | )
|Contributions to unconsolidated affiliates                                                               |  |                                 | (3,865   | ) |      |   |         |  
|Other investing activities                                                                               |  |                                 | 81       |   |      |   | (215     | )
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                                                    |  |                                 | 15,256   |   |      |   | 28,342   |  
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Financing activities:                                                                                    |  |                                 |          |   |      |   |          |  
|Distributions paid on common units                                                                       |  |                                 | (76,215  | ) |      |   | (86,301  | )
|Distributions paid on preferred units                                                                    |  |                                 | (23,139  | ) |      |   | (23,139  | )
|Net proceeds from the sale of common units                                                               |  |                                 | 1,439    |   |      |   | 619      |  
|Repurchase of common units                                                                               |  |                                 | (483     | ) |      |   | (19,072  | )
|Borrowings on revolving loan                                                                             |  |                                 | 356,000  |   |      |   | 187,500  |  
|Repayment of revolving loan                                                                              |  |                                 | (206,000 | ) |      |   | (147,500 | )
|Borrowings on mortgages and notes payable                                                                |  |                                 | 143,000  |   |      |   | 20,000   |  
|Repayment of mortgages and notes payable                                                                 |  |                                 | (263,638 | ) |      |   | (51,770  | )
|Payments on financing obligations                                                                        |  |                                 | (62,500  | ) |      |   |         |  
|Payments on co-venture obligation                                                                        |  |                                 |         |   |      |   | (26,223  | )
|Settlement of interest rate swap agreement                                                               |  |                                 |         |   |      |   | 3,866    |  
|Net change in deferred financing costs                                                                   |  |                                 | (1,505   | ) |      |   | (2,818   | )
|Payments on debt extinguishments                                                                         |  |                                 | (12,457  | ) |      |   | (16,282  | )
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash used in financing activities                                                                    |  |                                 | (145,498 | ) |      |   | (161,120 | )
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Net (decrease)/increase in cash and cash equivalents                                                     |  |                                 | (1,425   | ) |      |   | 1,522    |  
|Cash and cash equivalents at beginning of the period                                                     |  |                                 | 21,329   |   |      |   | 15,509   |  
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of the period                                                           |  | $                               | 19,904   |   |      | $ | 17,031   |  
|                                                                                                         |  |                                 |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                                        |  |                                 |          |   |      |   |          |  
|Cash paid for interest                                                                                   |  | $                               | 78,553   |   |      | $ | 84,656   |  
|                                                                                                         |  |                                 |          |   |      |   |          |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



Consolidated Statements of Cash Flows (Continued)



(Unaudited and in thousands)



Supplemental disclosure of non-cash investing and financing activities:



The following table summarizes the net assets acquired/disposed subject to mortgage notes payable and other non-cash transactions:



|                                                         |  |                                |          |   |      |   |       
|-------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------
|                                                         |  | Nine Months EndedSeptember 30,
|                                                         |  | 2004                           |          |   | 2003
|Assets:                                                  |  |                                |          |   |      |   |       
|Net real estate assets                                   |  | $                              | (154,548 | ) |      | $ | 6,029 
|Notes receivable                                         |  |                                | 702      |   |      |   | 2,142 
|Investment in unconsolidated affiliates                  |  |                                | 14,300   |   |      |   | 3,801 
|Prepaid expenses and other                               |  |                                |         |   |      |   | 855   
|                                                         |  |                                |          |   |      |   |       
|                                                         |  | $                              | (139,546 | ) |      | $ | 12,827
|                                                         |  |                                |          |   |      |   |       
|Liabilities:                                             |  |                                |          |   |      |   |       
|Mortgages and notes payable                              |  | $                              | (143,000 | ) |      | $ |      
|Accounts payable, accrued expenses and other liabilities |  |                                | 3,454    |   |      |   | 9,625 
|                                                         |  |                                |          |   |      |   |       
|                                                         |  | $                              | (139,546 | ) |      | $ | 9,625 
|                                                         |  |                                |          |   |      |   |       
|Partners Capital:                                       |  | $                              |         |   |      | $ | 3,202 
|                                                         |  |                                |          |   |      |   |       



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



September 30, 2004



(Unaudited)



1. DESCRIPTION OF BUSINESS AND
BASIS OF PRESENTATION



Description of the Operating Partnership



Highwoods Realty Limited Partnership (the Operating Partnership) is managed by its sole general partner, Highwoods Properties, Inc. (the Company), a self-administered and self-managed real estate investment trust
(REIT) which operates in the southeastern and midwestern United States. The Operating Partnerships wholly owned assets include: 525 in-service office, industrial and retail properties; 1,200 acres of undeveloped land suitable for
future development; and an additional four properties under development (collectively, the Wholly Owned Properties).



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. At September 30, 2004, the Company owned 100.0% of the preferred partnership interests (Preferred Units) and 89.7% of the common partnership interests (Common Units) in the Operating Partnership.
Holders of Common Units may redeem them for the cash value of one share of the Companys Common Stock, $.01 par value (the Common Stock), or, at the Companys option, one share of Common Stock. During the nine months ended
September 30, 2004, the Company redeemed from limited partners (including certain officers and directors of the Company) 1,960 Common Units for $0.05 million in cash and converted 54,308 Common Units in exchange for Common Stock on a one-for-one
basis. These transactions increased the percentage of Common Units owned by the Company from 89.5% at December 31, 2003 to 89.7% at September 30, 2004. The three series of Preferred Units in the Operating Partnership were issued to the Company in
connection with the Companys three Preferred Stock offerings in 1997 and 1998. The net proceeds raised from each of the three Preferred Stock issuances were contributed by the Company to the Operating Partnership in exchange for preferred
interests in the Operating Partnership. The terms of each series of Preferred Units generally parallel the terms of the respective Preferred Stock as to dividends, liquidation and redemption rights.



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. When a common unitholder redeems a Common Unit for a share of Common Stock or cash, the Companys share in the Operating Partnership will increase. 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.



8



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



1. DESCRIPTION OF BUSINESS AND BASIS OF
PRESENTATION - Continued



Basis of Presentation



The Consolidated Financial Statements include the
accounts of the Operating Partnership, wholly owned subsidiaries and those subsidiaries in which the Operating Partnership owns a majority voting interest with the ability to control operations of the subsidiaries and where no approval, veto or
other important rights have been granted to the minority unitholders. In accordance with Statement of Position 78-9, Accounting for Investments in Real Estate Ventures, the Operating Partnership consolidates partnerships, joint ventures
and limited liability companies when the Operating Partnership controls the major operating and financial policies of the entity through majority ownership or in its capacity as general partner or managing member. The Operating Partnership does not
consolidate entities where the other interest holders have important rights, including approving decisions to encumber the entities with debt and acquire or dispose of properties. In addition, the Operating Partnership consolidates those entities,
if any, where the Operating Partnership is deemed to be the primary beneficiary in a variable interest entity (as defined by FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities (FIN
46)). All significant intercompany transactions and accounts have been eliminated.



Certain amounts originally reported in the September 30, 2003 and the amended December 31, 2003 financial statements have been reclassified to conform to the September 30, 2004 presentation and accounting for
discontinued operations (see Note 9 for further discussion). These reclassifications had no effect on net income or partners capital as previously reported.



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 the Operating Partnerships financial position, results of operations and cash flows have been made. The Operating Partnership has condensed or omitted certain notes and other
information from the interim financial statements presented in this Quarterly Report on Form 10-Q. These financial statements should be read in conjunction with the Operating Partnerships 2003 amended Annual Report on Form 10-K.



Income Taxes



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



Use of
Estimates



The preparation of financial statements in
accordance with United States 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.



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 22.81% to 50.00% in
these joint ventures. The Operating Partnership has accounted for its unconsolidated joint ventures using the equity method of accounting. As a result, the assets and liabilities of these joint ventures for which it uses the equity method of
accounting are not included on the Operating Partnerships Consolidated Balance Sheet. As of September 30, 2004, one joint venture is accounted for as a financing arrangement pursuant to Statement of Financial Accounting Standards
(SFAS) No. 66, Accounting for Sales of Real Estate, as described in Note 3 and accordingly, is not reflected in the table below.



9



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES - Continued



The following table sets forth information regarding the Operating
Partnerships unconsolidated joint ventures as recorded on the joint ventures books for the nine months ended September 30, 2004 and 2003 (in thousands):



|                                      |  |              |   |  |                                      |        |                   |                                      |          |  |            |        |                   |   |        |         |   |                    |   |          |   |            |  |                  |        |  |   |        |  |   |        |  |   |       |  
|------------------------------------- |  | ------------ | - |  | ------------------------------------ | ------ | ----------------- | ------------------------------------ | -------- |  | ---------- | ------ | ----------------- | - | ------ | ------- | - | ------------------ | - | -------- | - | ---------- |  | ---------------- | ------ |  | - | ------ |  | - | ------ |  | - | ----- | -
|                                      |  |              |   |  | Nine Months Ended September 30, 2004 |        |                   | Nine Months Ended September 30, 2003 |         
|                                      |  | PercentOwned |   |  | Revenue                              |        | OperatingExpenses |                                      | Interest |  | Depr/Amort |        | Net Income/(Loss) |   |        | Revenue |   | Operating Expenses |   | Interest |   | Depr/Amort |  | NetIncome/(Loss) |       
|Income Statement Data:                |  |              |   |  |                                      |        |                   |                                      |          |  |            |        |                   |   |        |         |   |                    |   |          |   |            |  |                  |        |  |   |        |  |   |        |  |   |       |  
|Board of Trade Investment Company     |  | 49.00        | % |  | $                                    | 1,904  |                   | $                                    | 1,286    |  | $          | 40     |                   | $ | 340    |         | $ | 238                |   |          | $ | 1,768      |  | $                | 1,191  |  | $ | 50     |  | $ | 304    |  | $ | 223   |  
|Dallas County Partners (1)            |  | 50.00        | % |  |                                      | 8,908  |                   |                                      | 4,270    |  |            | 2,021  |                   |   | 1,407  |         |   | 1,210              |   |          |   | 7,954      |  |                  | 4,135  |  |   | 2,079  |  |   | 1,415  |  |   | 325   |  
|Dallas County Partners II (1)         |  | 50.00        | % |  |                                      | 4,788  |                   |                                      | 2,115    |  |            | 1,686  |                   |   | 561    |         |   | 426                |   |          |   | 4,579      |  |                  | 1,914  |  |   | 1,775  |  |   | 617    |  |   | 273   |  
|Fountain Three (1)                    |  | 50.00        | % |  |                                      | 5,467  |                   |                                      | 2,402    |  |            | 1,598  |                   |   | 1,147  |         |   | 320                |   |          |   | 5,174      |  |                  | 2,346  |  |   | 1,687  |  |   | 1,160  |  |   | (19   | )
|RRHWoods, LLC (1)                     |  | 50.00        | % |  |                                      | 10,489 |                   |                                      | 5,848    |  |            | 1,961  |                   |   | 2,536  |         |   | 144                |   |          |   | 10,918     |  |                  | 5,551  |  |   | 1,979  |  |   | 2,545  |  |   | 843   |  
|Highwoods DLF 98/29, LP               |  | 22.81        | % |  |                                      | 14,861 |                   |                                      | 4,287    |  |            | 3,398  |                   |   | 2,657  |         |   | 4,519              |   |          |   | 14,492     |  |                  | 4,142  |  |   | 3,448  |  |   | 2,592  |  |   | 4,310 |  
|Highwoods DLF 97/26 DLF 99/32, LP     |  | 42.93        | % |  |                                      | 11,088 |                   |                                      | 3,318    |  |            | 3,409  |                   |   | 3,132  |         |   | 1,229              |   |          |   | 12,082     |  |                  | 3,345  |  |   | 3,448  |  |   | 2,979  |  |   | 2,310 |  
|Highwoods-Markel Associates, LLC      |  | 50.00        | % |  |                                      | 4,988  |                   |                                      | 1,117    |  |            | 1,729  |                   |   | 1,103  |         |   | 1,039              |   |          |   | 2,462      |  |                  | 1,300  |  |   | 800    |  |   | 464    |  |   | (102  | )
|MG-HIW Peachtree Corners III, LLC (2) |  | 50.00        | % |  |                                      |       |                   |                                      |         |  |            |       |                   |   |       |         |   |                   |   |          |   | 219        |  |                  | 75     |  |   | 73     |  |   | 76     |  |   | (5    | )
|MG-HIW Metrowest I, LLC (3)           |  | 50.00        | % |  |                                      |       |                   |                                      | 5        |  |            |       |                   |   |       |         |   | (5                 | ) |          |   |           |  |                  | 26     |  |   |       |  |   |       |  |   | (26   | )
|MG-HIW Metrowest II, LLC (3)          |  | 50.00        | % |  |                                      | 141    |                   |                                      | 88       |  |            | 39     |                   |   | 70     |         |   | (56                | ) |          |   | 441        |  |                  | 325    |  |   | 124    |  |   | 252    |  |   | (260  | )
|Concourse Center Associates, LLC      |  | 50.00        | % |  |                                      | 1,579  |                   |                                      | 439      |  |            | 523    |                   |   | 249    |         |   | 368                |   |          |   | 1,556      |  |                  | 401    |  |   | 518    |  |   | 227    |  |   | 410   |  
|Plaza Colonnade, LLC                  |  | 50.00        | % |  |                                      | 27     |                   |                                      | 3        |  |            |       |                   |   | 17     |         |   | 7                  |   |          |   | 10         |  |                  | 2      |  |   |       |  |   | 3      |  |   | 5     |  
|Highwoods KC Glenridge, LLC (4)       |  | 40.00        | % |  |                                      | 1,999  |                   |                                      | 879      |  |            | 332    |                   |   | 374    |         |   | 414                |   |          |   |           |  |                  |       |  |   |       |  |   |       |  |   |      |  
|HIW-KC Orlando, LLC (5)               |  | 40.00        | % |  |                                      | 7,187  |                   |                                      | 2,752    |  |            | 1,924  |                   |   | 1,036  |         |   | 1,475              |   |          |   |           |  |                  |       |  |   |       |  |   |       |  |   |      |  
|                                      |  |              |   |  |                                      |        |                   |                                      |          |  |            |        |                   |   |        |         |   |                    |   |          |   |            |  |                  |        |  |   |        |  |   |        |  |   |       |  
|Total                                 |  |              |   |  | $                                    | 73,426 |                   | $                                    | 28,809   |  | $          | 18,660 |                   | $ | 14,629 |         | $ | 11,328             |   |          | $ | 61,655     |  | $                | 24,753 |  | $ | 15,981 |  | $ | 12,634 |  | $ | 8,287 |  
|                                      |  |              |   |  |                                      |        |                   |                                      |          |  |            |        |                   |   |        |         |   |                    |   |          |   |            |  |                  |        |  |   |        |  |   |        |  |   |       |  

---

|(1) | Des Moines joint ventures.
|--- | --------------------------

|(2) | As part of the MG-HIW, LLC acquisition on July 29, 2003, the Operating Partnership 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. As a result, this entity became wholly owned as of July 29, 2003 and is consolidated as of that date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On March 2, 2004, the Operating Partnership exercised an option to acquire its partners 50.0% equity interest in the assets of MG-HIW Metrowest I, LLC and MG-HIW Metrowest II,
LLC. The Operating Partnership paid its partner $3.2 million for such remaining interest and a $7.4 million construction loan was paid in full by the Operating Partnership. The assets encompass 87,832 square feet of property and 7.0 acres of
development land zoned for the development of 90,000 square feet of office space. This acquisition increased the Operating Partnerships ownership interest to 100.0% and these entities are consolidated commencing as of March 2, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The Operating Partnership and Kapital-Consult, a European investment firm, formed this joint venture partnership, which on February 26, 2004 acquired from a third party Glenridge
Point Office Park, consisting of two office buildings aggregating 185,000 square feet located in the Central Perimeter sub-market of Atlanta. As of September 30, 2004, the buildings were 91.0% leased. The Operating Partnership contributed $10.0
million to the joint venture in return for a 40.0% equity interest and Kapital-Consult contributed $14.9 million for a 60.0% equity interest in the partnership. The joint venture entered into a $16.5 million ten-year secured loan on the assets. The
Operating Partnership is the manager and leasing agent for this property and will receive customary management fees and leasing commissions. The acquisition also included 2.9 acres of development land that can accommodate 150,000 square feet of
office space.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES - Continued



|(5) | On June 28, 2004, Kapital-Consult, a European investment firm, bought an interest in HIW-KC Orlando, LLC, an entity formed by the Operating Partnership. HIW-KC Orlando, LLC owns
five in-service office properties, encompassing 1.3 million rentable square feet, located in the central business district of Orlando, Florida, which were valued under the joint venture agreement at $212.0 million, including amounts related to the
Operating Partnerships guarantees described below, and which were subject to a $136.2 million secured mortgage loan. Kapital-Consult contributed $42.1 million in cash and received a 60.0% equity interest in return. The joint venture borrowed
$143.0 million under a ten-year fixed rate mortgage loan from a third party lender and repaid the $136.2 million loan. The Operating Partnership retained a 40.0% equity interest in the joint venture and received net cash proceeds of approximately
$46.6 million, of which $33.0 million was used to pay down the Operating Partnerships $250.0 million revolving loan (the Revolving Loan) and $13.6 million was used to pay down other debt of the Operating Partnership. In connection
with this transaction, the Operating Partnership agreed to guarantee rent to the joint venture for 3,248 rentable square feet commencing in August 2004 and expiring in April 2011. Additionally, the Operating Partnership agreed to guarantee
re-tenanting costs for approximately 11.0% of the joint ventures total square footage. The Operating Partnership recorded a $4.1 million liability with respect to such guarantee at the date of formation and reduced the total amount of the gain
recognized by the same amount. At September 30, 2004, $2.6 million remains in other liabilities in connection with this guarantee. The Operating Partnership believes its estimate related to the re-tenanting costs guarantee is accurate. However, if
its assumptions prove to be incorrect, future losses may occur. The contribution was accounted for as a partial sale as defined by SFAS No. 66, and the Operating Partnership recognized a $15.9 million gain in June 2004. Since the Operating
Partnership has an ongoing 40.0% financial interest in the joint venture and since the Operating Partnership is engaged by the joint venture to provide management and leasing services for the joint venture, for which it receives customary management
fees and leasing commissions, the operations of these properties will not be reflected as discontinued operations consistent with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) and
the related gain on sale was included in continuing operations in June 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities (VIEs), 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 the entitys activities without additional financial support. FIN 46 also requires additional disclosures. FIN 46 was effective
immediately for interests acquired subsequent to January 31, 2003 and was effective March 31, 2004 for interests in VIEs created before February 1, 2003. The Operating Partnership assessed its variable interests, including the joint ventures listed
above, and determined the interests were not VIEs. As a result, the provisions of FIN 46 did not have an impact on the Operating Partnerships financial condition or results of operations.



3. FINANCING ARRANGEMENTS



The following summarizes sales transactions that are accounted for as
financing arrangements at September 30, 2004 under paragraphs 25 through 29 under SFAS No. 66.



SF-HIW Harborview, LP



On September 11, 2002, the Operating Partnership contributed Harborview Plaza, an office building located in Tampa, Florida, to SF-HIW Harborview Plaza, LP (Harborview LP), a newly formed entity, in exchange for a 20.0% limited
partnership interest and $35.4 million in cash. The Operating Partnership also entered into a master lease agreement with Harborview, LP for five years on the vacant space in the building (approximately 20.0%) and guaranteed payment of tenant
improvements and lease commissions of $1.2 million. The Operating Partnerships maximum exposure to loss under the master lease agreement was $2.1 million at September 11, 2002 and was $1.1 million at September 30, 2004. Additionally, the
Operating Partnerships partner in Harborview LP was granted the right to put its 80.0% equity interest in Harborview LP to the Operating Partnership in exchange for cash at any time during the one-year period commencing on September 11, 2014.
The value of the 80.0% equity interest will be determined at the time, if ever, that such partner elects to exercise its put right, based upon the then fair market value of Harborview LPs assets and liabilities, less 3.0%, which was intended
to cover normal costs of a sale transaction.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



3. FINANCING ARRANGEMENTS - Continued



Because of the put option and master lease agreement, this transaction is accounted for as a financing transaction.
Accordingly, the assets, liabilities and operations related to Harborview Plaza, the property owned by Harborview LP, including any new financing by the partnership, remain on the books of the Operating Partnership. As a result, the Operating
Partnership has established a financing obligation equal to the net equity contributed by the other partner. At the end of each reporting period, the balance of the financing obligation is adjusted to equal the current fair value, which is $13.7
million at September 30, 2004, but not less than the original financing obligation. This adjustment is amortized prospectively through September 2014. Additionally, the net income from the operations before depreciation of Harborview Plaza allocable
to the 80.0% partner is recorded as interest expense on financing obligation. The Operating Partnership continues to depreciate the property and record all of the depreciation on its books. Additionally, any payments made under the master lease
agreement are expensed as incurred ($0.07 million and $0.3 million was expensed during the nine months ended September 30, 2004 and 2003, respectively) and any amounts paid under the tenant improvement and lease commission guarantee are capitalized
and amortized to expense over the remaining lease term. At such time as the put option expires or otherwise is terminated, the Operating Partnership will record the transaction as a sale and recognize gain on sale.



