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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
March 31, 2006

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 a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act.    Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes ̈No  x



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2006

TABLE OF CONTENTS



|        |  |                                                                                                    |  |     
|------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                    |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                              |  |     
|        |  |                                                                                                   
|Item 1. |  | Financial Statements                                                                               |  | 2   
|        |  |                                                                                                   
|        |  | Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                   |  | 3   
|        |  |                                                                                                   
|        |  | Consolidated Statements of Income for the three months ended March 31, 2006 and 2005               |  | 4   
|        |  |                                                                                                   
|        |  | Consolidated Statement of Partners Capital for the three months ended March 31, 2006              |  | 5   
|        |  |                                                                                                   
|        |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |  | 6   
|        |  |                                                                                                   
|        |  | Notes to Condensed Consolidated Financial Statements                                               |  | 8   
|        |  |                                                                                                   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 31  
|        |  |                                                                                                   
|        |  | Disclosure Regarding Forward-Looking Statements                                                    |  | 31  
|        |  |                                                                                                   
|        |  | Overview                                                                                           |  | 31  
|        |  |                                                                                                   
|        |  | Results of Operations                                                                              |  | 34  
|        |  |                                                                                                   
|        |  | Liquidity and Capital Resources                                                                    |  | 37  
|        |  |                                                                                                   
|        |  | Critical Accounting Policies                                                                       |  | 41  
|        |  |                                                                                                   
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 42  
|        |  |                                                                                                   
|Item 4. |  | Controls and Procedures                                                                            |  | 43  
|        |  |                                                                                                   
|PART II |  | OTHER INFORMATION                                                                                  |  |     
|        |  |                                                                                                   
|Item 1. |  | Legal Proceedings                                                                                  |  | 46  
|        |  |                                                                                                   
|Item 6. |  | Exhibits                                                                                           |  | 46  



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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 Company has title and all of the ownership rights as the Wholly Owned Properties.

The information
furnished in the accompanying Condensed 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, Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors included herein and in our 2005 Annual Report on Form 10-K.



2



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

Condensed Consolidated Balance Sheets

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



|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                           |  | March 31,2006 |           |   | December 31,2005 |  
|Assets:                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Real estate assets, at cost:                                                                                                                                               |  |               |           |   |                  |   |           |  
|Land                                                                                                                                                                       |  | $             | 349,074   |   |                  | $ | 344,555   |  
|Buildings and tenant improvements                                                                                                                                          |  |               | 2,543,081 |   |                  |   | 2,523,003 |  
|Development in process                                                                                                                                                     |  |               | 60,679    |   |                  |   | 28,727    |  
|Land held for development                                                                                                                                                  |  |               | 143,377   |   |                  |   | 149,476   |  
|Furniture, fixtures and equipment                                                                                                                                          |  |               | 23,305    |   |                  |   | 22,462    |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|                                                                                                                                                                           |  |               | 3,119,516 |   |                  |   | 3,068,223 |  
|Less  accumulated depreciation                                                                                                                                            |  |               | (582,923  | ) |                  |   | (564,588  | )
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Net real estate assets                                                                                                                                                     |  |               | 2,536,593 |   |                  |   | 2,503,635 |  
|Real estate and other assets, net, held for sale                                                                                                                           |  |               | 7,379     |   |                  |   | 148,029   |  
|Cash and cash equivalents                                                                                                                                                  |  |               | 23,671    |   |                  |   | 970       |  
|Restricted cash                                                                                                                                                            |  |               | 15,015    |   |                  |   | 16,223    |  
|Accounts receivable, net                                                                                                                                                   |  |               | 20,021    |   |                  |   | 24,188    |  
|Notes receivable, net                                                                                                                                                      |  |               | 8,719     |   |                  |   | 9,232     |  
|Accrued straight-line rents receivable, net                                                                                                                                |  |               | 63,979    |   |                  |   | 60,938    |  
|Investments in unconsolidated affiliates                                                                                                                                   |  |               | 62,001    |   |                  |   | 65,