Eastshore



On November 26, 2002, the Operating Partnership sold three buildings located in Richmond, Virginia for a total purchase
price of $28.5 million in cash, which was paid in full by the buyer at closing (the Eastshore transaction). Each of the sold properties is a single tenant building leased on a triple-net basis to Capital One Services, Inc., a subsidiary
of Capital One Financial Services, Inc.



In connection with the
sale, the Operating Partnership entered into a rental guarantee agreement for each building for the benefit of the buyer to guarantee any rent shortfalls which may be incurred in the payment of rent and re-tenanting costs for a five-year period from
the date of sale (through November 2007). The Operating Partnerships maximum exposure to loss under the rental guarantee agreements was $18.7 million at the date of sale and $13.4 million as of September 30, 2004. In June 2004, the Operating
Partnership began to make monthly payments to the buyer, at an annual rate of $0.1 million, as a result of the existing tenant renewing a lease in one building at a lower rental rate.



These rent guarantees are a form of continuing involvement as prescribed by SFAS No. 66. Because the guarantees cover the
entire space occupied by a single tenant under a triple-net lease arrangement, the Operating Partnerships guarantees are considered a guaranteed return on the buyers investment for an extended period of time. Therefore, the transaction
has been accounted for as a financing transaction. Accordingly, the assets and operations are included in these Consolidated Financial Statements, and a financing obligation of $28.5 million was initially recorded which represents the amount
received from the buyer. The income from the operations of the properties, other than depreciation, is allocated 100.0% to the owner as interest expense on financing obligation. Payments made under the rent guarantees are charged to expense as
incurred which totaled $0.04 million for the nine months ended September 30, 2004. This transaction will be recorded as a completed sale transaction in the future when the maximum exposure to loss under the guarantees is equal to or less than the
related gain.



MG-HIW, LLC



As previously disclosed, on March 2, 2004, the Operating Partnership
exercised its option and acquired its partners 80.0% interest in the Orlando City Group of MG-HIW, LLC. At the closing of the transaction, the Operating Partnership paid its partner, Miller Global, $62.5 million and a $7.5 million letter of
credit delivered to the seller in connection with the option was cancelled. The initial contribution of these assets was accounted for as a financing arrangement and continued to be so treated through March 1, 2004. The financing obligation was
eliminated on March 2, 2004. Since the financing obligation was adjusted each period for a 20.0% leveraged internal rate of return guarantee, no gain or loss was recognized upon the extinguishment of the financing obligation.



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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



4. ASSET DISPOSITIONS



Gains on disposition of properties, net excluding gains or losses from discontinued operations, consisted of the following (in thousands):



|                                                      |  |                                 |       |                                |   |       |  |   |        |   |  |   |       |  
|----------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | - | ------ | - |  | - | ----- | -
|                                                      |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30, |  
|                                                      |  | 2004                            |       | 2003                           |   | 2004  |  |   | 2003   |  
|Gain/(loss) on disposition of land, net of impairment |  | $                               | 579   |                                | $ | 1,067 |  | $ | (100   | ) |  | $ | 3,439 |  
|Gain on disposition of depreciable properties         |  |                                 | 1,729 |                                |   | 4,489 |  |   | 17,883 |   |  |   | 4,729 |  
|(Impairment) of depreciable properties                |  |                                 |      |                                |   |      |  |   |       |   |  |   | (197  | )
|                                                      |  |                                 |       |                                |   |       |  |   |        |   |  |   |       |  
|Total                                                 |  | $                               | 2,308 |                                | $ | 5,556 |  | $ | 17,783 |   |  | $ | 7,971 |  
|                                                      |  |                                 |       |                                |   |       |  |   |        |   |  |   |       |  



Gains on disposition
of properties consisted of the following (in thousands):



|                                              |  |                                 |     |                                |   |       |  |   |        |   |  |   |       |  
|--------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ----- |  | - | ------ | - |  | - | ----- | -
|                                              |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30, |  
|                                              |  | 2004                            |     | 2003                           |   | 2004  |  |   | 2003   |  
|Gain on disposition of depreciable properties |  | $                               | 703 |                                | $ | 7,796 |  | $ | 4,538  |   |  | $ | 8,803 |  
|(Impairment) of depreciable properties        |  |                                 |    |                                |   |      |  |   | (3,856 | ) |  |   | (128  | )
|                                              |  |                                 |     |                                |   |       |  |   |        |   |  |   |       |  
|Total                                         |  | $                               | 703 |                                | $ | 7,796 |  | $ | 682    |   |  | $ | 8,675 |  
|                                              |  |                                 |     |                                |   |       |  |   |        |   |  |   |       |  



On June 16, 2004, the
Operating Partnership sold a 177,000 square foot building (the network operations center) located in the Highwoods Preserve Office Park in Tampa, Florida. Highwoods Preserve is a 816,000 square foot office park that has not been occupied since
WorldCom vacated the space as of December 31, 2002. Net proceeds from the sale were $18.6 million. The asset had a net book value of $22.4 million. The Operating Partnership recognized an impairment loss of approximately $3.7 million in April 2004
when the planned sale met the criteria to be classified as held for sale. In connection with the sale of the network operations center, the buyer also agreed to purchase a 3.3 acre tract of development land located in the office park for
approximately $1.4 million, which is subject to the Operating Partnership securing certain development rights for the land from the local municipality. The net book value of the land is approximately $0.6 million and was classified as held for sale
in accordance with SFAS No.144 in April 2004. This land sale is subject to customary closing conditions and no assurances can be provided that the disposition will occur. The remaining assets in the office park were classified as held for use as of
September 30, 2004 and continue to be so classified in accordance with SFAS No. 144.



In May 2004, the Operating Partnership executed two agreements to sell 30.0 acres of land in suburban Baltimore, Maryland. The agreements provide for estimated net proceeds of approximately $6.1 million and the net
book value of the land is $7.9 million. Accordingly, an impairment loss of approximately $1.8 million was recorded in May 2004 when the land was reclassified from held for use to held for sale. On September 30, 2004, one sale of 27.0 acres was
consummated. The Operating Partnership received $5.5 million in net proceeds. The sale of the remaining 3.0 acres is estimated to close in the second quarter of 2005, however, no assurances can be provided that the disposition will occur.



See Note 9 for additional disclosure on asset impairment and
disposals in accordance with SFAS No. 144.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



5. PUT OPTION NOTES REFINANCING AND REVOLVING
LOAN



In 1997, the Operating Partnership
sold $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the Put Option Notes). The Put Option Notes bore 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 the Put Option Notes was required to be 6.39% plus the applicable spread determined as of June 10, 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 on June 15, 2004 at 100.0% of the principal amount. The counter party exercised this option and acquired the Put Option Notes on June 15, 2004. On that same date, the Operating Partnership exercised its option to acquire the Put Option Notes
from the counter party for a purchase price equal to the sum of the present value of the remaining scheduled payments of principal and interest (assuming an interest rate of 6.39%) on the Put Option Notes, or $112.3 million. The difference between
the $112.3 million and the $100.0 million was charged to loss on extinguishment of debt in the nine months ended September 30, 2004. The Operating Partnership borrowed funds from its Revolving Loan to make the $112.3 million payment.



In June 2004, the Operating Partnership amended its Revolving Loan and two
bank term loans. The changes excluded the $12.5 million charge taken related to the refinancing of the Put Option Notes from the calculations used to compute financial covenants. The amendment did not change any economic terms of the loans. In
connection with the amendment, the Operating Partnership incurred certain loan costs that are capitalized and amortized over the remaining term of the loans.



In August 2004, the Operating Partnership further amended its Revolving Loan and two bank term loans. The changes excluded the effects of accounting for
three sales transactions as financing and/or profit-sharing arrangements under SFAS No. 66 from the calculations used to compute financial covenants, adjusted one financial covenant and temporarily adjusted a second financial covenant until the
earlier of December 31, 2004 or the period when the Operating Partnership can record income from the anticipated settlement of a claim against WorldCom  see Note 13.



See Note 14 for further discussion of a waiver of certain financial covenants in October 2004 to the Operating
Partnerships Revolving Loan and the two bank term loans.



6.
RELATED PARTY TRANSACTIONS



The Operating Partnership has previously reported that it has had a contract to acquire development land in the Bluegrass Valley office development project from GAPI, Inc., a corporation controlled by an executive
officer and director of the Company. On January 17, 2003, the Operating Partnership acquired an additional 23.5 acres of this land from GAPI, Inc. for cash and shares of Common Stock valued at $2.3 million. In May 2003, 4.0 acres of the remaining
acres not yet acquired by the Operating Partnership was taken by the Georgia 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 contract between the Operating Partnership and GAPI, Inc., the Operating Partnership was entitled to the proceeds from the condemnation of $1.8 million, less the contracted purchase price between the
Operating Partnership and GAPI, Inc. for the condemned property of $0.7 million. On September 30, 2003, as a result of the condemnation, the Operating Partnership received the proceeds of $1.8 million. A related party payable of $0.7 million to
GAPI, Inc. related to the condemnation of the development land is included in accounts payable, accrued expenses and other liabilities in the Operating Partnerships Consolidated Balance Sheet at December 31, 2003 and at September 30, 2004.



7. DERIVATIVE FINANCIAL
INSTRUMENTS



The interest rates on all of
the Operating Partnerships variable rate debt are currently adjusted at one to three month intervals, subject to settlements under interest rate hedge contracts. Net payments made to counter parties under interest rate hedge contracts were
nominal in the nine months ended September 30, 2004 and were recorded as increases to interest expense.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



7. DERIVATIVE FINANCIAL INSTRUMENTS - Continued



In addition, the Operating Partnership is exposed to certain losses in the
event of non-performance by the counter party under the interest rate hedge contracts. The Operating Partnership expects the counter party, which is a major financial institution, to perform fully under the contracts. However, if the counter party
was to default on its obligations under the interest rate hedge contracts, the Operating Partnership could be required to pay the full rates on its debt, even if such rates were in excess of the rate in the contracts.



During the year ended December 31, 2003, the Operating Partnership entered
into and subsequently terminated three interest rate swap agreements related to a ten-year fixed rate financing completed on December 1, 2003. These swap agreements were designated as cash flow hedges and the unamortized effective portion of the
cumulative gain on these derivative instruments was $3.5 million at September 30, 2004 and is being reported as a component of AOCL in unitholders equity. This deferred gain is being recognized in net income as a reduction of interest expense
in the same period or periods during which interest expense on the hedged fixed rate financing effects net income. The Operating Partnership expects that approximately $0.3 million will be recognized in the next 12 months.



In 2003, the Operating Partnership also entered into two interest rate swaps
related to a floating rate credit facility. The swaps effectively fix the one-month LIBOR rate on $20.0 million of floating rate debt 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 $0.1 million at September 30, 2004. The Operating Partnership expects that the portion of the cumulative loss recorded in AOCL at September 30, 2004 associated with these
derivative instruments, which will be recognized within the next 12 months, will be approximately $0.1 million.



At September 30, 2004, approximately $5.4 million of deferred financing costs from past cash flow hedging instruments remain in AOCL, including those
described above. These costs are recognized as interest expense as the underlying debt is repaid and amounted to $0.2 million and $0.4 million during the quarters ended September 30, 2004 and 2003, respectively. The Operating Partnership expects
that the portion of the cumulative loss recorded in AOCL at September 30, 2004 associated with these derivative instruments, which will be recognized within the next 12 months, will be approximately $0.7 million.



8. OTHER COMPREHENSIVE INCOME



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



|                                                                                |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                                |  | 2004                            |        | 2003                           |   | 2004   |  | 2003
|Net income                                                                      |  | $                               | 23,280 |                                | $ | 34,614 |  | $    | 33,826 |  | $ | 38,625
|Other comprehensive income:                                                     |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Unrealized derivative gains/(losses) on cashflow hedges                         |  |                                 | 37     |                                |   | 3,366  |  |      | 65     |  |   | 3,842 
|Amortization of hedging gains and losses included in other comprehensive income |  |                                 | 175    |                                |   | 463    |  |      | 582    |  |   | 1,360 
|                                                                                |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total other comprehensive income                                                |  |                                 | 212    |                                |   | 3,829  |  |      | 647    |  |   | 5,202 
|                                                                                |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total comprehensive income                                                      |  | $                               | 23,492 |                                | $ | 38,443 |  | $    | 34,473 |  | $ | 43,827
|                                                                                |  |                                 |        |                                |   |        |  |      |        |  |   |       



9. DISCONTINUED
OPERATIONS AND IMPAIRMENT OF LONG-LIVED ASSETS



In October 2001, the FASB issued SFAS No. 144, which 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 business as addressed in Accounting Principles Board Opinion No. 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.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



9. DISCONTINUED OPERATIONS AND IMPAIRMENT OF
LONG-LIVED ASSETS - Continued



The net operating results and net carrying value of 1.3 million square feet of property and 7.8 acres of revenue-producing land sold during 2004 and 2003 and 0.5 million square feet of property and 88 apartment units
held for sale at September 30, 2004 are shown in the following table. These long-lived assets relate to disposal activities that were initiated subsequent to the effective date of SFAS No. 144 and are classified as discontinued operations in the
Operating Partnerships Consolidated Income Statements since the operations and cash flows have been or will be eliminated from the ongoing operations of the Operating Partnership and the Operating Partnership will not have any significant
continuing involvement in the operations after the disposal transaction (in thousands):



|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                         |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                         |  | 2004                            |        | 2003                           |   | 2004   |  | 2003
|Rental and other revenues                                                |  | $                               | 1,467  |                                | $ | 3,065  |  | $    | 5,160  |  | $ | 10,438
|Operating expenses:                                                      |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Rental property and other expenses                                       |  |                                 | 736    |                                |   | 1,399  |  |      | 2,768  |  |   | 4,227 
|Depreciation and amortization                                            |  |                                 | 126    |                                |   | 836    |  |      | 1,105  |  |   | 2,824 
|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total operating expenses                                                 |  |                                 | 862    |                                |   | 2,235  |  |      | 3,873  |  |   | 7,051 
|Other income                                                             |  |                                 | 6      |                                |   | 14     |  |      | 15     |  |   | 45    
|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Income before gain on sale of discontinued operations                    |  |                                 | 611    |                                |   | 844    |  |      | 1,302  |  |   | 3,432 
|Gain on sale of discontinued operations, net of impairment               |  |                                 | 703    |                                |   | 7,796  |  |      | 682    |  |   | 8,675 
|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total discontinued operations                                            |  | $                               | 1,314  |                                | $ | 8,640  |  | $    | 1,984  |  | $ | 12,107
|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Carrying value of assets held for sale and assets sold during the period |  | $                               | 27,272 |                                | $ | 76,046 |  | $    | 27,272 |  | $ | 76,046
|                                                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       



SFAS No. 144 also
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. During the nine months ended September 30, 2004, the Operating Partnership determined that three properties
held for sale, of which one has now been sold, had a carrying value that was greater than fair value less cost to sell; therefore, an impairment loss of $3.9 million was recognized in the Consolidated Income Statement for the nine months ended
September 30, 2004. For 2003, an impairment loss related to one office property whose carrying value was greater than its fair value less cost to sell, which has now been sold, was $0.1 million. This impairment loss is included in gain on sale of
discontinued operations in the Consolidated Income Statement for the nine months ended September 30, 2003.



SFAS No. 144 also requires that if indicators of impairment exist, the carrying value of a long-lived asset classified as held for use be compared to the
sum of its estimated undiscounted future cash flows. If the carrying value is greater than the sum of its undiscounted future cash flows, an impairment loss should be recognized for the excess of the carrying amount of the asset over its estimated
fair value. For the nine months ended September 30, 2004, there was one property held for use with indicators of impairment where the carrying value exceeds the sum of estimated undiscounted future cash flows, therefore an impairment loss of $0.5
million related to held for use properties was recognized during the nine months ended September 30, 2004.



10. STOCK BASED COMPENSATION



The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the
date of grant. Upon exercise of a stock option, the Company will contribute the exercise price to the Operating Partnership in exchange for a Common Unit; therefore, the Operating Partnership accounts for such options as if issued by the Operating
Partnership.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



10. STOCK BASED COMPENSATION - Continued



In accordance with SFAS No. 148, Accounting for Stock-based Compensation  Transition and Disclosure, the
Operating Partnership expenses all stock options issued on or after January 1, 2003 over the vesting period based upon the fair value of the award on the date of grant. General and administrative expenses for the nine months ended September 30, 2004
and 2003 include amortization related to the vesting of stock options granted subsequent to January 1, 2003 of $0.3 million and $0.04 million, respectively. The unamortized value of option grants since January 1, 2003 aggregates $0.7 million. 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 only those awards issued subsequent to January 1, 2003:



|                                                                                                     |  |                                          |        |      |                                |   |        |      |  |   |        |      |  |   |        |     
|---------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | ---- | ------------------------------ | - | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ----
|                                                                                                     |  | Three Months EndedSeptember 30,          |        |      | Nine Months EndedSeptember 30, |  
|                                                                                                     |  | 2004                                     |        |      | 2003                           |   |        | 2004 |  |   | 2003   |     
|                                                                                                     |  | (in thousands, except per share amounts) |       
|Net income available for common unitholders  as reported                                            |  | $                                        | 15,567 |      |                                | $ | 26,901 |      |  | $ | 10,687 |      |  | $ | 15,486 |     
|Add: Stock option expense included in reported net income                                            |  |                                          | 359    | (2)  |                                |   | 483    | (2)  |  |   | 798    | (1)  |  |   | 795    | (2) 
|Deduct: Total stock option expense determined under fair value recognition method for all awards (1) |  |                                          | (466   | )(2) |                                |   | (631   | )(2) |  |   | (1,118 | )(1) |  |   | (1,250 | )(2)
|                                                                                                     |  |                                          |        |      |                                |   |        |      |  |   |        |      |  |   |        |     
|Pro forma net income available for common unitholders                                                |  | $                                        | 15,460 |      |                                | $ | 26,753 |      |  | $ | 10,367 |      |  | $ | 15,031 |     
|                                                                                                     |  |                                          |        |      |                                |   |        |      |  |   |        |      |  |   |        |     
|Basic net income per common unit - as reported                                                       |  | $                                        | 0.26   |      |                                | $ | 0.46   |      |  | $ | 0.18   |      |  | $ | 0.26   |     
|Basic net income per common unit - pro forma                                                         |  | $                                        | 0.26   |      |                                | $ | 0.45   |      |  | $ | 0.18   |      |  | $ | 0.25   |     
|Diluted net income per common unit - as reported                                                     |  | $                                        | 0.26   |      |                                | $ | 0.45   |      |  | $ | 0.18   |      |  | $ | 0.26   |     
|Diluted net income per common unit - pro forma                                                       |  | $                                        | 0.26   |      |                                | $ | 0.45   |      |  | $ | 0.17   |      |  | $ | 0.25   |     

---

|(1) | Amounts include the stock option expense recorded in the first and second quarters of 2004 for the accelerated vesting related to the retirement of the Companys Chief
Executive Officer in June 2004 as well as expense recorded for dividend equivalent rights.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts include the effects of accounting for dividend equivalent rights.
|--- | -------------------------------------------------------------------------



11. COMMITMENTS AND CONTINGENCIES



Concentration of Credit Risk



The Operating Partnership maintains its cash and cash equivalent investments at financial institutions. The combined account balances at each institution
typically exceed the FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management of the Operating Partnership believes that the potential risk of
loss is remote.



Contracts



The Operating Partnership has entered into contracts related to tenant
improvements and the development of certain properties totaling $54.2 million as of September 30, 2004. The amounts remaining to be paid under these contracts as of September 30, 2004 totaled $27.0 million.



Environmental Matters



Substantially all of the Operating Partnerships in-service properties have been subjected to Phase I environmental
assessments (and, in certain instances, Phase II environmental assessments). Such assessments and/or updates have not revealed, nor is management aware of, any environmental liability that management believes would have a material adverse effect on
the accompanying Consolidated Financial Statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Joint Ventures



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.



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



11. COMMITMENTS AND CONTINGENCIES - Continued



Guarantees and Other Obligations



The following is a tabular presentation and related discussion of various
guarantees and other obligations as of September 30, 2004:



|                                                  |  |                                       |  |                         |        |                      |        
|------------------------------------------------- |  | ------------------------------------- |  | ----------------------- | ------ | -------------------- | -------
|Entity or Transaction                             |  | Type of Guarantee or Other Obligation |  | AmountRecorded/Deferred |        | DateGuaranteeExpires
|                                                  |  |                                       |  | (in thousands)         
|Des Moines Joint Ventures (1),(6)                 |  | Debt                                  |  | $                       |       |                      | Various
|RRHWoods, LLC (2),(7)                             |  | Debt                                  |  | $                       |       |                      | 8/2006 
|Plaza Colonnade (2),(8)                           |  | Construction loan and completion      |  | $                       | 2,844  |                      | 2/2006 
|Plaza Colonnade (2),(8)                           |  | Letter of credit                      |  | $                       |       |                      | 12/2004
|SF-HIW Harborview, LP (3),(5)                     |  | Rent and tenant improvement (4)       |  | $                       |       |                      | 9/2007 
|SF-HIW Harborview, LP (3),(5)                     |  | Purchase obligation                   |  | $                       | 13,725 |                      | 9/2015 
|Eastshore (Capital One) (3),(9)                   |  | Rent (4)                              |  | $                       |       |                      | 11/2007
|Capital One (3),(10)                              |  | Rent (4)                              |  | $                       | 1,402  |                      | 10/2009
|Industrial (3),(11)                               |  | Rent (4)                              |  | $                       | 1,827  |                      | 12/2006
|Highwoods DLF 97/26 DLF 99/32, LP (2),(12)        |  | Rent (4)                              |  | $                       | 855    |                      | 6/2008 
|RRHWoods, LLC and Dallas County Partners (2),(13) |  | Indirect Debt (4)                     |  | $                       | 1,290  |                      | 6/2014 
|HIW-KC Orlando, LLC (3),(14)                      |  | Rent (4)                              |  | $                       | 615    |                      | 4/2011 
|HIW-KC Orlando, LLC (3),(14)                      |  | Leasing costs                         |  | $                       | 2,625  |                      | 12/2024

---

|(1) | Represents guarantees entered into prior to the January 1, 2003 effective date of FIN 45 for initial recognition and measurement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents guarantees that fall under the initial recognition and measurement requirements of FIN 45.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | Represents guarantees that are excluded from the fair value accounting and disclosure provisions of FIN 45 since the existence of such guarantees prevents sale treatment and/or the
recognition of profit from the sale transaction.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The maximum potential amount of future payments disclosed below for these guarantees assumes the Operating Partnership pays the maximum possible liability under the guaranty with no
offsets or reductions. If the space is leased, it assumes the existing tenant defaults at September 30, 2004 and the space remains unleased through the remainder of the guaranty term. If the space is vacant, it assumes the space remains vacant
through the expiration of the guaranty. Since it is assumed that no new tenant will occupy the space, lease commissions, if applicable, are excluded.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As more fully described in Note 3, in 2002 the Operating Partnership granted its partner in SF-HIW Harborview, LP a put option and also entered into a master lease arrangement for
five years covering vacant space in the building owned by the partnership and agreed to pay certain tenant improvement costs. The maximum potential amount of future payments the Operating Partnership could be required to make related to the rent
guarantees and tenant improvements is $1.2 million as of September 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The Operating Partnership has guaranteed certain loans in connection with the Des Moines joint ventures. The maximum potential amount of future payments the Operating Partnership
could be required to make under the guarantees is $24.9 million. Of this amount, $8.6 million arose from housing revenue bonds that require credit enhancements in addition to the real estate mortgages. The bonds bear a floating interest rate, which
at September 30, 2004 averaged 1.2% and mature in 2015. Guarantees of $9.4 million will expire upon two industrial buildings becoming 93.8% and 95.0% leased or when the related loans mature. As of September 30, 2004, these buildings were 87.5% and
75.0% leased, respectively. The remaining $6.9 million in guarantees relate to loans on four office buildings that were in the lease-up phase at the time the loans were initiated. Each of the loans will expire by May 2008. The average occupancy of
the four buildings at September 30, 2004 is 92.0%. If the joint ventures are unable to repay the outstanding balance under the loans, the Operating Partnership will be required, under the terms of the agreements, to repay the outstanding balance.
Recourse provisions exist to enable the Operating Partnership to recover some or all of such payments from the joint ventures assets and/or the other partner. The joint ventures currently generate sufficient cash flow to cover the debt service
required by the loans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



11. COMMITMENTS AND CONTINGENCIES - Continued



|(7) | In connection with the RRHWoods, LLC joint venture, the Operating Partnership renewed its guarantee of $6.2 million to a bank in July 2003; this guarantee expires in August 2006 and
may be renewed by the Operating Partnership. The bank provides a letter of credit securing industrial revenue bonds, which mature in 2015. The Operating Partnership would be required to perform under the guarantee should the joint venture be unable
to repay the bonds. The Operating Partnership has recourse provisions in order to recover from the joint ventures assets and the other partner for amounts paid in excess of their proportionate share. The property collateralizing the bonds is
100.0% leased and currently generates sufficient cash flow to cover the debt service required by the bond financing. As a result, no liability has been recorded in the Operating Partnerships Balance Sheet.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | With respect to the Plaza Colonnade, LLC joint venture, the Operating Partnership has included $2.8 million in other liabilities and adjusted the investment in unconsolidated
affiliates by $2.8 million on its Consolidated Balance Sheet at September 30, 2004 related to two separate guarantees of a construction loan agreement and a construction completion agreement, which were subsequently terminated in December 2004. The
construction loan was scheduled to mature in February 2006, with two one-year options to extend the maturity date that were conditional on completion and lease-up of the project. The term of the construction completion agreement required the core
and shell of the building to be completed by December 15, 2005; the core and shell were completed in November 2004. Both guarantees arose from the formation of the joint venture to construct an office building. If the joint venture were unable to
repay the outstanding balance under the construction loan agreement or complete the construction of the office building, the Operating Partnership could have been required, under the terms of the agreements, to repay its 50.0% share of the
outstanding balance under the construction loan and complete the construction of the office building.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 30, 2004, the Industrial Development Authority of the City of Kansas City, Missouri issued $18.5 million in non-recourse bonds to finance public
improvements made by the joint venture for the benefit of the Kansas City Missouri Public Library. Since the joint venture leases the land for the office building from the library, the joint venture is obligated to build certain public improvements.
The net bond proceeds of $16.3 million have been deposited with a trustee for the payment of project costs, interest and issuance costs. The joint venture is reimbursed for qualified project costs as they are certified. The joint venture has
recorded this obligation on its balance sheet. The bonds are ultimately paid by the Tax Increment Financing Revenue generated by the building and its tenants. As funds are transferred from the bond fund to the construction lender, the Operating
Partnerships exposure is reduced.



As a result of the
bond proceeds, the maximum potential amount of future payments by the Operating Partnership under the construction loan and completion agreements was $27.6 million assuming the construction loan was fully funded. No recourse provisions existed that
would have enabled the Operating Partnership to recover from the other partner amounts paid under the guarantee. However, given that the loan is collateralized by the building, the Operating Partnership and their partner could have obtained and
liquidated the building to recover the amounts paid should the Operating Partnership have been required to perform under the guarantees.



In addition to the Plaza Colonnade, LLC construction loan and completion agreement described above, the partners collectively had provided $12.0 million
in letters of credit in December 2002, $6.0 million by the Operating Partnership and $6.0 million by its partner. The Operating Partnership and its partner could have been held liable under the letter of credit agreements had the joint venture not
completed construction of the building. No recourse provisions existed that would have enabled the Operating Partnership to recover from the other partner amounts drawn under the letter of credit.



In December 2004, the joint venture secured a $50.0 million non-recourse
permanent loan and the $34.9 million construction loan was paid off. The related letters of credit were cancelled, and the aforementioned guarantee obligations terminated when the construction loan was paid off.

|(9) | As more fully described in Note 3, in connection with the sale of three office buildings to a third party in 2002 (the Eastshore transaction), the Operating Partnership
agreed to guarantee rent shortfalls and re-tenanting costs for a five-year period of time from the date of sale (i.e., through November 2007). The maximum potential amount of future payments related to this guarantee the Operating Partnership could
be required to make as of September 30, 2004 is $13.4 million. These three buildings are currently leased to a single tenant, Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., under leases that expire from May 2006 to
March 2010.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



11. COMMITMENTS AND CONTINGENCIES - Continued



|(10) | In connection with an unrelated disposition of 298,000 square feet of property in 2003 (the Capital One transaction), which was fully leased to Capital One Services,
Inc., a subsidiary of Capital One Financial Services, Inc., the Operating Partnership agreed to guarantee to the buyer, over various contingency periods through October 2009, any rent shortfalls on certain space. Because of this guarantee, in
accordance with SFAS No. 66, the Operating Partnership deferred $4.4 million of the total $8.4 million gain. The deferred portion of the gain is recognized when each contingency period is concluded. As a result, the Operating Partnership recognized
$1.3 million of the deferred gain in 2003 and an additional $1.7 million during the nine months ended September 30, 2004. The Operating Partnerships remaining contingent liability of $1.4 million with respect to the guarantee is included in
the deferred gain as of September 30, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | In December 2003, the Operating Partnership sold 1.9 million square feet of industrial property for $58.4 million in cash, a $5.0 million note receivable that bears interest at
12.0% and a $1.7 million note receivable that bears interest at 8.0%. In addition, the Operating Partnership agreed to guarantee, over various contingency periods through December 2006, any rent shortfalls on 16.3% of the rentable square footage of
the industrial property, which is occupied by two tenants. The Operating Partnerships contingent liability with respect to such guarantee as of September 30, 2004 is $1.8 million. The total gain as a result of the transaction was $5.2 million.
Because the terms of the notes require only interest payments to be made by the buyer until 2005, in accordance with SFAS No. 66, the entire $5.2 million gain was deferred and offset against the note receivable on the balance sheet and the cost
recovery method is being used for this transaction. Accordingly, once sufficient principal amounts have been paid on the note receivable so that the note receivable balance is equal to the deferred gain, the gain will be recognized as additional
payments are made on the notes.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | In the Highwoods DLF 97/26 DLF 99/32, LP joint venture, a single tenant currently leases an entire building under a lease scheduled to expire June 30, 2008. The tenant also leases
space in other buildings owned by the Operating Partnership. In conjunction with an overall restructuring of the tenants leases with the Operating Partnership and with this joint venture, the Operating Partnership agreed to certain changes to
the lease with the joint venture in September 2003. The modifications include allowing the tenant to terminate the lease on January 1, 2006, reducing the rent obligation by 50.0% and converting the net lease to a full service
lease with the tenant liable for 50.0% of these costs beginning January 1, 2006. In turn, the Operating Partnership agreed to compensate the joint venture for any economic losses incurred as a result of these lease modifications. Based on the lease
guarantee agreement, the Operating Partnership recorded approximately $0.9 million in other liabilities and recorded a deferred charge of $0.9 million in September 2003. However, should new tenants occupy the vacated space during the two and a half
year guarantee period, the Operating Partnerships liability under the guarantee would diminish. The Operating Partnerships maximum potential amount of future payments with regards to this guarantee as of September 30, 2004 is $1.1
million. No recourse provisions exist to enable the Operating Partnership to recover the amounts paid to the joint venture under this lease guarantee arrangement.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | RRHWOODS, LLC and Dallas County Partners each developed a new office building in Des Moines, Iowa. On June 25, 2004, the joint ventures financed both buildings with a $7.4 million
10-year loan from a bank. As an inducement to make the loan at 6.3% long-term rate, the Operating Partnership and its partner agreed to master lease the vacant space and guaranteed $1.6 million, or $0.8 million each, with limited recourse. As
leasing improves, the obligations under the loan agreement diminish. As of September 30, 2004, the Operating Partnership recorded $1.3 million in other liabilities and $1.3 million as a deferred charge on its Consolidated Balance Sheet with respect
to this guarantee. The maximum potential amount of future payments that the Operating Partnership could be required to make based on the current leases in place is approximately $4.7 million as of September 30, 2004. The likelihood of the Operating
Partnership paying on its $0.8 million guarantee is remote since the master lease payments provide the required 1.3 debt coverage ratio and should the Operating Partnership have to pay, it would recover the $0.8 million from other joint venture
assets.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | As more fully described in Note 2, in connection with the formation of HIW-KC Orlando, LLC, the Operating Partnership agreed to guarantee rent to the joint venture for 3,248
rentable square feet commencing in August 2004 and expiring in April 2011. Additionally, the Operating Partnership agreed to guarantee leasing costs for approximately 11.0% of the joint ventures total square footage. The Operating Partnership
believes its estimate related to the leasing costs guarantee is accurate. However, if the Operating Partnerships assumptions prove to be incorrect, future losses may occur.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Litigation



The Operating Partnership is 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 or results of
operations.



21



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



12. SEGMENT INFORMATION



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



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



The accounting policies of the segments are the same as those
of the Operating Partnership. Further, all operations are within the United States and at September 30, 2004, no tenant of the Operating Partnerships Wholly Owned Properties, which includes in-service properties (excluding apartment units) to
which the Operating Partnership has title and 100.0% ownership rights, comprises more than 10.0% of the respective consolidated revenues. The following table summarizes the rental income, net operating income and assets for each reportable segment
for the three and nine months ended September 30, 2004 and 2003 (in thousands):



|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                                     |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003     |  
|Rental and Other Revenues (1):                                                                                       |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Office segment                                                                                                       |  | $                               | 95,787  |   |                                | $ | 102,154 |      |  | $ | 296,593  |   |  | $ | 312,839  |  
|Industrial segment                                                                                                   |  |                                 | 8,874   |   |                                |   | 10,322  |      |  |   | 25,404   |   |  |   | 30,705   |  
|Retail segment                                                                                                       |  |                                 | 9,251   |   |                                |   | 8,933   |      |  |   | 28,050   |   |  |   | 28,395   |  
|Apartment segment                                                                                                    |  |                                 | 286     |   |                                |   | 279     |      |  |   | 858      |   |  |   | 839      |  
|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Total Rental and Other Revenues                                                                                      |  | $                               | 114,198 |   |                                | $ | 121,688 |      |  | $ | 350,905  |   |  | $ | 372,778  |  
|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Net Operating Income (1):                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Office segment                                                                                                       |  | $                               | 59,161  |   |                                | $ | 64,186  |      |  | $ | 184,654  |   |  | $ | 199,188  |  
|Industrial segment                                                                                                   |  |                                 | 6,894   |   |                                |   | 8,326   |      |  |   | 19,672   |   |  |   | 24,621   |  
|Retail segment                                                                                                       |  |                                 | 6,433   |   |                                |   | 6,141   |      |  |   | 19,277   |   |  |   | 19,819   |  
|Apartment segment                                                                                                    |  |                                 | 154     |   |                                |   | 142     |      |  |   | 459      |   |  |   | 434      |  
|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Total Net Operating Income                                                                                           |  | $                               | 72,642  |   |                                | $ | 78,795  |      |  | $ | 224,062  |   |  | $ | 244,062  |  
|Reconciliation to income before disposition of property, co-venture expense and equity of unconsolidated affiliates: |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Depreciation and amortization                                                                                        |  | $                               | (33,411 | ) |                                | $ | (34,043 | )    |  | $ | (103,086 | ) |  | $ | (105,372 | )
|Interest expense                                                                                                     |  |                                 | (27,756 | ) |                                |   | (36,048 | )    |  |   | (90,432  | ) |  |   | (107,102 | )
|Impairment of assets held for use                                                                                    |  |                                 | (500    | ) |                                |   |        |      |  |   | (500     | ) |  |   |         |  
|General and administrative expense                                                                                   |  |                                 | (10,069 | ) |                                |   | (6,520  | )    |  |   | (28,047  | ) |  |   | (17,908  | )
|Interest and other income                                                                                            |  |                                 | 1,760   |   |                                |   | 1,246   |      |  |   | 4,805    |   |  |   | 4,341    |  
|Settlement of bankruptcy claim                                                                                       |  |                                 | 14,435  |   |                                |   |        |      |  |   | 14,435   |   |  |   |         |  
|Loss on debt extinguishment                                                                                          |  |                                 |        |   |                                |   |        |      |  |   | (12,457  | ) |  |   | (14,653  | )
|Gain on extinguishment of co-venture obligation                                                                      |  |                                 |        |   |                                |   | 16,301  |      |  |   |         |   |  |   | 16,301   |  
|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Income before disposition of property, co-venture expense and equity in earnings of unconsolidated affiliates        |  | $                               | 17,101  |   |                                | $ | 19,731  |      |  | $ | 8,780    |   |  | $ | 19,669   |  
|                                                                                                                     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  



|                    |  |               |           |      |   |          
|------------------- |  | ------------- | --------- | ---- | - | ---------
|                    |  | September 30,
|                    |  | 2004          |           | 2003
|Total Assets:       |  |               |           |      |   |          
|Office segment      |  | $             | 2,586,153 |      | $ | 2,832,532
|Industrial segment  |  |               | 266,872   |      |   | 341,770  
|Retail segment      |  |               | 262,779   |      |   | 275,434  
|Apartment segment   |  |               | 12,449    |      |   | 12,263   
|Corporate and other |  |               | 175,204   |      |   | 151,748  
|                    |  |               |           |      |   |          
|Total Assets        |  | $             | 3,303,457 |      | $ | 3,613,747
|                    |  |               |           |      |   |          

---

|(1) | Net of discontinued operations.
|--- | -------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



13. OTHER EVENTS



Retirement of Chief Executive Officer



As previously announced, the Companys Chief Executive Officer retired June 30, 2004. In connection with his retirement, the Companys Board of
Directors approved a retirement package for him that included a lump-sum cash payment, accelerated vesting of stock options and restricted stock, extended lives of stock options and continued coverage under the Operating Partnerships health
and life insurance plan for three years at the Operating Partnerships expense. Under GAAP, the changes to existing stock options and restricted stock give rise to new measurement dates and revised compensation computations. General and
administrative expense for the nine months ended September 30, 2004 includes the total cost of $4.6 million for the retirement package.



WorldCom/MCI Settlement



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. In connection with the bankruptcy filing, WorldCom rejected leases with the Operating Partnership encompassing 819,653 square feet including the entire 816,000 square foot Highwoods Preserve office campus in Tampa, Florida. The
Operating Partnership submitted bankruptcy claims against WorldCom aggregating $21.2 million related to these rejected leases and other matters. WorldCom emerged from bankruptcy (now MCI, Inc.) on April 20, 2004. On August 27, 2004, the Operating
Partnership and various MCI subsidiaries and affiliates (the MCI Entities) executed a settlement agreement. The agreement provides that the MCI Entities will pay the Operating Partnership approximately $8.6 million in cash and also
transfer to it approximately 340,000 shares of new MCI, Inc. stock. The Operating Partnership received the $8.6 million cash payment and the MCI, Inc. stock in September 2004. The Operating Partnership sold the stock for net proceeds of
approximately $5.8 million, and recorded the full settlement of approximately $14.4 million as Other Income in the third quarter of 2004.



14. SUBSEQUENT EVENTS



Mortgages and Notes Payable



In October 2004, the Operating Partnership obtained a waiver from the lenders of the Operating Partnerships Revolving Loan and two bank term loans
for certain covenant violations caused by the effects of the loss on debt extinguishment from the MOPPRS transaction in early 2003. The waiver did not change any economic terms of the loan, although the Operating Partnership incurred certain loan
costs that were capitalized and amortized over the remaining term of the loans.



Dispositions



In November 2004, the Operating
Partnership sold a 165,000 square foot building located in Orlando, Florida with a net book value of approximately $9.7 million. Net proceeds from the sale were approximately $6.4 million. The building did not meet the criteria to be classified as
held for the sale until November 2004 and as a result, the Operating Partnership has recognized an impairment loss of approximately $3.3 million in November 2004.



In the Fourth Quarter 2004, the Operating Partnership sold an additional 14 buildings encompassing 514,191 square feet, and
one 88 unit apartment building, for gross proceeds of $37.5 million and recorded an approximate $4.8 million gain on sales. In addition, the Operating Partnership sold approximately 95 acres of non-core land for gross proceeds of $20.1 million and
recorded approximately $3 million in gain on sales.



23



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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 tenant
demand;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the financial condition of our tenants 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 2003 amended Annual Report on Form 10-K.



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 sole general partner, the Company, a self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for its properties and for
third parties. As of September 30, 2004, we own or have an interest in 525 in-service office, industrial and retail properties encompassing approximately 41.4 million square feet. We also own 1,200 acres of development land which is suitable to
develop approximately 13.9 million rentable square feet of office, industrial and retail space. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Iowa, Kansas, Maryland, Missouri, North
Carolina, South Carolina, Tennessee and Virginia.



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. At September 30, 2004, the Company owned 89.7% of the Common Units in the
Operating Partnership.



24



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##### Table of Contents



Property Information



The following table sets forth certain information with respect to our
Wholly Owned Properties and our development properties (excluding apartment units) as of September 30, 2004 and 2003:



|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|---------------------------- |  | ------------------- |  | ------------------------- | ------------------ |  | ------------------- |  | ------------------------- | -
|                             |  | September 30, 2004  |  |                           | September 30, 2003 | 
|                             |  | RentableSquare Feet |  | Percent Leased/Pre-Leased |                    |  | RentableSquare Feet |  | PercentLeased/ Pre-Leased |  
|In-Service:                  |  |                     |  |                           |                    |  |                     |  |                           |  
|Office (1)                   |  | 25,151,000          |  | 80.9                      | %                  |  | 25,710,000          |  | 79.4                      | %
|Industrial                   |  | 7,992,000           |  | 88.4                      | %                  |  | 9,934,000           |  | 88.0                      | %
|Retail (2)                   |  | 1,410,000           |  | 94.5                      | %                  |  | 1,527,000           |  | 96.3                      | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Total                        |  | 34,553,000          |  | 83.2                      | %                  |  | 37,171,000          |  | 82.4                      | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Development:                 |  |                     |  |                           |                    |  |                     |  |                           |  
|CompletedNot Stabilized (3) |  |                     |  |                           |                    |  |                     |  |                           |  
|Office (1)                   |  |                    |  |                          |                    |  | 140,000             |  | 30.0                      | %
|Industrial                   |  | 350,000             |  | 100.0                     | %                  |  | 60,000              |  | 50.0                      | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Total                        |  | 350,000             |  | 100.0                     | %                  |  | 200,000             |  | 36.0                      | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|In Process                   |  |                     |  |                           |                    |  |                     |  |                           |  
|Office (1)                   |  | 333,000             |  | 100.0                     | %                  |  |                    |  |                          |  
|Industrial                   |  |                    |  |                          |                    |  | 350,000             |  | 100.0                     | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Total                        |  | 333,000             |  | 100.0                     | %                  |  | 350,000             |  | 100.0                     | %
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Total:                       |  |                     |  |                           |                    |  |                     |  |                           |  
|Office (1)                   |  | 25,484,000          |  |                           |                    |  | 25,850,000          |  |                           |  
|Industrial                   |  | 8,342,000           |  |                           |                    |  | 10,344,000          |  |                           |  
|Retail (2)                   |  | 1,410,000           |  |                           |                    |  | 1,527,000           |  |                           |  
|                             |  |                     |  |                           |                    |  |                     |  |                           |  
|Total                        |  | 35,236,000          |  |                           |                    |  | 37,721,000          |  |                           |  
|                             |  |                     |  |                           |                    |  |                     |  |                           |  

---

|(1) | Substantially all of our Office properties are located in suburban markets.
|--- | ---------------------------------------------------------------------------

|(2) | Excludes basement space in the Country Club Plaza property of 418,000 square feet.
|--- | ----------------------------------------------------------------------------------

|(3) | Not stabilized is generally defined as less than 95% occupied or a year from completion.
|--- | ----------------------------------------------------------------------------------------



25



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The following tables set
forth scheduled lease expirations at our Wholly Owned Properties as of September 30, 2004, assuming no tenant exercises renewal options.



Office Properties:



|                        |  |                                             |  |                                                                |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  
|----------------------- |  | ------------------------------------------- |  | -------------------------------------------------------------- | - |  | ------------------------------------------------ | ------- | ----------------------------------------------------- | - | ------------------------------------------------------------------ |  | ----- | -
|Lease Expiring (1)      |  | RentableSquare FeetSubject toExpiringLeases |  | Percentage ofLeasedSquare FootageRepresented byExpiring Leases |   |  | AnnualizedRental RevenueUnder ExpiringLeases (2) |         | AverageAnnualRental RatePer SquareFoot forExpirations |   | Percent ofAnnualizedRental RevenueRepresented byExpiringLeases (2) | 
|                        |  | (in thousands)                              | 
|2004 (three months) (3) |  | 630,576                                     |  | 3.1                                                            | % |  | $                                                | 11,157  |                                                       | $ | 17.69                                                              |  | 3.1   | %
|2005                    |  | 3,300,589                                   |  | 16.2                                                           |   |  |                                                  | 61,179  |                                                       |   | 18.54                                                              |  | 17.0  |  
|2006                    |  | 3,294,361                                   |  | 16.2                                                           |   |  |                                                  | 61,417  |                                                       |   | 18.64                                                              |  | 17.1  |  
|2007                    |  | 2,089,231                                   |  | 10.3                                                           |   |  |                                                  | 35,311  |                                                       |   | 16.90                                                              |  | 9.8   |  
|2008                    |  | 3,182,194                                   |  | 15.6                                                           |   |  |                                                  | 51,953  |                                                       |   | 16.33                                                              |  | 14.5  |  
|2009                    |  | 2,701,406                                   |  | 13.3                                                           |   |  |                                                  | 45,441  |                                                       |   | 16.82                                                              |  | 12.7  |  
|2010                    |  | 1,532,968                                   |  | 7.5                                                            |   |  |                                                  | 30,856  |                                                       |   | 20.13                                                              |  | 8.6   |  
|2011                    |  | 1,316,848                                   |  | 6.5                                                            |   |  |                                                  | 23,253  |                                                       |   | 17.66                                                              |  | 6.5   |  
|2012                    |  | 690,449                                     |  | 3.4                                                            |   |  |                                                  | 13,402  |                                                       |   | 19.41                                                              |  | 3.7   |  
|2013                    |  | 553,028                                     |  | 2.7                                                            |   |  |                                                  | 9,214   |                                                       |   | 16.66                                                              |  | 2.6   |  
|Thereafter              |  | 1,058,144                                   |  | 5.2                                                            |   |  |                                                  | 15,805  |                                                       |   | 14.94                                                              |  | 4.4   |  
|                        |  |                                             |  |                                                                |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  
|                        |  | 20,349,794                                  |  | 100.0                                                          | % |  | $                                                | 358,988 |                                                       | $ | 17.64                                                              |  | 100.0 | %
|                        |  |                                             |  |                                                                |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  



Industrial Properties:



|                        |  |                                             |  |                                                                |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  
|----------------------- |  | ------------------------------------------- |  | -------------------------------------------------------------- | - |  | ------------------------------------------------ | ------ | ----------------------------------------------------- | - | ------------------------------------------------------------------ |  | ----- | -
|Lease Expiring (1)      |  | RentableSquare FeetSubject toExpiringLeases |  | Percentage ofLeasedSquare FootageRepresented byExpiring Leases |   |  | AnnualizedRental RevenueUnder ExpiringLeases (2) |        | AverageAnnualRental RatePer SquareFoot forExpirations |   | Percent ofAnnualizedRental RevenueRepresented byExpiringLeases (2) | 
|                        |  | (in thousands)                              | 
|2004 (three months) (4) |  | 505,287                                     |  | 7.0                                                            | % |  | $                                                | 2,018  |                                                       | $ | 3.99                                                               |  | 6.0   | %
|2005                    |  | 1,839,198                                   |  | 25.6                                                           |   |  |                                                  | 8,134  |                                                       |   | 4.42                                                               |  | 24.1  |  
|2006                    |  | 993,823                                     |  | 13.8                                                           |   |  |                                                  | 5,147  |                                                       |   | 5.18                                                               |  | 15.2  |  
|2007                    |  | 1,891,322                                   |  | 26.4                                                           |   |  |                                                  | 8,706  |                                                       |   | 4.60                                                               |  | 25.7  |  
|2008                    |  | 368,823                                     |  | 5.1                                                            |   |  |                                                  | 1,982  |                                                       |   | 5.37                                                               |  | 5.9   |  
|2009                    |  | 620,951                                     |  | 8.6                                                            |   |  |                                                  | 3,489  |                                                       |   | 5.62                                                               |  | 10.3  |  
|2010                    |  | 131,040                                     |  | 1.8                                                            |   |  |                                                  | 592    |                                                       |   | 4.52                                                               |  | 1.8   |  
|2011                    |  | 152,742                                     |  | 2.1                                                            |   |  |                                                  | 724    |                                                       |   | 4.74                                                               |  | 2.1   |  
|2012                    |  | 109,840                                     |  | 1.5                                                            |   |  |                                                  | 435    |                                                       |   | 3.96                                                               |  | 1.3   |  
|2013                    |  | 102,384                                     |  | 1.4                                                            |   |  |                                                  | 613    |                                                       |   | 5.99                                                               |  | 1.8   |  
|Thereafter              |  | 485,779                                     |  | 6.7                                                            |   |  |                                                  | 1,948  |                                                       |   | 4.01                                                               |  | 5.8   |  
|                        |  |                                             |  |                                                                |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  
|                        |  | 7,201,189                                   |  | 100.0                                                          | % |  | $                                                | 33,788 |                                                       | $ | 4.69                                                               |  | 100.0 | %
|                        |  |                                             |  |                                                                |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  

---

|(1) | Includes effects of any early renewals exercised by tenants on or before September 30, 2004.
|--- | --------------------------------------------------------------------------------------------

|(2) | Annualized Rental Revenue is September 2004 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 149,000 square feet of leases that are on a month-to-month basis or 0.7% of total annualized revenue.
|--- | --------------------------------------------------------------------------------------------------------------

|(4) | Includes 165,000 square feet of leases that are on a month-to-month basis or 0.2% of total annualized revenue.
|--- | --------------------------------------------------------------------------------------------------------------



26



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Retail Properties:



|                        |  |                                              |  |                                                                 |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  
|----------------------- |  | -------------------------------------------- |  | --------------------------------------------------------------- | - |  | ------------------------------------------------ | ------ | ----------------------------------------------------- | - | ------------------------------------------------------------------ |  | ----- | -
|Lease Expiring (1)      |  | Rentable Square FeetSubject toExpiringLeases |  | Percentage of LeasedSquare FootageRepresented byExpiring Leases |   |  | AnnualizedRental RevenueUnder ExpiringLeases (2) |        | AverageAnnualRental RatePer SquareFoot forExpirations |   | Percent ofAnnualizedRental RevenueRepresented byExpiringLeases (2) | 
|                        |  | (in thousands)                               | 
|2004 (three months) (3) |  | 25,582                                       |  | 1.9                                                             | % |  | $                                                | 495    |                                                       | $ | 19.35                                                              |  | 1.4   | %
|2005                    |  | 110,594                                      |  | 8.3                                                             |   |  |                                                  | 2,719  |                                                       |   | 24.59                                                              |  | 7.8   |  
|2006                    |  | 92,283                                       |  | 6.9                                                             |   |  |                                                  | 2,345  |                                                       |   | 25.41                                                              |  | 6.8   |  
|2007                    |  | 76,682                                       |  | 5.8                                                             |   |  |                                                  | 2,141  |                                                       |   | 27.92                                                              |  | 6.2   |  
|2008                    |  | 131,003                                      |  | 9.8                                                             |   |  |                                                  | 3,705  |                                                       |   | 28.28                                                              |  | 10.7  |  
|2009                    |  | 188,105                                      |  | 14.1                                                            |   |  |                                                  | 4,541  |                                                       |   | 24.14                                                              |  | 13.1  |  
|2010                    |  | 71,076                                       |  | 5.3                                                             |   |  |                                                  | 2,298  |                                                       |   | 32.33                                                              |  | 6.6   |  
|2011                    |  | 53,833                                       |  | 4.0                                                             |   |  |                                                  | 1,800  |                                                       |   | 33.44                                                              |  | 5.2   |  
|2012                    |  | 136,044                                      |  | 10.2                                                            |   |  |                                                  | 3,614  |                                                       |   | 26.56                                                              |  | 10.4  |  
|2013                    |  | 108,866                                      |  | 8.2                                                             |   |  |                                                  | 2,681  |                                                       |   | 24.63                                                              |  | 7.7   |  
|Thereafter              |  | 338,686                                      |  | 25.5                                                            |   |  |                                                  | 8,330  |                                                       |   | 24.60                                                              |  | 24.1  |  
|                        |  |                                              |  |                                                                 |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  
|                        |  | 1,332,754                                    |  | 100.0                                                           | % |  | $                                                | 34,669 |                                                       | $ | 26.01                                                              |  | 100.0 | %
|                        |  |                                              |  |                                                                 |   |  |                                                  |        |                                                       |   |                                                                    |  |       |  



Total:



|                        |  |                                              |  |                                                                 |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  
|----------------------- |  | -------------------------------------------- |  | --------------------------------------------------------------- | - |  | ------------------------------------------------ | ------- | ----------------------------------------------------- | - | ------------------------------------------------------------------ |  | ----- | -
|Lease Expiring (1)      |  | Rentable Square FeetSubject toExpiringLeases |  | Percentage of LeasedSquare FootageRepresented byExpiring Leases |   |  | AnnualizedRental RevenueUnder ExpiringLeases (2) |         | AverageAnnualRental RatePer SquareFoot forExpirations |   | Percent ofAnnualizedRental RevenueRepresented byExpiringLeases (2) | 
|                        |  | (in thousands)                               | 
|2004 (three months) (4) |  | 1,161,445                                    |  | 4.0                                                             | % |  | $                                                | 13,670  |                                                       | $ | 11.77                                                              |  | 3.2   | %
|2005                    |  | 5,250,381                                    |  | 18.3                                                            |   |  |                                                  | 72,032  |                                                       |   | 13.72                                                              |  | 16.9  |  
|2006                    |  | 4,380,467                                    |  | 15.2                                                            |   |  |                                                  | 68,909  |                                                       |   | 15.73                                                              |  | 16.1  |  
|2007                    |  | 4,057,235                                    |  | 14.0                                                            |   |  |                                                  | 46,158  |                                                       |   | 11.38                                                              |  | 10.8  |  
|2008                    |  | 3,682,020                                    |  | 12.7                                                            |   |  |                                                  | 57,640  |                                                       |   | 15.65                                                              |  | 13.5  |  
|2009                    |  | 3,510,462                                    |  | 12.2                                                            |   |  |                                                  | 53,471  |                                                       |   | 15.23                                                              |  | 12.5  |  
|2010                    |  | 1,735,084                                    |  | 6.0                                                             |   |  |                                                  | 33,746  |                                                       |   | 19.45                                                              |  | 7.9   |  
|2011                    |  | 1,523,423                                    |  | 5.3                                                             |   |  |                                                  | 25,777  |                                                       |   | 16.92                                                              |  | 6.0   |  
|2012                    |  | 936,333                                      |  | 3.2                                                             |   |  |                                                  | 17,451  |                                                       |   | 18.64                                                              |  | 4.1   |  
|2013                    |  | 764,278                                      |  | 2.6                                                             |   |  |                                                  | 12,508  |                                                       |   | 16.37                                                              |  | 2.9   |  
|Thereafter              |  | 1,882,609                                    |  | 6.5                                                             |   |  |                                                  | 26,083  |                                                       |   | 13.85                                                              |  | 6.1   |  
|                        |  |                                              |  |                                                                 |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  
|                        |  | 28,883,737                                   |  | 100.0                                                           | % |  | $                                                | 427,445 |                                                       | $ | 14.80                                                              |  | 100.0 | %
|                        |  |                                              |  |                                                                 |   |  |                                                  |         |                                                       |   |                                                                    |  |       |  

---

|(1) | Includes effects of any early renewals exercised by tenants on or before September 30, 2004.
|--- | --------------------------------------------------------------------------------------------

|(2) | Annualized Rental Revenue is September 2004 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 19,000 square feet of leases that are on a month-to-month basis or 0.1% of total annualized revenue.
|--- | -------------------------------------------------------------------------------------------------------------

|(4) | Includes 333,000 square feet of leases that are on a month-to-month basis or 1.0% of total annualized revenue.
|--- | --------------------------------------------------------------------------------------------------------------



Capital Recycling Program



Our strategy has been to focus our real estate activities in markets where
we believe our extensive local knowledge gives us a competitive advantage over other real estate developers and operators. Through our capital recycling program, we generally seek to:



| |  | engage in the development of office and industrial projects in our existing geographic markets, primarily in suburban business parks;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



27



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| |  | acquire selective suburban office and industrial properties in our existing geographic markets at prices below replacement cost that offer attractive returns; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | selectively dispose of non-core properties or other properties in order to use the net proceeds for investments or other purposes.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Our capital recycling activities benefit from our local market presence and
knowledge. Our division officers have significant real estate experience in their respective markets. Based on this experience, we believe that we are in a better position to evaluate capital recycling opportunities than many of our competitors. In
addition, our relationships with our tenants and those tenants at properties for which we conduct third-party fee-based services may lead to development projects when these tenants seek new space.



The following summarizes the change in our Wholly Owned Properties:



|                                                                                                      |  |                                     |   |  |                             |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------- | - |  | --------------------------- | -
|                                                                                                      |  | Nine Months EndedSeptember 30, 2004 |   |  | Year EndedDecember 31, 2003 |  
|Office, Industrial and Retail Properties(rentable square feet in thousands)                           |  |                                     |   |  |                             |  
|Dispositions                                                                                          |  | (617                                | ) |  | (3,298                      | )
|Contributions to Joint Ventures                                                                       |  | (1,270                              | ) |  | (291                        | )
|Developments Placed In-Service                                                                        |  | 141                                 |   |  | 191                         |  
|Redevelopments                                                                                        |  |                                    |   |  | (221                        | )
|Acquisitions (including 1,319 from a joint venture in 2003 and 1,358 from two joint ventures in 2004) |  | 1,358                               |   |  | 1,429                       |  
|                                                                                                      |  |                                     |   |  |                             |  
|Net Change of In-Service Wholly Owned Properties                                                      |  | (388                                | ) |  | (2,190                      | )
|                                                                                                      |  |                                     |   |  |                             |  



Customer Information



The following table sets forth information concerning the
20 largest customers of our Wholly Owned Properties as of September 30, 2004 ($ in thousands):



|                          |  |                   |  |                              |        |                                             |       |   |                                     |     
|------------------------- |  | ----------------- |  | ---------------------------- | ------ | ------------------------------------------- | ----- | - | ----------------------------------- | ----
|Customer                  |  | RentalSquare Feet |  | AnnualizedRental Revenue (1) |        | Percent of TotalAnnualizedRental Revenue(1) |       |   | AverageRemaining LeaseTerm in Years
|                          |  | (in thousands)    |  |                              |       
|Federal Government        |  | 1,084,079         |  | $                            | 20,362 |                                             | 4.76  | % |                                     | 6.4 
|AT&T                      |  | 541,313           |  |                              | 10,211 |                                             | 2.39  |   |                                     | 4.3 
|PricewaterhouseCoopers    |  | 297,795           |  |                              | 7,313  |                                             | 1.71  |   |                                     | 5.6 
|State of Georgia          |  | 365,076           |  |                              | 7,134  |                                             | 1.67  |   |                                     | 4.4 
|Sara Lee                  |  | 1,195,383         |  |                              | 4,682  |                                             | 1.10  |   |                                     | 2.9 
|IBM                       |  | 194,934           |  |                              | 4,105  |                                             | 0.96  |   |                                     | 1.4 
|Northern Telecom          |  | 246,000           |  |                              | 3,651  |                                             | 0.85  |   |                                     | 3.4 
|Volvo                     |  | 270,774           |  |                              | 3,502  |                                             | 0.82  |   |                                     | 4.8 
|US Airways (2)            |  | 295,046           |  |                              | 3,375  |                                             | 0.79  |   |                                     | 3.2 
|Lockton Companies         |  | 132,718           |  |                              | 3,303  |                                             | 0.77  |   |                                     | 10.4
|BB&T                      |  | 229,459           |  |                              | 3,234  |                                             | 0.76  |   |                                     | 6.9 
|T-Mobile USA              |  | 120,561           |  |                              | 3,058  |                                             | 0.72  |   |                                     | 1.8 
|Bank of America           |  | 151,633           |  |                              | 3,042  |                                             | 0.71  |   |                                     | 4.7 
|ITC Deltacom (3)          |  | 147,379           |  |                              | 2,987  |                                             | 0.70  |   |                                     | 0.6 
|CHS Professional Services |  | 162,374           |  |                              | 2,896  |                                             | 0.68  |   |                                     | 2.3 
|Ford Motor Company        |  | 125,989           |  |                              | 2,727  |                                             | 0.64  |   |                                     | 5.4 
|MCI                       |  | 132,208           |  |                              | 2,627  |                                             | 0.61  |   |                                     | 1.8 
|IKON                      |  | 181,361           |  |                              | 2,609  |                                             | 0.61  |   |                                     | 3.1 
|Hartford Insurance        |  | 116,010           |  |                              | 2,508  |                                             | 0.59  |   |                                     | 2.1 
|Aspect Communications     |  | 116,692           |  |                              | 2,328  |                                             | 0.54  |   |                                     | 2.2 
|                          |  |                   |  |                              |        |                                             |       |   |                                     |     
|Total                     |  | 6,106,784         |  | $                            | 95,654 |                                             | 22.38 | % |                                     | 4.5 
|                          |  |                   |  |                              |        |                                             |       |   |                                     |     

---

|(1) | Annualized Rental Revenue is September 2004 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
|--- | -----------------------------------------------------------------------------------------------------------------------------



28



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|(2) | In August 2002, US Airways filed voluntary petitions for reorganization under Chapter 11 of the US Bankruptcy Code. US Airways emerged from Chapter 11 bankruptcy protection in March
2003. On September 12, 2004, US Airways again filed voluntary petitions for reorganization under Chapter 11. No action has been taken to date with respect to the Operating Partnerships leases with US Airways.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | ITC Deltacom (formerly Business Telecom) is located in a property that, as of September 30, 2004, is under contract for sale. Although no assurances can be made, the sale is
expected to close in early 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



During the nine months ended September 30, 2004,
approximately 84.5% of our rental revenue was derived from our office properties. As a result, while we own and operate a limited number of industrial and retail properties, our operating results depend heavily on successfully leasing our office
properties. Furthermore, since most of our office properties are located in Florida, Georgia and North Carolina, employment growth in those states is and will continue to be an important determinative factor in predicting our future operating
results.



The key components affecting our revenue stream are
average occupancy and rental rates. During the past several years, as the average occupancy of our portfolio has decreased, our same property rental revenue has declined. Average occupancy generally increases during times of improving economic
growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases, while average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease
space. Asset acquisitions and dispositions also impact our rental revenues and could impact our average occupancy, depending upon the occupancy percentage of the properties that are acquired or sold.



Whether or not our rental revenue tracks average occupancy proportionally
depends upon whether rents under new leases are higher or lower than the rents under the previous leases. The average straight-lined rate per square foot on new leases signed during the nine months ended September 30, 2004 in our Wholly Owned
Properties was 0.3% lower than the average rate per square foot on the expiring leases. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. Our average office lease term, excluding renewal
periods is 4.5 years. Leases that will expire during the last three months of 2004 and which have not been renewed as of September 30, 2004 approximate 1.2 million square feet of space. This square footage represents approximately 3.2% of our
annualized revenue. As of September 30, 2004, based on our leasing efforts since December 31, 2003 and on other activity, such as early lease terminations, the occupancy rate for our Wholly Owned Properties improved to 83.2%. As a result, in
addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing leases on expiring space. For more information regarding our lease expirations, see Properties
 Lease Expirations.



Our expenses primarily consist
of depreciation and amortization, general and administrative expenses, rental property expenses and interest expense. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively
consistent each year, unless we buy or sell assets, since we depreciate our properties on a straight-line basis. General and administrative expenses, net of amounts capitalized and excluding retirement compensation, consist primarily of management
and employee salaries and other personnel costs, corporate overhead and long-term incentive compensation. Rental property expenses are expenses associated with our ownership and operating of rental properties and include variable expenses, such as
common area maintenance and utilities, and fixed expenses, such as property taxes and insurance. Some of these variable expenses may be lower as our average occupancy declines, while the fixed expenses remain constant regardless of average
occupancy. Interest expense depends upon the amount of our borrowings, the weighted average interest rates on our debt and the amount capitalized on development projects.



We also record income from our investments in unconsolidated affiliates, which are our joint ventures except for one joint
venture, which is included in our Consolidated Financial Statements as a result of our continuing involvement with the properties  see Note 3 to the Consolidated Financial Statements. We record in equity in earnings of unconsolidated
affiliates our proportionate share of the unconsolidated joint ventures net income or loss. During the first three quarters of 2004, income earned from our unconsolidated joint ventures aggregated $5.3 million which represented
approximately 15.6% of our total net income.



29



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Additionally, Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets requires us to record net income received from properties sold or held for sale separately as income from
discontinued operations. As a result, we separately record revenues and expenses from these properties. During the nine months ended September 30, 2004, income, including gains and losses from the sale of properties, from discontinued
operations accounted for approximately 5.9% of our total net income.



Liquidity and Capital Resources



We incur
capital expenditures to lease space to our customers and to maintain the quality of our properties to successfully compete against other properties. Tenant improvements are the costs required to customize the space for the specific needs of the
customer. Lease commissions are costs incurred to find space for the customer. Building improvements are recurring capital costs not related to a customer to maintain the buildings. As leases expire, we either attempt to relet the space to an
existing customer or attract a new customer to occupy the space. Generally, customer renewals require lower leasing capital than reletting to a new customer. However, market conditions such as supply of available space on the market, as well as
demand for space, drive not only customer rental rates but also tenant improvement costs. Leasing capital expenditures are amortized over the term of the lease and building improvements are depreciated over the appropriate useful life of the assets
acquired. Both are included in depreciation and amortization in results of operations.



Because the Company is a REIT, our partnership agreement requires us to distribute at least enough cash for the Company to be able to distribute at least 90.0% of its REIT taxable income to its stockholders. We
generally use rents received from customers to fund our operating expenses, recurring capital expenditures, debt securities, guarantee obligations and common and preferred unit distributions. To fund property acquisitions, development activity or
building renovations, we incur debt from time to time. As of September 30, 2004, we had $819.1 million of secured debt outstanding and $776.0 million of unsecured debt outstanding. Our debt consists of mortgage debt, unsecured debt securities and
borrowings under our $250.0 million revolving loan (the Revolving Loan). As of December 31, 2004, we have $78.8 million of additional borrowing availability under our Revolving Loan.



Our Revolving Loan and the indenture governing our outstanding long-term
unsecured debt securities each require us to satisfy various operating and financial covenants and performance ratios. As a result, to ensure that we do not violate the provisions of these debt instruments, we may from time to time be limited in
undertaking certain activities that may otherwise be in the best interest of our unitholders, such as repurchasing partnership units, acquiring additional assets, increasing the total amount of our debt, or increasing unitholders distributions. We
review our current and expected operating results, financial condition and planned strategic actions on an ongoing basis for the purpose of monitoring our continued compliance with these covenants and ratios. While we are currently in compliance
with these covenants and ratios and expect to remain so for the foreseeable future, we cannot provide any assurance of such continued compliance and any failure to remain in compliance could result in an acceleration of some or all of our debt,
severely restrict our ability to incur additional debt to fund short- and long-term cash needs, or result in higher interest expense. See Notes 5 and 14 to the Consolidated Financial Statements for disclosure regarding a waiver of and amendments to
these covenants.



To generate additional capital to fund our
growth and other strategic initiatives and to lessen the ownership risks typically associated with owning 100.0% of a property, we may sell some of our properties or contribute them to joint ventures. When we create a joint venture with a strategic
partner, we usually contribute one or more properties that we own and/or vacant land to a newly formed entity in which we retain an interest of 50.0% or less. In exchange for our equal or minority interest in the joint venture, we generally receive
cash from the partner and retain all of the management income relating to the properties in the joint venture. The joint venture itself will frequently borrow money on its own behalf to finance the acquisition of and/or leverage the return upon the
properties being acquired by the joint venture or to build or acquire additional buildings, typically on a non-recourse or limited recourse basis. We generally are not liable for the debts of our joint ventures, except to the extent of our equity
investment, unless we have directly guaranteed any of that debt. In most cases, we and/or our strategic partners are required to guarantee customary exceptions to non-recourse liability in non-recourse loans. See Note 11 to the Consolidated
Financial Statements for additional information on certain debt guarantees.



We have historically also sold additional common or preferred equity to fund additional growth or to reduce our debt, but we have limited those efforts during the past five years because funds generated from our
capital recycling program in recent years have provided sufficient funds. In addition, we used funds from our capital recycling to repurchase common equity in 2003, 2002 and 2001 and preferred equity in 2001.



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Managements Analysis



We believe that funds from operations (FFO)
and FFO per unit are beneficial to management and investors and are important indicators of the performance of any equity REIT. Because FFO and FFO per unit calculations exclude such factors as depreciation and amortization or real estate assets and
gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), they facilitate comparisons of operating performance
between periods and between other REITs. Our management believes that historical cost accounting for real estate assets in accordance with United States Generally Accepted Accounting Principles (GAAP) implicitly assumes that the value of
real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real
estate companies that use historical cost accounting to be insufficient by themselves. As a result, our management believes that the use of FFO and FFO per unit, together with the required GAAP presentations, provides a more complete understanding
of the Operating Partnerships performance relative to its competitors and a more informed and appropriate basis on which to make decisions involving operating, financing and investing activities. See Funds From Operations.



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RESULTS OF OPERATIONS



On January 1, 2002, we adopted SFAS No. 144. As described in Note 9 to the Consolidated Financial Statements, we reclassified the operations and/or
gain/(loss) from disposal of certain properties to discontinued operations for all periods presented if the operations and cash flows have been or will be eliminated from our ongoing operations and we will not have any significant continuing
involvement in the operations after the disposal transaction and the properties were either sold during 2003 and 2004 or were held for sale at September 30, 2004. Accordingly, properties sold during 2003 and 2004 that did not meet certain conditions
as stipulated by SFAS No. 144 were not reclassified to discontinued operations.



Three Months Ended September 30, 2004



The
following table sets forth information regarding our results of operations for the three months ended September 30, 2004 and 2003 (in millions):



|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | -------- | - | ----- | ----------- |  | - | ----- | - |  | ------ | --
|                                                                                                          |  | Three Months Ended September 30, |       |   | $ Change |   |       | % of Change | 
|                                                                                                          |  | 2004                             |       |   | 2003     |   |       |            
|Rental and other revenues                                                                                 |  | $                                | 114.2 |   |          | $ | 121.7 |             |  | $ | (7.5  | ) |  | (6.2   | )%
|Operating expenses:                                                                                       |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Rental property and other expenses                                                                        |  |                                  | 41.5  |   |          |   | 42.9  |             |  |   | (1.4  | ) |  | (3.3   | ) 
|Depreciation and amortization                                                                             |  |                                  | 33.4  |   |          |   | 34.0  |             |  |   | (0.6  | ) |  | (1.8   | ) 
|Impairment of assets held for use                                                                         |  |                                  | 0.5   |   |          |   |      |             |  |   | 0.5   |   |  | 100.0  |   
|General and administrative                                                                                |  |                                  | 10.1  |   |          |   | 6.5   |             |  |   | 3.6   |   |  | 55.4   |   
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Total operating expenses                                                                                  |  |                                  | 85.5  |   |          |   | 83.4  |             |  |   | 2.1   |   |  | 2.5    |   
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Interest expense:                                                                                         |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Contractual                                                                                               |  |                                  | 25.6  |   |          |   | 29.9  |             |  |   | (4.3  | ) |  | (14.4  | ) 
|Amortization of deferred financing costs                                                                  |  |                                  | 0.8   |   |          |   | 1.7   |             |  |   | (0.9  | ) |  | (52.9  | ) 
|Financing obligations                                                                                     |  |                                  | 1.4   |   |          |   | 4.4   |             |  |   | (3.0  | ) |  | (68.2  | ) 
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                          |  |                                  | 27.8  |   |          |   | 36.0  |             |  |   | (8.2  | ) |  | (22.8  | ) 
|Other income/expense:                                                                                     |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Interest and other income                                                                                 |  |                                  | 1.8   |   |          |   | 1.2   |             |  |   | 0.6   |   |  | 50.0   |   
|Settlement of bankruptcy claim                                                                            |  |                                  | 14.4  |   |          |   |      |             |  |   | 14.4  |   |  | 100.0  |   
|Gain on extinguishment of co-venture obligation                                                           |  |                                  |      |   |          |   | 16.3  |             |  |   | (16.3 | ) |  | (100.0 | ) 
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                          |  |                                  | 16.2  |   |          |   | 17.5  |             |  |   | (1.3  | ) |  | (7.4   | ) 
|Income before disposition of property, co-venture expense equity in earnings of unconcolidated affiliates |  |                                  | 17.1  |   |          |   | 19.8  |             |  |   | (2.7  | ) |  | (13.6  | ) 
|                                                                                                          |  |                                  |       |  
|Gains on disposition of property, net                                                                     |  |                                  | 2.3   |   |          |   | 5.5   |             |  |   | (3.2  | ) |  | (58.2  | ) 
|Co-venture expense                                                                                        |  |                                  |      |   |          |   | (0.3  | )           |  |   | 0.3   |   |  | 100.0  |   
|Equity in earnings of unconsolidated affiliates                                                           |  |                                  | 2.6   |   |          |   | 1.0   |             |  |   | 1.6   |   |  | 160.0  |   
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Income from continuing operations                                                                         |  |                                  | 22.0  |   |          |   | 26.0  |             |  |   | (4.0  | ) |  | (15.4  | ) 
|Discontinued operations:                                                                                  |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Income from discontinued operations                                                                       |  |                                  | 0.6   |   |          |   | 0.8   |             |  |   | (0.2  | ) |  | (25.0  | ) 
|Gain on sale of discontinued operations                                                                   |  |                                  | 0.7   |   |          |   | 7.8   |             |  |   | (7.1  | ) |  | (91.0  | ) 
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                          |  |                                  | 1.3   |   |          |   | 8.6   |             |  |   | (7.3  | ) |  | (84.9  | ) 
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Net income                                                                                                |  |                                  | 23.3  |   |          |   | 34.6  |             |  |   | (11.3 | ) |  | (32.7  | ) 
|Distributions on preferred units                                                                          |  |                                  | (7.7  | ) |          |   | (7.7  | )           |  |   |      |   |  |       |   
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   
|Net income available for common unitholders                                                               |  | $                                | 15.6  |   |          | $ | 26.9  |             |  | $ | (11.3 | ) |  | (42.0  | )%
|                                                                                                          |  |                                  |       |   |          |   |       |             |  |   |       |   |  |        |   



Rental and Other Revenues



The decrease in rental and other revenues from
continuing operations was primarily the result of the disposition of certain properties in 2003 and 2004 that were not included in discontinued operations, which negatively impacted rental and other revenues by approximately $3.1 million; a slight
decrease in average occupancy rates in our Wholly Owned Properties from 83.2% for the three months ended September 30, 2003 to 82.8% for the three months ended September 30, 2004; and a decrease of approximately $0.2 million in recovery income from
certain operating expenses in the three months ended September 30, 2004.



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During the three months
ended September 30, 2004, 271 second generation leases representing 1.7 million square feet of office, industrial and retail space were executed in our Wholly Owned Properties. The average rate per square foot on a GAAP basis over the lease term for
these leases was 1.0% lower than the rent paid by previous customers.



As of the date of this filing, we are beginning to see a modest improvement in employment trends in a few of our markets and an improving economic climate in the Southeast. There has been modest positive absorption of office space in most
of our markets during the last five quarters. Accordingly, we expect our occupancy rate to increase modestly during the remainder of 2004.



Operating Expenses



The decrease in rental and other operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other
property-related expenses) primarily resulted from the disposition of certain properties in 2003 and 2004 that were not included in discontinued operations, which positively impacted rental operating expenses by approximately $0.6 million offset by
general inflationary increases, particularly salaries, benefits, utility costs, real estate taxes and insurance and the fact that certain fixed operating expenses do not vary with net changes in our occupancy percentages, such as real estate taxes,
insurance and utility rate changes.



Rental and other operating
expenses as a percentage of rental and other revenues increased from 35.3% for the three months ended September 30, 2003 to 36.3% for the three months ended September 30, 2004. The increase was a result of decreases in rental and other operating
expenses as described above offset by a larger proportional decrease in rental and other revenues as described above.



Excluding the effects of property acquisitions or dispositions, we expect rental and other operating expenses to increase slightly in the remainder of
2004 due to inflationary increases along with increases in certain fixed operating expenses that do not vary with occupancy.



The decrease in depreciation and amortization from continuing operations is primarily related to the disposition of certain properties sold in 2003 and
2004 which were not included in discontinued operations, and a decrease in leasing commissions and tenant improvement amortization.



The increase in general and administrative expenses primarily relates to: (1) increased costs of personnel and consultants in connection with implementing
the Sarbanes-Oxley Act and the restatement of our financial statements, (2) higher long-term incentive compensation costs, (3) higher salary, fringe benefit and employee relocation costs, and (4) increased costs related to a strategic transaction
terminated in the third quarter of 2004.



In the remainder of
2004, general and administrative expenses are expected to increase compared to 2003 due to inflationary increases in compensation, benefits and other expenses related to the implementation of the Sarbanes-Oxley Act, professional fees and other costs
related to consideration of a strategic transaction that were incurred largely in the third quarter 2004, and professional fees and other costs related to the restatement of our financial statements.



Interest Expense



The decrease in contractual interest was primarily due to a decrease in average interest rates on outstanding debt from 6.6%
in the three months ended September 30, 2003 to 6.3% in the three months ended September 30, 2004, primarily due to a debt refinancing completed in December 2003 and a decrease in average borrowings from $1.8 billion in the three months ended
September 30, 2003 to $1.6 billion in the three months ended September 30, 2004. These decreases were partly offset by slightly lower capitalized interest in 2004 compared to 2003 due to lower average construction and development costs.



The decrease in interest expense on financing obligation was primarily a
result of the purchase of our partners interest in the Orlando City Group properties in MG-HIW, LLC in March 2004 which eliminated interest on the $62.5 million financing obligation. (See Note 3 to the Consolidated Financial Statements for
additional information on real estate sales that are accounted for as financing transactions).



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Total interest expense is
expected to decline in the remainder of 2004 primarily due to (1) the December 2003 refinancing of certain long-term debt with new borrowings that have lower interest rates, and (2) the June 2004 refinancing of the Put Option Notes with borrowings
on our Revolving Loan which currently has lower floating rate interest. Certain of these transactions are discussed in the footnotes to the Consolidated Financial Statements. This decline may be slightly offset by any increases in average debt
balances resulting from acquisitions or other activities.



Other
Income/Expense



The increase in interest and other
income is primarily related to the interest received during the three months ended September 30, 2004 related to a note receivable acquired in connection with the disposition of certain properties in 2003 and higher interest rates earned on cash
reserves.



In the three months ended September 30, 2004, we
received net proceeds of $14.4 million as a result of the settlement of the bankruptcy of WorldCom. See Note 13 to our Consolidated Financial Statements for further discussion on this settlement.



In the three months ended September 30, 2003, we recorded a $16.3 gain on
extinguishment of debt related to the settlement of the co-venture obligation, which relates to the operations of the MG-HIW, LLC non-Orlando City Group properties which were accounted for as a profit-sharing arrangement until July 2003, at which
time, we acquired our partners interest in the non-Orlando City Group properties.



Gains on Disposition of Property; Co-Venture Expense; Equity in Earnings of Unconsolidated Affiliates



In the three months ended September 30, 2004, gain on disposition of properties was primarily comprised of a $1.6 million gain due to the partial
recognition of a $4.4 million deferred gain related to the disposition of three office buildings in July 2003 and of a $0.6 million gain related to the disposition of 27.5 acres of land. In the three months ended September 30, 2003, gain on
disposition of properties was primarily comprised of a $4.7 million gain related to the disposition of 0.4 million square feet of office properties that did not meet certain conditions to be classified as discontinued operations and of a $1.1
million gain related to the disposition of 21.1 acres of land.



The decrease in co-venture expense is due to our acquisition of our partners interest in the non-Orlando City Group properties in July 2003 and the resultant elimination of recording co-venture expense as of that date. Co-venture
expense relates to the operations of the MG-HIW, LLC non-Orlando City Group properties which were accounted for as a profit-sharing arrangement until July 2003.



The increase in equity in earnings from continuing operations of unconsolidated affiliated was primarily a result of a gain of $1.1 million recognized
in 2004 by a certain joint venture related to the disposition of land, of which $0.5 million was our portion, and an increase related to the formation of the HIW-KC Orlando, LLC certain joint venture in 2004, which contributed approximately $0.5
million to equity in earnings from continuing operations of unconsolidated affiliates in 2004.



Discontinued Operations



In accordance with SFAS No. 144, we classified net income of $1.3 million and $8.6 million as discontinued operations for the three months ended September 30, 2004 and 2003, respectively. These amounts pertained to 1.3 million square feet
of property and 7.8 acres of revenue-producing land sold during 2004 and 2003 and 0.5 million square feet of property and 88 apartment units held for sale at September 30, 2004. These amounts include gain on the sale of these properties of $0.7
million and $7.8 million in the three months ended September 30, 2004 and 2003, respectively.



Preferred Unit Distributions



We recorded $7.7 million in preferred unit distributions in each of the three months ended September 30, 2004 and 2003.



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Net Income



We recorded net income in the three months ended September 30, 2004 of $23.3
million, which was a 32.7% decrease from net income of $34.6 million in the three months ended September 30, 2003. The decrease was primarily due to disposition of certain properties in 2004 and 2003 and increases in general and administrative costs
as described above. These amounts were offset by lower rental property expenses, depreciation and amortization expense, interest expense and co-venture expense and an increase in gains on disposition of property as described above. In the remainder
of 2004, we expect net income to be lower as compared with 2003 due to slightly rising average occupancy, pressure on GAAP rental rates, higher depreciation and amortization, higher property operating costs, and higher general and administrative
costs (including professional fees and other costs related to consideration of a strategic transaction and professional fees and other costs related to the restatement of our financial statements) which amounts should be offset by lower interest
expense and settlement of our bankruptcy claim against WorldCom as more fully described in Note 14 to the Consolidated Financial Statements.



Nine Months Ended September 30, 2004



The following table sets forth information regarding our results of operations for the nine months ended September 30, 2004 and 2003 (in millions):



|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | -------- | - | ----- | ---------- |  | - | ----- | - |  | ------ | --
|                                                                                                              |  | Nine Months Ended September 30, |       |   | $ Change |   |       | % ofChange | 
|                                                                                                              |  | 2004                            |       |   | 2003     |   |       |           
|Rental and other revenues                                                                                     |  | $                               | 350.9 |   |          | $ | 372.8 |            |  | $ | (21.9 | ) |  | (5.9   | )%
|Operating expenses:                                                                                           |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Rental property and other expenses                                                                            |  |                                 | 126.8 |   |          |   | 128.7 |            |  |   | (1.9  | ) |  | (1.5   | ) 
|Depreciation and amortization                                                                                 |  |                                 | 103.1 |   |          |   | 105.4 |            |  |   | (2.3  | ) |  | (2.2   | ) 
|Impairment of assets held for use                                                                             |  |                                 | 0.5   |   |          |   |      |            |  |   | 0.5   |   |  | 100.0  |   
|General and administrative                                                                                    |  |                                 | 28.0  |   |          |   | 17.9  |            |  |   | 10.1  |   |  | 56.4   |   
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Total operating expenses                                                                                      |  |                                 | 258.4 |   |          |   | 252.0 |            |  |   | 6.4   |   |  | 2.5    |   
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Interest expense:                                                                                             |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Contractual                                                                                                   |  |                                 | 80.1  |   |          |   | 90.1  |            |  |   | (10.0 | ) |  | (11.1  | ) 
|Amortization of deferred financing costs                                                                      |  |                                 | 2.9   |   |          |   | 3.5   |            |  |   | (0.6  | ) |  | (17.1  | ) 
|Financing obligations                                                                                         |  |                                 | 7.5   |   |          |   | 13.5  |            |  |   | (6.0  | ) |  | (44.4  | ) 
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|                                                                                                              |  |                                 | 90.5  |   |          |   | 107.1 |            |  |   | (16.6 | ) |  | (15.5  | ) 
|Other income/(expense):                                                                                       |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Interest and other income                                                                                     |  |                                 | 4.8   |   |          |   | 4.3   |            |  |   | 0.5   |   |  | 11.6   |   
|Settlement of bankruptcy claim                                                                                |  |                                 | 14.4  |   |          |   |      |            |  |   | 14.4  |   |  | 100.0  |   
|Loss on debt extinguishment                                                                                   |  |                                 | (12.5 | ) |          |   | (14.7 | )          |  |   | 2.2   |   |  | 15.0   |   
|Gain on extinguishment of co-venture obligation                                                               |  |                                 |      |   |          |   | 16.3  |            |  |   | (16.3 | ) |  | (100.0 | ) 
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|                                                                                                              |  |                                 | 6.7   |   |          |   | 5.9   |            |  |   | 0.8   |   |  | 13.6   |   
|Income before disposition of property, co-venture expense and equity in earnings of unconsolidated affiliates |  |                                 | 8.7   |   |          |   | 19.6  |            |  |   | (10.9 | ) |  | (55.6  | ) 
|                                                                                                              |  |                                 |       |  
|Gains on disposition of property, net                                                                         |  |                                 | 17.8  |   |          |   | 8.0   |            |  |   | 9.8   |   |  | 122.5  |   
|Co-venture expense                                                                                            |  |                                 |      |   |          |   | (4.6  | )          |  |   | 4.6   |   |  | 100.0  |   
|Equity in earnings of unconsolidated affiliates                                                               |  |                                 | 5.3   |   |          |   | 3.5   |            |  |   | 1.8   |   |  | 51.4   |   
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Income from continuing operations                                                                             |  |                                 | 31.8  |   |          |   | 26.5  |            |  |   | 5.3   |   |  | 20.0   |   
|Discontinued operations:                                                                                      |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Income from discontinued operations                                                                           |  |                                 | 1.3   |   |          |   | 3.4   |            |  |   | (2.1  | ) |  | (61.8  | ) 
|Gain on sale of discontinued operations                                                                       |  |                                 | 0.7   |   |          |   | 8.7   |            |  |   | (8.0  | ) |  | (92.0  | ) 
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|                                                                                                              |  |                                 | 2.0   |   |          |   | 12.1  |            |  |   | (10.1 | ) |  | (83.5  | ) 
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Net income                                                                                                    |  |                                 | 33.8  |   |          |   | 38.6  |            |  |   | (4.8  | ) |  | (12.4  | ) 
|Distributions on preferred units                                                                              |  |                                 | (23.1 | ) |          |   | (23.1 | )          |  |   |      |   |  |       |   
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   
|Net income available for common unitholders                                                                   |  | $                               | 10.7  |   |          | $ | 15.5  |            |  | $ | (4.8  | ) |  | (31.0  | )%
|                                                                                                              |  |                                 |       |   |          |   |       |            |  |   |       |   |  |        |   



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Rental and Other Revenues



The decrease in rental and other revenues from
continuing operations was primarily the result of the disposition of certain properties in 2003 and 2004 that were not included in discontinued operations, which negatively impacted rental revenues by approximately $13.6 million; a decrease in
average occupancy rates in our Wholly Owned Properties from 83.3% for the nine months ended September 30, 2003 to 82.1% for the nine months ended September 30, 2004; a decrease of approximately $2.2 million in recovery income from certain operating
expenses in the nine months ended September 30, 2004; and a decrease in straight-line rental income as a result of a $0.8 million reserve established in 2004 related to the bankruptcy of US Airways.



During the nine months ended September 30, 2004, 772 second generation leases
representing 5.8 million square feet of office, industrial and retail space were executed in our Wholly Owned Properties. The average rate per square foot on a GAAP basis over the lease term for these leases was only 0.5 % lower than the rent paid
by previous customers.



As of the date of this filing, we are
beginning to see a modest improvement in employment trends in a few of our markets and an improving economic climate in the Southeast. There has been modest positive absorption of office space in most of our markets during the last five quarters.
Accordingly, we expect our occupancy rate to increase modestly during the remainder of 2004.



Operating Expenses



The decrease in rental and other operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) primarily resulted from the disposition of certain
properties in 2003 and 2004 that were not included in discontinued operations, which positively impacted rental operating expenses by approximately $3.3 million, offset by general inflationary increases, particularly salaries, benefits, utility
costs, real estate taxes and insurance and the fact that certain fixed operating expenses do not vary with net changes in our occupancy percentages, such as real estate taxes, insurance and utility rate changes.



Rental and other operating expenses as a percentage of rental and other
revenues increased from 34.5% for the nine months ended September 30, 2003 to 36.1% for the nine months ended September 30, 2004. The increase was a result of decreases in rental and other operating expenses as described above offset by a larger
proportional decrease in rental and other revenues as described above.



Excluding the effects of property acquisitions or dispositions, we expect rental and other operating expenses to increase slightly in the remainder of 2004 due to inflationary increases along with increases in certain fixed operating
expenses that do not vary with occupancy.



The decrease in
depreciation and amortization from continuing operations is primarily related to the disposition of certain properties sold in 2003 and 2004 which were not included in discontinued operations, which positively impacted depreciation and amortization
by approximately $1.1 million; a decrease in leasing commissions and tenant improvement amortization; and a decrease in leasing commissions and tenant improvement write-offs in the nine months ended September 30, 2004.



The increase in general and administrative expense primarily relates to $4.6
million recognized in connection with a retirement package for the Companys Chief Executive Officer, as described in Note 13 to the Consolidated Financial Statements and the following: (1) increased costs of personnel and consultants in
connection with implementing the Sarbanes-Oxley Act and the restatement of our financial statements, (2) higher long-term incentive compensation costs, (3) a decrease in general and administrative expenses in 2003 from settlement of a litigation
matter, (4) higher salary, fringe benefit and employee relocation costs, and (5) increased costs related to a strategic transaction terminated in the third quarter of 2004. These increases were partly offset by a decrease in compensation expense in
2004 related to dividend equivalent rights attached to option shares granted to certain officers of the Company in 1997. We account for the option shares using variable accounting as provided by FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation.



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In the remainder of 2004,
general and administrative expenses are expected to significantly increase compared to 2003 due to inflationary increases in compensation, benefits and other expenses related to the implementation of the Sarbanes-Oxley Act and professional fees and
other costs related to the restatement of our financial statements.



Interest Expense



The decrease in
contractual interest expense was primarily due to a decrease in average interest rates on outstanding debt from 6.6% in the nine months ended September 30, 2003 to 6.3% in the nine months ended September 30, 2004, primarily due to a debt refinancing
completed in December 2003 and a decrease in average borrowings from $1.8 billion in the nine months ended September 30, 2003 to $1.7 billion in the nine months ended September 30, 2004. These decreases were partly offset by slightly lower
capitalized interest in 2004 compared to 2003 due to lower average construction and development costs.



Interest expense on financing obligations decreased by $6.0 million in the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003 (See Note 3 to the Consolidated Financial Statements for additional information on real estate sales that are accounted for as financing transactions). The decrease was primarily a result of the purchase of our partners
interest in the Orlando City Group properties in MG-HIW, LLC in March 2004 which eliminated interest on the $62.5 million financing obligation.



Total interest expense is expected to decline in the remainder of 2004 primarily due to (1) the December 2003 refinancing of certain long-term debt with
new borrowings that have lower interest rates, and (2) the June 2004 refinancing of the Put Option Notes with borrowings on our Revolving Loan which currently has lower floating rate interest. Certain of these transactions are discussed in the
footnotes to the Consolidated Financial Statements. This decline may be slightly offset by any increases in average debt balances resulting from acquisitions or other activities.



Other Income/Expense



The increase in interest and other income is primarily related to the interest received during the nine months ended September 30, 2004 related to a note
receivable acquired in connection with the disposition of certain properties in 2003 and higher interest rates earned on cash reserves.



In the nine months ended September 30, 2004, a $12.5 million loss was recorded related to the retirement of the Put Option Notes described in Note 5 to
the Consolidated Financial Statements. In addition, in the nine months ended September 30, 2003, a $14.7 million loss was recorded related to retirement of the MOPPRS debt described in Note 5 to the Consolidated Financial Statements.



Gains on Disposition of Property; Co-Venture Expense; Equity in Earnings of
Unconsolidated Affiliates



In the nine months ended
September 30, 2004, gain on disposition of properties was primarily comprised of a $15.9 million gain related to the disposition of approximately 1.3 million square feet of office properties contributed to the HIW-KC Orlando, LLC in June 2004, as
discussed in Note 2 to the Consolidated Financial Statements, a $1.6 million gain due to the partial recognition of a $4.4 million deferred gain related to the disposition of three office buildings in July 2003 and a $1.7 million gain related to the
disposition of 50.2 acres of land. Offsetting this gain was a $1.8 million impairment loss on 27.0 acres of land, which is discussed further in Note 4 to the Consolidated Financial Statements. In the nine months ended September 30, 2003, gain on
disposition of properties was primarily comprised of a $4.7 million gain related to the disposition of 0.4 million square feet of office properties that did not meet certain conditions to be classified as discontinued operations, a $2.6 million gain
related to the disposition of 33.5 acres of land and a $1.1 million gain on the disposition of 4.0 acres of land, as discussed in Note 6 to the Consolidated Financial Statements.



The decrease in co-venture expense is due to our acquisition of our partners interest in the non-Orlando City Group
properties in July 2003 and the resultant elimination of recording co-venture expense as of that date. Co-venture expense relates to the operations of the MG-HIW, LLC non-Orlando City Group properties which were accounted for as a profit-sharing
arrangement until July 2003.



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The increase in equity in
earnings from continuing operations of unconsolidated affiliates was primarily a result of a gain of $1.1 million recognized in 2004 by a certain joint venture related to the disposition of land, of which $0.5 million was our portion, and an
increase related to the formation of the HIW-KC Orlando, LLC certain joint venture in 2004, which contributed approximately $0.6 million to equity in earnings from continuing operations of unconsolidated affiliates in 2004.



Discontinued Operations



In accordance with SFAS No. 144, we classified net income of $2.0 million
and $12.1 million as discontinued operations for the nine months ended September 30, 2004 and 2003, respectively. These amounts pertained to 1.3 million square feet of property and 7.8 acres of revenue-producing land sold during 2004 and 2003 and
0.5 million square feet of property and 88 apartment units held for sale at September 30, 2004. These amounts include gain on the sale of these properties, net of impairment charges related to discontinued operations, of $0.7 million and $8.7
million in the nine months ended September 30, 2004 and 2003, respectively.



Preferred Unit Distributions



We
recorded $23.1 million in preferred unit distributions in each of the nine months ended September 30, 2004 and 2003.



Net Income



We recorded net income in the nine months ended September 30, 2004 of $33.8 million, which was a 12.4% decrease from net income of $38.6 million in the
nine months ended September 30, 2003. The decrease was primarily due to the disposition of certain properties in 2004 and 2003 and increases in general and administrative costs and loss on early extinguishment of debt as described above. These
amounts were offset by lower rental property expenses, depreciation and amortization expense, interest expense and co-venture expense and an increase in gains on disposition of property as described above. In the remainder of 2004, we expect net
income to be lower as compared with 2003 due to slightly rising average occupancy, pressure on GAAP rental rates, higher depreciation and amortization, higher property operating costs, and higher general and administrative costs (including
professional fees and other costs related to consideration of a strategic transaction and professional fees and other costs related to the restatement of our financial statements) which amounts should be offset by lower interest expense and
settlement of our bankruptcy claim against WorldCom as more fully described in Note 14 to the Consolidated Financial Statements.



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LIQUIDITY AND CAPITAL RESOURCES



Statement of Cash Flows



As required by GAAP, we report and analyze our cash flows based on operating activities, investing activities and financing activities. The following
table sets forth the changes in the Operating Partnerships cash flows from the first nine months of 2003 to the first nine months of 2004 (in thousands):



|                                      |  |                                |          |   |      |   |          |        |  |   |         |  
|------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | ------ |  | - | ------- | -
|                                      |  | Nine Months EndedSeptember 30, |          |   |      |  
|                                      |  | 2004                           |          |   | 2003 |   |          | Change | 
|Cash Provided By Operating Activities |  | $                              | 128,817  |   |      | $ | 134,300  |        |  | $ | (5,483  | )
|Cash Provided By Investing Activities |  |                                | 15,256   |   |      |   | 28,342   |        |  |   | (13,086 | )
|Cash Used In Financing Activities     |  |                                | (145,498 | ) |      |   | (161,120 | )      |  |   | 15,622  |  
|                                      |  |                                |          |   |      |   |          |        |  |   |         |  
|Total Cash Flows                      |  | $                              | (1,425   | ) |      | $ | 1,522    |        |  | $ | (2,947  | )
|                                      |  |                                |          |   |      |   |          |        |  |   |         |  



In calculating cash
flow from operating activities, GAAP requires us to add depreciation and amortization, which are non-cash expenses, back to net income. As a result, we have historically generated a significant positive amount of cash from operating activities. From
period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully under Results of Operations, changes in receivables and payables, and net additions or decreases in our overall
portfolio, which affect the amount of depreciation and amortization expense.



Cash provided by or used in investing activities generally relates to capitalized costs incurred for leasing and major building improvements, and our acquisition, development, disposition and joint venture activity.
During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically would consist of cash received upon the sale of
properties or distributions from our joint ventures.



Cash used
in financing activities generally relates to unitholder distributions, incurrence and repayment of debt and sales or repurchases of common units and preferred units. As discussed previously, we use a significant amount of our cash to fund unitholder
distributions. Whether or not we incur significant new debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We use our Revolving Loan for working capital purposes, which
means that during any given period, in order to minimize interest expense associated with balances outstanding under the Revolving Loan, we will likely record significant repayments and borrowings under the Revolving Loan.



The decrease of $5.5 million in cash provided by operating activities was
primarily a result of lower net income due to the disposition of certain properties under our capital recycling program, a decrease in average occupancy rates for our wholly owned portfolio and an increase in general and administrative expenses,
offset by settlement of the Operating Partnerships bankruptcy claim against WorldCom. In addition, the level of net cash provided by operating activities is affected by the timing of receipt of revenues and payment of expenses.



The decrease of $13.1 million in cash provided by investing activities was
primarily a result of a decrease in proceeds from dispositions of real estate assets of approximately $16.3 million, and contributions of $3.9 million made to unconsolidated affiliates during the nine months ended September 30, 2004 while no
contributions were made during the nine months ended September 30, 2003 offsetting the decrease was a decrease in addition to real estate assets of $3.2 million and an increase in distributions from affiliates of $2.2 million.



The decrease of $15.6 million in cash used in financing activities was
primarily a result of a decrease of $10.1 million in distributions paid on common units, a decrease of $18.6 million in common unit repurchases and no co-venture obligation payments during 2004. These decreases were partly offset by an increase of
$15.1 million in net repayments on the unsecured Revolving Loan and mortgages and notes payable, financing obligations and co-venture obligations.



In 2004, we expect to continue our capital recycling program of selectively disposing of non-core properties or other properties in order to use the net
proceeds for investments or other purposes. At September 30, 2004, we had



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0.6 million square feet of properties, 88
apartment units and 126.1 acres of land classified as held for sale pursuant to SFAS No. 144 with a carrying value of $69.0 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are
expected to close by early 2005. However, we can provide no assurance that all these transactions will be consummated. As of December 31, 2004, we have closed on some of these transactions consisting of 0.5 million square feet of properties, 88
apartment units and 90.0 acres of land.



During the remainder
of 2004, we expect to have positive cash flows from operating activities. The net cash flows from investing activities in the remainder of 2004 could be positive or negative, depending on the level and timing of property dispositions, property
acquisitions, development and capitalized leasing and improvement costs. Any positive cash flows from operating and investing activities in the remainder of 2004 are expected to be used to pay unitholder distributions, required debt amortization and
recurring capital expenditures.



Capitalization



Our total indebtedness at September 30, 2004 was approximately $1.6 billion
and was comprised of $819.1 million of secured indebtedness with a weighted average interest rate of 6.9% and $776.0 million of unsecured indebtedness with a weighted average interest rate of 5.4%. As of September 30, 2004, our outstanding mortgages
and notes payable were secured by real estate assets with an aggregate carrying value of approximately $1.4 billion.



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 Liquidity and Capital Resources - Current and Future Cash Needs.



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The following table sets
forth a summary regarding our known contractual obligations at September 30, 2004 (in thousands):



|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|------------------------------------------------------------ |  | ---------------------- | --------- | ----------------------- | - | ------ |  | ---- | ------- | ---- | - | ------- |  | ---------- | ------ |  | - | ------- |  | - | -------
|                                                             |  | Payments Due By Period
|                                                             |  | Total                  |           | ThroughRemainderof 2004 |   | 2005   |  | 2006 |         | 2007 |   | 2008    |  | Thereafter
|Fixed Rate Debt: (1)                                         |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Unsecured                                                    |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Notes                                                        |  | $                      | 460,000   |                         | $ |       |  | $    |        |      | $ | 110,000 |  | $          |       |  | $ | 100,000 |  | $ | 250,000
|Secured:                                                     |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Mortgage Loans Payable (2)                                   |  |                        | 768,324   |                         |   | 3,346  |  |      | 81,447  |      |   | 17,213  |  |            | 81,626 |  |   | 14,343  |  |   | 570,349
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Total Fixed Rate Debt                                        |  |                        | 1,228,324 |                         |   | 3,346  |  |      | 81,447  |      |   | 127,213 |  |            | 81,626 |  |   | 114,343 |  |   | 820,349
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Variable Rate Debt:                                          |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Unsecured:                                                   |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Term Loan                                                    |  |                        | 120,000   |                         |   |       |  |      | 120,000 |      |   |        |  |            |       |  |   |        |  |   |       
|Revolving Loan                                               |  |                        | 196,000   |                         |   |       |  |      |        |      |   | 196,000 |  |            |       |  |   |        |  |   |       
|Secured:                                                     |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Mortgage Loans Payable (2)                                   |  |                        | 50,803    |                         |   | 73     |  |      | 289     |      |   | 47,273  |  |            | 3,168  |  |   |        |  |   |       
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Total Variable Rate Debt                                     |  |                        | 366,803   |                         |   | 73     |  |      | 120,289 |      |   | 243,273 |  |            | 3,168  |  |   |        |  |   |       
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Total Long-Term Debt                                         |  |                        | 1,595,127 |                         |   | 3,419  |  |      | 201,736 |      |   | 370,486 |  |            | 84,794 |  |   | 114,343 |  |   | 820,349
|                                                             |  |                        |           |                         |   |        | 
|Operating Lease Obligations:                                 |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Land Leases                                                  |  |                        | 47,445    |                         |   | 318    |  |      | 1,272   |      |   | 1,213   |  |            | 1,191  |  |   | 1,195   |  |   | 42,256 
|Purchase Obligations:                                        |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Completion Contracts (3)                                     |  |                        | 26,975    |                         |   | 11,805 |  |      | 15,170  |      |   |        |  |            |       |  |   |        |  |   |       
|Other Long-Term Liabilities Reflected on the Balance Sheet:  |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Plaza Colonade Debt Repayment Guarantee (3)                  |  |                        | 2,468     |                         |   |       |  |      |        |      |   | 2,468   |  |            |       |  |   |        |  |   |       
|Plaza Colonnade Completion Guarantee (3)                     |  |                        | 376       |                         |   |       |  |      |        |      |   | 376     |  |            |       |  |   |        |  |   |       
|Highwoods DLF 97/26 DLF 99/32, LP Lease Guarantee (3)        |  |                        | 855       |                         |   |       |  |      |        |      |   |        |  |            |       |  |   | 855     |  |   |       
|HIW-KC Orlando, LLC Lease Guarantee (3)                      |  |                        | 3,240     |                         |   | 21     |  |      | 83      |      |   | 92      |  |            | 97     |  |   | 97      |  |   | 2,850  
|RRHWoods, LLC and Dallas County Partners Lease Guarantee (3) |  |                        | 1,290     |                         |   |       |  |      |        |      |   |        |  |            |       |  |   |        |  |   | 1,290  
|Capital One Lease Guarantee (4)                              |  |                        | 1,402     |                         |   |       |  |      |        |      |   | 334     |  |            | 369    |  |   | 378     |  |   | 321    
|Industrial Portfolio Lease Guarantee (4)                     |  |                        | 1,827     |                         |   | 330    |  |      | 991     |      |   | 506     |  |            |       |  |   |        |  |   |       
|Eastshore Financing Obligation (5)                           |  |                        | 28,634    |                         |   |       |  |      |        |      |   | 28,634  |  |            |       |  |   |        |  |   |       
|SF-HIW Harborview Financing Obligation (5)                   |  |                        | 13,725    |                         |   |       |  |      |        |      |   |        |  |            |       |  |   |        |  |   | 13,725 
|Tax Increment Financing Obligation (6)                       |  |                        | 20,633    |                         |   | 687    |  |      | 775     |      |   | 863     |  |            | 913    |  |   | 976     |  |   | 16,419 
|DLF Note Payable (7)                                         |  |                        | 3,142     |                         |   | 49     |  |      | 216     |      |   | 250     |  |            | 286    |  |   | 325     |  |   | 2,016  
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        
|Total                                                        |  | $                      | 1,747,139 |                         | $ | 16,629 |  | $    | 220,243 |      | $ | 405,222 |  | $          | 87,650 |  | $ | 118,169 |  | $ | 899,226
|                                                             |  |                        |           |                         |   |        |  |      |         |      |   |         |  |            |        |  |   |         |  |   |        

---

|(1) | The Operating Partnerships unsecured notes of $460.0 million bear interest at rates ranging from 7.0% to 8.125% with interest payable semi-annually in arrears. Any premium and
discount related to the issuance of the unsecured notes together with other issuance costs is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes are redeemable at any time prior to
maturity at our option, subject to certain conditions including the payment of make-whole amounts. Our fixed rate mortgage loans generally are either locked out to prepayment for all or a portion of their term, or are pre-payable subject to certain
conditions including prepayment penalties.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The mortgage loans payable were secured by real estate assets with an aggregate carrying value of approximately $1.4 billion at September 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | See Note 11 to the Consolidated Financial Statements for further discussion.
|--- | ----------------------------------------------------------------------------

|(4) | These liabilities represent gains that were deferred in accordance with SFAS No. 66 when we sold these properties to a third party. We defer gains on sales of real estate up to our
maximum exposure to contingent loss. See Note 11 to the Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | These liabilities represent our financing obligation to either our partner in the respective joint venture or the third-party buyer as a result of accounting for these transactions
as financing arrangements. See Note 3 to the Consolidated Financial Statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) | In connection with Tax Increment Financing for construction of a public garage related to an office building constructed by us, we are obligated to pay fixed special assessments
over a 20-year period. The net present value of these assessments, discounted at 6.93%, is shown as a Financing Obligation in the balance sheet. We also receive special tax revenues and property tax rebates which are intended, but not guaranteed, to
provide funds to pay the special assessments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Represents a fixed obligation which we owe our partner in Highwoods DLF 98/29, LP. This amount arose from an excess contribution from our partner at the formation of the joint
venture.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating and Financial Covenants and Performance
Ratios



The terms of the Revolving Loan, the $120.0
million bank term loans and the indentures that govern 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 Loan and bank term loans for the foreseeable future, depending upon our future operating performance and property and financing transactions, we cannot assure you that we will
continue to be in compliance.



If we fail to comply with these
financial ratios and other covenants, we would likely not be able to borrow any further amounts under the Revolving Loan, which could adversely affect our ability to fund our operations, and our lenders could accelerate any debt outstanding under
our Revolving Loan, bank term loans or our indenture. If our debt cannot be paid, refinanced or extended at maturity, in addition to our failure to repay our debt, we may not be able to make distributions to unitholders at expected levels or at all.
Furthermore, if any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flows and ability to make distributions to unitholders. Any such refinancing could also impose tighter financial ratios
and other covenants that could restrict our ability to take actions that could otherwise be in our unitholders best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying
distributions.



The following table sets forth more detailed
information about our ratio and covenant compliance under the Revolving Loan and the bank term loans, which have identical covenants. If we fail to satisfy any of the covenants detailed in the table below (including the covenants regarding non-GAAP
financial measures such as EBITDA, Cash Available for Distributions (CAD) and adjusted NOI) after the expiration of certain cure periods, the lenders under our Revolving Loan, our bank term loans and/or the construction loan in Kansas
City for Colonnade could accelerate amounts outstanding there under, which aggregated $340.0 million at September 30, 2004. Certain of these definitions may differ from similar terms used in the accompanying Consolidated Financial Statements and
may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our Revolving Loan, including definitions of certain relevant terms, see the credit agreement
governing our Revolving Loan which is incorporated by reference in this Quarterly Report in Exhibit 10.14.



|                                                                                               |  |                    |              |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------------ | -
|                                                                                               |  | September 30, 2004 |             
|Total Liabilities Less Than or Equal to 57.5% of Total Assets                                  |  |                    | 53.6         | %
|Unencumbered Assets Greater Than or Equal to 2 times Unsecured Debt                            |  |                    | 2.15         |  
|Secured Debt Less Than or Equal to 35% of Total Assets                                         |  |                    | 28.1         | %
|Adjusted EBITDA Greater Than 2.10 times Interest Expense                                       |  |                    | 2.28         |  
|Adjusted EBITDA Greater Than 1.50 times Fixed Charges                                          |  |                    | 1.64         |  
|Adjusted NOI Unencumbered assets Greater Than 2.25 times Interest on Unsecured Debt            |  |                    | 2.79         |  
|Tangible Net Worth Greater Than $1.45 Billion                                                  |  | $                  | 1.57 billion |  
|Restricted Payments, including distributions to shareholders, Less Than or Equal to 95% of CAD |  |                    | 74.4         | %



In June 2004, the
Operating Partnership amended its Revolving Loan and two bank term loans. The changes excluded the $12.5 million charge taken related to the refinancing of the Put Option Notes from the calculations used to compute financial covenants.



In August 2004, the Operating Partnership further amended its Revolving
Loan and two bank term loans. The changes excluded the effects of accounting for three sales transactions as financing or profit sharing arrangements under SFAS No. 66 from the calculations used to compute financial covenants, adjusted one financial
covenant and temporarily adjusted a second financial covenant until the earlier of December 31, 2004 or the period when the Operating Partnership can record income from the anticipated settlement of a claim against WorldCom - see Note 13 to the
Consolidated Financial Statements.



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In early October 2004, the
Operating Partnership obtained a waiver from the lenders of the Operating Partnerships Revolving Loan and two bank term loans for certain covenant violations caused by the effects of the loss on debt extinguishment from the MOPPRS transaction
in early 2003.



The aforementioned modifications did not change
the economic terms of the loans. In connection with these modifications, the Operating Partnership incurred certain loan costs that are capitalized and amortized over the remaining term of the loans.



The Revolving Loan carries an interest rate based upon its senior unsecured
credit ratings. As a result, interest currently accrues on borrowings under the Revolving Loan at LIBOR plus 105 basis points. The terms of the Revolving Loan require the Operating Partnership to pay an annual base facility fee equal to .25% of the
aggregate amount of the Revolving Loan. The Operating Partnership currently has a credit rating of BBB- assigned by Standard & Poors and Fitch Inc. In August 2003, Moodys Investor Service downgraded its assigned credit rating from
Baa3 to Ba1. If Standard and Poors or Fitch Inc. were to lower the Operating Partnerships credit ratings without a corresponding increase by Moodys, the interest rate on borrowings under the Operating Partnerships Revolving
Loan would be automatically increased by 60 basis points.



Refinancings in
2004



In 1997, a trust formed by the Operating Partnership
sold $100.0 million of Exercisable Put Option Securities due June 15, 2004 (X-POS). The assets of the trust consisted 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 bore an interest rate of 7.19% from the date of issuance through 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. The counter party exercised this option and acquired the Put Option Notes on June 15, 2004. On that same date, the Operating Partnership
exercised its option to acquire the Put Option Notes from the counter party for a purchase price equal to the sum of the present value of the remaining scheduled payments of principal and interest (assuming an interest rate of 6.39%) on the Put
Option Notes, or $112.3 million. The difference between the $112.3 million and the $100.0 million was charged to loss on extinguishment of debt in the quarter ended June 30, 2004. We borrowed funds from our Revolving Loan to make the $112.3 million
payment.



In late June 2004, we repaid $51.0 million of the
increased borrowing under our Revolving Loan with proceeds from the sale of a 60.0% interest in five office buildings in Orlando, Florida and from the sale of a building at Highwoods Preserve in Tampa, Florida. See Notes 2 and 4 to the Consolidated
Financial Statements for further details of these asset sales.



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 recurring capital expenditures. In addition, we could
incur tenant improvements and lease commissions related to any releasing of space at the Highwoods Preserve campus vacated by WorldCom.



In addition to the requirements discussed above, our short-term liquidity requirements also include the funding of 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 some or all of the following:



| |  | borrowings under the Revolving Loan (which has up to $78.8 million of availability as of December 31, 2004);
| | - | ------------------------------------------------------------------------------------------------------------



| |  | the selective disposition of non-core assets or other assets;
| | - | -------------------------------------------------------------



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| |  | 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the issuance of secured debt (at December 31, 2004, we had approximately $2.2 billion of unencumbered real estate assets at cost) ; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | the issuance of new unsecured debt.
| | - | -----------------------------------



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 Revolving Loan and long-term unsecured debt. Our goal is to maintain 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 Revolving Loan. As mentioned above, 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 pay distributions to unitholders and
satisfy other cash payments may be adversely affected.



Off Balance Sheet
Arrangements



The Operating Partnership has several off
balance sheet joint venture and guarantee arrangements. The joint ventures were formed with unrelated investors to generate additional capital to fund property acquisitions, repay outstanding debt or fund other strategic initiatives and to lessen
the ownership risks typically associated with owning 100.0% of a property. When we create a joint venture with a strategic partner, we usually contribute one or more properties that we own to a newly formed entity in which we retain an interest of
50.0% or less. In exchange for an equal or minority interest in the joint venture, we generally receive cash from the partner and retain the management income relating to the properties in the joint venture. For financial reporting purposes, the
sales of assets we sold to one of our joint ventures is accounted for as a financing arrangement.



At September 30, 2004, our unconsolidated joint ventures had $805.2 million of total assets and $586.1 million of total liabilities. Our weighted average
equity interest based on the total assets of these unconsolidated joint ventures was 41.3%. During the nine months ended September 30, 2004, these unconsolidated joint ventures earned $11.3 million of total net income of which our share was $5.3
million. For additional discussion of our unconsolidated joint ventures, see Note 2 in the Consolidated Financial Statements.



As required by GAAP, we use the equity method of accounting for our unconsolidated joint ventures in which we exercise significant influence but do not
control the major operating and financial policies of the entity regarding encumbering the entities with debt and the acquisition and disposal of properties. As a result, the assets and liabilities of these joint ventures are not included on our
balance sheet and the results of operations of these joint ventures are not included on our income statement, other than as equity in earnings of unconsolidated affiliates. Generally, we are not liable for the debts of our joint ventures, except to
the extent of our equity investment, unless we have directly guaranteed any of that debt. In most cases, we and/or our strategic partners are required to guarantee customary limited exceptions to non-recourse liability in non-recourse loans.



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As of September 30, 2004,
our unconsolidated joint ventures had $544.0 million of outstanding debt. The following table sets forth the principal payments due on that outstanding long-term debt as recorded on the respective joint ventures books at September 30, 2004 (in
thousands):



|                                  |  |              |   |  |       |         |     |                  |   |       |  |      |       |      |   |        |  |            |        |  |   |        |  |   |        
|--------------------------------- |  | ------------ | - |  | ----- | ------- | --- | ---------------- | - | ----- |  | ---- | ----- | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | -------
|                                  |  | PercentOwned |   |  | Total |         |     | Remainderof 2004 |   | 2005  |  | 2006 |       | 2007 |   | 2008   |  | Thereafter
|Board of Trade Investment Company |  | 49.00        | % |  | $     | 612     |     |                  | $ | 47    |  | $    | 198   |      | $ | 215    |  | $          | 152    |  | $ |       |  | $ |       
|Dallas County Partners (1)        |  | 50.00        | % |  |       | 40,976  |     |                  |   | 265   |  |      | 1,106 |      |   | 4,487  |  |            | 13,405 |  |   | 5,842  |  |   | 15,871 
|Dallas County Partners II (1)     |  | 50.00        | % |  |       | 21,545  |     |                  |   | 322   |  |      | 1,375 |      |   | 1,522  |  |            | 1,684  |  |   | 1,863  |  |   | 14,779 
|Fountain Three (1)                |  | 50.00        | % |  |       | 29,101  |     |                  |   | 283   |  |      | 1,172 |      |   | 1,243  |  |            | 1,316  |  |   | 6,400  |  |   | 18,687 
|RRHWoods, LLC (1)                 |  | 50.00        | % |  |       | 69,828  |     |                  |   | 114   |  |      | 468   |      |   | 500    |  |            | 4,313  |  |   | 459    |  |   | 63,974 
|Highwoods DLF 98/29, LP           |  | 22.81        | % |  |       | 66,472  |     |                  |   | 266   |  |      | 1,107 |      |   | 1,185  |  |            | 1,268  |  |   | 1,356  |  |   | 61,290 
|Highwoods DLF 97/26 DLF 99/32, LP |  | 42.93        | % |  |       | 58,497  |     |                  |   | 184   |  |      | 770   |      |   | 831    |  |            | 897    |  |   | 969    |  |   | 54,846 
|Highwoods-Markel Associates, LLC  |  | 50.00        | % |  |       | 39,597  |     |                  |   | 155   |  |      | 643   |      |   | 682    |  |            | 722    |  |   | 766    |  |   | 36,629 
|Concourse Center Associates, LLC  |  | 50.00        | % |  |       | 9,564   |     |                  |   | 45    |  |      | 189   |      |   | 202    |  |            | 217    |  |   | 232    |  |   | 8,679  
|Plaza Colonnade, LLC              |  | 50.00        | % |  |       | 48,065  |     |                  |   |      |  |      |      |      |   |       |  |            | 48,065 |  |   |       |  |   |       
|Highwoods KC Glenridge, LLC       |  | 40.00        | % |  |       | 16,750  |     |                  |   |      |  |      |      |      |   | 250    |  |            |       |  |   | 136    |  |   | 16,364 
|HIW-KC Orlando, LLC               |  | 40.00        | % |  |       | 143,000 |     |                  |   |      |  |      |      |      |   |       |  |            | 1,020  |  |   | 2,540  |  |   | 139,440
|                                  |  |              |   |  |       |         |     |                  |   |       |  |      |       |      |   |        |  |            |        |  |   |        |  |   |        
|Total                             |  |              |   |  | $     | 544,007 | (2) |                  | $ | 1,681 |  | $    | 7,028 |      | $ | 11,117 |  | $          | 73,059 |  | $ | 20,563 |  | $ | 430,559
|                                  |  |              |   |  |       |         |     |                  |   |       |  |      |       |      |   |        |  |            |        |  |   |        |  |   |        

---

|(1) | Des Moines joint ventures.
|--- | --------------------------

|(2) | All of this joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and
material misrepresentations and (2) those guarantees and loans described in the following paragraphs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with the Des Moines joint ventures, we guaranteed certain debt, and the maximum potential amount of future payments we could be required to
make under the guarantees is $24.9 million. Of this amount, $8.6 million arose from housing revenue bonds that require credit enhancements in addition to the real estate mortgages. The bonds bear a floating interest rate, which at September 30, 2004
averaged 1.2% and mature in 2015. Guarantees of $9.4 million will expire upon two industrial buildings becoming 93.8% and 95.0% leased or when the related loans mature. As of September 30, 2004, these buildings were 87.5% and 75.0% leased,
respectively. The remaining $6.9 million in guarantees relate to loans on four office buildings that were in the lease-up phase at the time the loans were initiated. Each of the loans will expire by May 2008. The average occupancy of the four
buildings at September 30, 2004 is 92.0%. If the joint ventures are unable to repay the outstanding balance under the loans, we will be required, under the terms of the agreements, to repay the outstanding balance. Recourse provisions exist to
enable us to recover some or all of our losses from the joint ventures assets and/or the other partner. The joint ventures currently generate sufficient cash flow to cover the debt service required by the loans.



In connection with the RRHWoods, LLC joint venture, we renewed our guarantee
of $6.2 million to a bank in July 2003; this guarantee expires in September 2015 and may be renewed by us. The bank provides a letter of credit securing industrial revenue bonds, which mature in 2015. We would be required to perform under the
guarantee should the joint venture be unable to repay the bonds. We have recourse provisions in order to recover from the joint ventures assets and the other partner for amounts paid in excess of our proportionate share. The property
collateralizing the bonds is 100.0% leased and currently generates sufficient cash flow to cover the debt service required by the bond financing.



With respect to the Plaza Colonnade, LLC joint venture, we have included $2.8 million in other liabilities and adjusted the investment in unconsolidated
affiliates by $2.8 million on our Consolidated Balance Sheet at September 30, 2004 related to two separate guarantees of a construction loan agreement and a construction completion agreement, which were subsequently terminated in December 2004. The
construction loan was scheduled to mature in February 2006, with two one-year options to extend the maturity date that were conditional on completion and lease-up of the project. The term of the construction completion agreement required the core
and shell of the building to be completed by December 15, 2005; the core and shell were completed in November 2004. Both guarantees arose from the formation of the joint venture to construct an office building. If the joint venture were unable to
repay the outstanding balance under the construction loan agreement or complete the construction of the office building, we could have been required, under the terms of the agreements, to repay our 50.0% share of the outstanding balance under the
construction loan and complete the construction of the office building.



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On March 30, 2004, the
Industrial Development Authority of the City of Kansas City, Missouri issued $18.5 million in non-recourse bonds to finance public improvements made by the joint venture for the benefit of the Kansas City Missouri Public Library. Since the joint
venture leases the land for the office building from the library, the joint venture is obligated to build certain public improvements. The net bond proceeds of $16.3 million have been deposited with a trustee for the payment of project costs,
interest and issuance costs. The joint venture is reimbursed for qualified project costs as they are certified. The joint venture has recorded this obligation on its balance sheet. The bonds are ultimately paid by the Tax Increment Financing Revenue
generated by the building and its tenants. As funds are transferred from the bond fund to the construction lender, our exposure is reduced.



As a result of the bond proceeds, our maximum potential amount of future payments under the construction loan and completion agreements was $27.6 million
assuming the construction loan was fully funded. No recourse provisions existed that would have enabled us to recover from the other partner amounts paid under the guarantee. However, given the loan is collateralized by the building, we and our
partner could have obtained and liquidated the building to recover the amounts paid should we have been required to perform under the guarantees.



In addition to the Plaza Colonnade, LLC construction loan and completion agreement described above, the partners collectively had provided $12.0 million
in letters of credit in December 2002, $6.0 million by us and $6.0 million by our partner. We and our partner could have been held liable under the letter of credit agreements had the joint venture not completed construction of the building. No
recourse provisions existed that would have enabled us to recover from the other partner amounts drawn under the letter of credit.



In December 2004, the joint venture secured a $50.0 million non-recourse permanent loan and the $34.9 million construction loan was paid off. The related
letters of credit were cancelled, and the aforementioned guarantee obligations terminated when the construction loan was paid off.



In the Highwoods DLF 97/26 DLF 99/32, LP joint venture, a single tenant currently leases an entire building under a lease scheduled to expire June 30,
2008. The tenant also leases space in other buildings owned by us. In conjunction with an overall restructuring of the tenants leases with us and with this joint venture, we agreed to certain changes to the lease with the joint venture in
September 2003. The modifications include allowing the tenant to terminate the lease on January 1, 2006, reducing the rent obligation by 50.0% and converting the net lease to a full service lease with the tenant liable for
50.0% of these costs beginning January 1, 2006. In turn, we agreed to compensate the joint venture for any economic losses incurred as a result of these lease modifications. Based on the lease guarantee agreement, we recorded approximately $0.9
million in other liabilities and recorded a deferred charge of $0.9 million in September 2003. However, should new tenants occupy the vacated space during the two-and-a-half year guarantee period, our liability under the guarantee would diminish.
Our maximum potential amount of future payments with regards to this guarantee as of September 30, 2004 is $1.1 million. No recourse provisions exist to enable us to recover the amounts paid to the joint venture under this lease guarantee
arrangement.



On February 20, 2004, we and Kapital-Consult, a
European investment firm, formed Highwoods KC Glenridge, LLC, which on February 26, 2004, acquired from a third-party Glenridge Point Office Park, consisting of two office buildings aggregating 185,000 square feet located in the Central Perimeter
sub-market of Atlanta. As of September 30, 2004, the buildings were 91.0% leased. We contributed $10.0 million to the joint venture in return for a 40.0% equity interest and Kapital-Consult contributed $14.9 million for a 60.0% equity interest in
the partnership. The joint venture entered into a $16.5 million 10-year secured loan on the assets. We are the manager and leasing agent for this property and receive customary management fees and leasing commissions. The acquisition also includes
2.9 acres of development land that can accommodate 150,000 square feet of office space.



On June 28, 2004, Kapital-Consult, a European investment firm, bought an interest in HIW-KC Orlando, LLC, an entity formed by us. HIW-KC Orlando, LLC owns five in-service office properties, encompassing 1.3 million
rentable square feet, located in the central business district of Orlando, Florida, which were valued under the joint venture agreement at $212.0 million, including amounts related to our guarantees described below, and which were subject to a
$136.2 million secured mortgage loan. Kapital-Consult contributed $42.1 million in cash and received a 60.0% equity interest in return. The joint venture borrowed $143.0 million under a 10-year fixed rate mortgage loan from a third-party lender and
repaid the $136.2 million loan. We retained a 40.0% equity interest in the joint venture and received net cash proceeds of $46.6 million, of which $33.0 million was used to pay down our $250.0 million revolving loan (the Revolving Loan)
and $13.6 million was used to pay down another of our loans. In connection with this transaction, we agreed to guarantee rent to the joint venture for 3,248 rentable square feet commencing in



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August 2004 and expiring in April 2011. Additionally, we agreed to guarantee re-tenanting costs for approximately 11.0% of the joint ventures total
square footage. We recorded a $4.1 million contingent liability with respect to such guarantee at the date of formation and reduced the total amount of the gain recognized by the same amount. At September 30, 2004, $2.6 million remains in other
liabilities in connection with this guarantee. We believe our estimate related to the re-tenanting costs guarantee is accurate. However, if our assumptions prove to be incorrect, future losses may occur. The contribution was accounted for as a
partial sale as defined by SFAS No. 66, and we recognized a $15.9 million gain in June 2004. Since we have an ongoing 40.0% financial interest in the joint venture and since we are engaged by the joint venture to provide management and leasing
services for the joint venture, for which we receive customary management fees and leasing commissions, the operations of these properties will not be reflected as discontinued operations consistent with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets and the related gain on sale was included in continuing operations in June 2004.



RRHWOODS, LLC and Dallas County Partners each developed a new office building in Des Moines, Iowa. On June 25, 2004, the joint ventures financed both
buildings with a $7.4 million loan from a bank. As an inducement to make the loan at 6.3% long-term rate, we and our partner agreed to master lease the vacant space and guaranteed $1.6 million or $0.8 million each with limited recourse. As leasing
improves, the obligations under the loan agreement diminish. As of September 30, 2004, we recorded $1.3 million in other liabilities and $1.3 million as a deferred charge on our Consolidated Balance Sheet with respect to this guarantee. The maximum
potential amount of future payments that we could be required to make based on the current leases in place is approximately $4.7 million. The likelihood of us paying on our $0.8 million guarantee is remote since the master lease payments provide the
required 1.3 debt coverage ratio and should we have to pay, we would recover the $0.8 million from other joint venture assets.



Financing Arrangements



The following summarizes sales transactions that are accounted for as financing arrangements under paragraphs 25 through 29 under SFAS No. 66 at September
30, 2004.



- SF-HIW Harborview, LP



On September 11, 2002, we contributed Harborview Plaza, an office building
located in Tampa, Florida, to SF-HIW Harborview Plaza, LP (Harborview LP), a newly formed entity, in exchange for a 20.0% limited partnership interest and $35.4 million in cash. We also entered into a master lease agreement with
Harborview, LP for five years on the vacant space in the building (approximately 20.0%) and guaranteed payment of tenant improvements and lease commissions of $1.2 million. Our maximum exposure to loss under the master lease agreement was $2.1
million at September 11, 2002 and was $1.1 million at September 30, 2004. Additionally, our partner in Harborview LP was granted the right to put its 80.0% equity interest in Harborview LP to us in exchange for cash at any time during the one-year
period commencing on September 11, 2014. The value of the 80.0% equity interest will be determined at the time, if ever, that such partner elects to exercise its put right, based upon the then fair market value of Harborview LPs assets and
liabilities, less 3.0%, which was intended to cover normal costs of a sale transaction.



Because of the put option and master lease agreement, this transaction is accounted for as a financing transaction. Consequently, the assets, liabilities and operations related to Harborview Plaza, the property owned
by Harborview LP, including any new financing by the partnership, remain on our books. As a result, we have established a financing obligation equal to the net equity contributed by the other partner. At the end of each reporting period, the balance
of the financing obligation is adjusted to equal the current fair value, which is $13.7 million at September 30, 2004, but not less than the original financing obligation. This adjustment is amortized prospectively through September 2014.
Additionally, the net income from the operations before depreciation of Harborview Plaza allocable to the 80.0% partner is recorded as interest expense on financing obligations. We continue to depreciate the property and record all of the
depreciation on our books. Additionally, any payments made under the master lease agreement are expensed as incurred ($0.07 million and $0.3 million was expensed during the nine months ended September 30, 2004 and 2003, respectively) and any amounts
paid under the tenant improvement and lease commission guarantee are capitalized and amortized to expense over the remaining lease term. At such time as the put option expires or otherwise is terminated, we will record the transaction as a sale and
recognize gain on sale.



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- Eastshore Transaction



On November 26, 2002, we sold three buildings located in
Richmond, Virginia for a total purchase price of $28.5 million in cash, which was paid in full by the buyer at closing (the Eastshore transaction). Each of the sold properties is a single tenant building leased on a triple-net basis to
Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc.



In connection with the sale, we entered into a rental guarantee agreement for each building for the benefit of the buyer to guarantee any rent shortfalls which may be incurred in the payment of rent and re-tenanting
costs for a five-year period from the date of sale (through November 2007). Our maximum exposure to loss under the rental guarantee agreements was $18.7 million at the date of sale and $13.4 million as of September 30, 2004. In June 2004, we began
to make monthly payments to the buyer, at an annual rate of $0.1 million, as a result of the existing tenant renewing a lease in one building at a lower rental rate.



These rent guarantees are a form of continuing involvement as prescribed by SFAS No. 66. Because the guarantees cover the
entire space occupied by a single tenant under a triple-net lease arrangement, our guarantees are considered a guaranteed return on the buyers investment for an extended period of time. Therefore, the transaction has been accounted for as a
financing transaction. Accordingly, the assets and operations are included in these Consolidated Financial Statements, and a financing obligation of $28.5 million was recorded which represents the amount received from the buyer. The income from the
operations of the properties, other than depreciation, is allocated 100.0% to the owner as interest on financing obligation. Payments made under the rent guarantees are charged to expense as incurred. This transaction will be recorded as a completed
sale transaction in the future when the maximum exposure to loss under the guarantees is equal to or less than the related gain.



-MG-HIW, LLC



As previously disclosed, on March 2, 2004, we exercised our option and acquired our partners 80.0% interest in the Orlando City Group of MG-HIW,
LLC. At the closing of the transaction, we paid our partner, Miller Global, $62.5 million and a $7.5 million letter of credit delivered to the seller in connection with the option was cancelled. The initial contribution of these assets was accounted
for as a financing arrangement and continued to be so treated through March 1, 2004. The financing obligation was eliminated on March 2, 2004. Since the financing obligation was adjusted each period for a 20.0% leveraged internal rate of return
guarantee, no gain or loss was recognized upon the extinguishment of the financing obligation.



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



The following table sets forth information regarding our interest rate hedge contracts as of September 30, 2004 (in thousands):



|                   |  |                |        |              |          |                |                       |           |       |   |                  |   |   
|------------------ |  | -------------- | ------ | ------------ | -------- | -------------- | --------------------- | --------- | ----- | - | ---------------- | - | --
|Type of Hedge      |  | NotionalAmount |        | MaturityDate |          | Reference Rate |                       | FixedRate |       |   | Fair MarketValue
|Interest Rate Swap |  | $              | 20,000 |              | 6/1/2005 |                | 1 month USD-LIBOR-BBA |           | 1.590 | % |                  | $ | 87
|                   |  |                |        |              |          |                |                       |           |       |   |                  |   |   
|                   |  |                |        |              |          |                |                       |           |       |   |                  | $ | 87
|                   |  |                |        |              |          |                |                       |           |       |   |                  |   |   



The interest rate on
all of our variable rate debt is adjusted at one and 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. During the third quarter of 2004, only a nominal amount was received from counter parties under interest rate hedge contracts.



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Related Party Transactions



We have previously reported that we have had a contract
to acquire development land in the Bluegrass Valley office development project from GAPI, Inc., a corporation controlled by an executive officer and director of the Company. On January 17, 2003, we acquired an additional 23.5 acres of this land from
GAPI, Inc. for cash and shares of Common Stock valued at $2.3 million. In May 2003, 4.0 acres of the remaining acres not yet acquired by us was taken by the Georgia 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 contract between us and GAPI, Inc., we were entitled to the proceeds from the condemnation of $1.8 million, less the
contracted purchase price between us and GAPI, Inc. for the condemned property of $0.7 million. On September 30, 2003, as a result of the condemnation, we received the proceeds of $1.8 million. A related party payable of $0.7 million to GAPI, Inc.
related to the condemnation of the development land is included in accounts payable, accrued expenses and other liabilities in our Consolidated Balance Sheet at September 30, 2004.



CRITICAL ACCOUNTING ESTIMATES



There were no changes to the critical accounting policies and estimates made by management in the nine months ended September 30, 2004. For a detailed
description of our critical accounting estimates, see Managements Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates in our 2003 amended Annual Report on Form 10-K.



FUNDS FROM OPERATIONS



We believe that funds from operations (FFO) and FFO per unit are beneficial to management and investors as important indicators of the
performance of any equity REIT. Because FFO and FFO per unit calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of
identical assets in similar condition based on historical cost accounting and useful life estimates), they facilitate comparisons of operating performance between periods and between other REITs. Our management believes that historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many
industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, our management believes that the use of FFO and FFO
per unit, together with the required GAAP presentations, provides a more complete understanding of the Operating Partnerships performance relative to its competitors and a more informed and appropriate basis on which to make decisions
involving operating, financing and investing activities.



FFO
and FFO per unit as disclosed by other REITs may not be comparable to our calculation of FFO and FFO per unit as described below. However, you should be aware that FFO and FFO per unit are non-GAAP financial measure and do therefore not represent
net income or net income per unit as defined by GAAP. Net income and net income per unit as defined by GAAP are the most relevant measures in determining our operating performance because FFO and FFO per unit include adjustments that investors may
deem subjective, such as adding back expenses such as depreciation and amortization. Furthermore, FFO per unit does not depict the amount that accrues directly to the unitholders benefit. Accordingly, FFO and FFO per unit should never be
considered as alternatives to net income or net income per unit as indicators of our operating performance.



Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by the National Association of Real Estate Investment Trusts
(NAREIT) and appropriately excludes the cost of capital improvements and related capitalized interest is 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, (excluding impairment losses  see Note 2 following the table) and items that are classified as
extraordinary items under GAAP;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Less distributions 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.
| | - | -----------------------------------------------------------------------------------------------------------------------



Other REITs may not define the term in accordance with the current NAREIT
definition or may interpret the current NAREIT definition differently than us.



FFO and FFO per unit for the three and nine months ended September 30, 2004 and 2003 are summarized in the following table ($ in thousands, except per unit amounts):



|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|----------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ----- | ------ |  | - | -------------- | - |  | ------ | ----- | - | -------------- | - | ------- | ------ |  | - | -------------- | - |  | - | ------- | - |  | - | ----- | -
|                                                                                    |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                                    |  | 2004                             |        |   | 2003                            |   |       | 2004   |  |   | 2003           |  
|                                                                                    |  | Amount                           |        |   | PerUnitDiluted                  |   |       | Amount |  |   | PerUnitDiluted |   |  | Amount |       |   | PerUnitDiluted |   |         | Amount |  |   | PerUnitDiluted |  
|Funds from operations:                                                              |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Net income                                                                          |  | $                                | 23,280 |   |                                 |   |       |        |  | $ | 34,614         |   |  |        |       |   |                | $ | 33,826  |        |  |   |                |   |  | $ | 38,625  |   |  |   |       |  
|Distributions to preferred unitholders                                              |  |                                  | (7,713 | ) |                                 |   |       |        |  |   | (7,713         | ) |  |        |       |   |                |   | (23,139 | )      |  |   |                |   |  |   | (23,139 | ) |  |   |       |  
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Net income attributable to common unitholders                                       |  |                                  | 15,567 |   |                                 | $ | 0.26  |        |  |   | 26,901         |   |  | $      | 0.45  |   |                |   | 10,687  |        |  | $ | 0.18           |   |  |   | 15,486  |   |  | $ | 0.26  |  
|Add/(Deduct):                                                                       |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Depreciation and amortization of real estate assets                                 |  |                                  | 32,641 |   |                                 |   | 0.55  |        |  |   | 33,223         |   |  |        | 0.56  |   |                |   | 100,956 |        |  |   | 1.69           |   |  |   | 103,219 |   |  |   | 1.73  |  
|Gain on disposition of depreciable property (1)                                     |  |                                  | (1,729 | ) |                                 |   | (0.03 | )      |  |   | (4,489         | ) |  |        | (0.08 | ) |                |   | (17,883 | )      |  |   | (0.30          | ) |  |   | (4,729  | ) |  |   | (0.08 | )
|Unconsolidated affiliates:                                                          |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Depreciation and amortization of real estate assets                                 |  |                                  | 2,268  |   |                                 |   | 0.04  |        |  |   | 1,709          |   |  |        | 0.03  |   |                |   | 6,048   |        |  |   | 0.10           |   |  |   | 5,262   |   |  |   | 0.09  |  
|Discontinued operations (2):                                                        |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Depreciation and amortization of real estate assets                                 |  |                                  | 126    |   |                                 |   |      |        |  |   | 836            |   |  |        | 0.02  |   |                |   | 1,105   |        |  |   | 0.02           |   |  |   | 2,824   |   |  |   | 0.05  |  
|Gain on sale (1)                                                                    |  |                                  | (703   | ) |                                 |   | (0.01 | )      |  |   | (7,796         | ) |  |        | (0.13 | ) |                |   | (4,538  | )      |  |   | (0.08          | ) |  |   | (8,803  | ) |  |   | (0.15 | )
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Funds from operations applicable to common unitholders                              |  | $                                | 48,170 |   |                                 | $ | 0.81  |        |  | $ | 50,384         |   |  | $      | 0.85  |   |                | $ | 96,375  |        |  | $ | 1.61           |   |  | $ | 113,259 |   |  | $ | 1.90  |  
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Distributions payout data:                                                          |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Distributions paid per common unit  diluted                                        |  | $                                | 0.425  |   |                                 |   |       |        |  | $ | 0.425          |   |  |        |       |   |                | $ | 1.275   |        |  |   |                |   |  | $ | 1.435   |   |  |   |       |  
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|As a % of funds from operations                                                     |  |                                  | 52.5   | % |                                 |   |       |        |  |   | 50.0           | % |  |        |       |   |                |   | 79.2    | %      |  |   |                |   |  |   | 75.5    | % |  |   |       |  
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Weighted average common units outstanding  diluted                                 |  |                                  | 59,726 |   |                                 |   |       |        |  |   | 59,518         |   |  |        |       |   |                |   | 59,747  |        |  |   |                |   |  |   | 59,750  |   |  |   |       |  
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  
|Impairment adjustments included in funds from operations applicable to common units |  | $                                | (500   | ) |                                 | $ | (0.01 | )      |  | $ |               |   |  | $      |      |   |                | $ | (4,356  | )      |  | $ | (0.07          | ) |  | $ | (325    | ) |  | $ | (0.01 | )
|                                                                                    |  |                                  |        |   |                                 |   |       |        |  |   |                |   |  |        |       |   |                |   |         |        |  |   |                |   |  |   |         |   |  |   |       |  

---

|(1) | In October 2003, NAREIT issued a Financial Reporting Alert that changed its current implementation guidance for FFO regarding impairment losses. Accordingly, impairment losses
related to depreciable assets have now been included in FFO for the periods presented.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For further discussion related to discontinued operations, see Note 9 to the Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------



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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 effects, but only indicators of
reasonably possible effects. As a result, actual future results may differ materially from those presented. See Managements Discussion and Analysis of Results of Operations - Liquidity and Capital Resources and the Notes to the
Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.



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



As of September 30, 2004, we had $1,228 million of fixed rate debt outstanding. The estimated aggregate fair value of this debt at September 30, 2004 was
$1,296 million. If interest rates increase by 100 basis points, the aggregate fair value of fixed rate debt as of September 30, 2004 would decrease by approximately $36.8 million. If interest rates decrease by 100 basis points, the aggregate fair
market value of fixed rate debt as of September 30, 2004 would increase by approximately $56.3 million.



As of September 30, 2004, we had $346.8 million of variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted
average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ended December 31, 2004, our interest expense would be increased or decreased approximately $3.5 million.



For a discussion of our interest rate hedge contracts in effect at September
30, 2004 see Managements Discussion and Analysis of Financial Conditions and Results of Operations  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 hedge contracts as of September 30, 2004 would increase by approximately $0.2 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge
contracts as of September 30, 2004 would decrease by approximately $0.03 million.



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



ITEM 4. CONTROLS AND PROCEDURES



GENERAL



The purpose of this
section is to discuss the effectiveness of our disclosure controls and procedures and our internal control over financial reporting. The statements in this section represent the conclusions of Edward J. Fritsch, the Companys CEO, and Terry L.
Stevens, the Companys CFO. Mr. Fritsch became the Companys CEO on July 1, 2004 and Mr. Stevens became the Companys CFO on December 1, 2003.



The Companys CEO and CFO evaluations of our disclosure controls and procedures over financial reporting include a review of the controls
objectives and design, the controls implementation by us and the effect of the controls on the information generated for use in this Quarterly Report. We seek to identify data errors, control problems or acts of fraud and confirm that
appropriate corrective action, including process improvements, is



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undertaken. Our disclosure controls and
procedures over financial reporting are also evaluated on an ongoing basis through the following:



| |  | activities undertaken and reports issued by employees in our internal audit department;
| | - | ---------------------------------------------------------------------------------------



| |  | by managements evaluation of the results of audits provided by our independent auditors in connection with their audit activities;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



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



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



| |  | members of the Audit Committee of the Companys Board of Directors.
| | - | -------------------------------------------------------------------



Our management, including the Companys CEO and CFO, do not expect that our disclosure controls and procedures and internal control over financial
reporting 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 and internal control over financial reporting 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 a 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.



DISCLOSURE CONTROLS AND PROCEDURES



SEC rules require us to 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. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management, including the Companys CEO and CFO, to allow
timely decisions regarding required disclosure.



Based on our
evaluation of disclosure controls and procedures, as of the date of the filing of this Quarterly Report, the Companys CEO and CFO believe that our disclosure controls and procedures are effective to ensure that information required to be
disclosed in its financial reports has been made known to management, including the Companys CEO and CFO, and other persons responsible for preparing such reports and is recorded, processed, summarized and reported.



INTERNAL CONTROL OVER
FINANCIAL REPORTING



SEC
rules also require us to maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP. Internal control over financial reporting includes those policies and procedures that:



| |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



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| |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures
are being made only in accordance with authorizations of the Companys management and directors; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January 2005, we filed
amended reports to restate our previously reported financial results as of March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003 included in our March 31, 2004 Quarterly Report on Form 10-Q and as of December
31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 included in our December 31, 2003 Annual Report on Form 10-K. Ernst & Young LLP has issued an unqualified opinion dated January 18, 2005 on our restated 2003, 2002 and
2001 Consolidated Financial Statements that are included in our 2003 amended Annual Report on Form 10-K.



In connection with their audit, Ernst & Young LLP advised our General Partners Audit Committee that they identified the following material
weaknesses during their audits of the restated financial statements for 2003, 2002 and 2001: inadequate procedures for appropriately assessing and applying accounting principles to complex transactions; lack of adequate finance and accounting staff
to appropriately identify and evaluate accounting for transactions; inadequate procedures to ensure critical information regarding a transaction is known by the persons accounting for such transaction; and lack of application of GAAP to transactions
due to perceived immateriality of transactions.



Since late
2002, we have added several experienced staff to our Finance and Accounting Departments. These included an Assistant Controller (new position), a Director of Financial Standards and Compliance (new position), a Senior Director of Investor Relations
(replacement) and a new Chief Financial Officer of our General Partner (replacement, as the former CFO assumed a new position within the Company). During 2003 and 2004 up to the filing date of this Quarterly Report, we have further improved our
internal control over financial reporting by, among other things, expanding supervisory activities and monitoring techniques and strengthening our procedures designed to ensure that information relating to transactions directly or indirectly
involving the Operating Partnership and its subsidiaries is made known to persons responsible for preparing our financial statements. We have also implemented revised checklists and additional management oversight of our accounting staff to ensure
appropriate assessment and application of GAAP to all transactions, particularly complex transactions such as sales of real estate with continuing involvement that are governed by SFAS No. 66.



Other than the foregoing, there have been no changes in our internal controls
over financial reporting since June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Section 404 of the Sarbanes-Oxley Act of 2002 requires public companies, including us, with a fiscal year that ends on
December 31 to report on the effectiveness of their internal control over financial reporting in their 2004 Annual Report on Form 10-K, which we are required to file with the SEC no later than March 16, 2005. Our independent auditor will be required
to attest to that report. Our management, including the Companys CEO and CFO, and the Companys Audit Committee are working diligently to ensure that our internal control over financial reporting provides reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.



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PART II - OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                 
|10.14       |  | The Third Amendment to Credit Agreement among Highwoods Realty Limited Partnership, Highwoods Properties Inc., the Subsidiaries named therein and the Lenders named therein, executed in August
2004 and effective June 30, 2004 listed as Exhibit No. 10.14 to the Quarterly Report on Form 10-Q of Highwoods Properties, Inc. for the quarter ended September 30, 2004 is incorporated herein by reference
|            | 
|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



None.



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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., in its capacity as general partner (the General Partner)By:

/s/ EDWARD J. FRITSCHEdward J. FritschPresident and Chief Executive OfficerBy:

/s/ TERRY L. STEVENSTerry L. StevensVice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)




Date: January 19, 2005



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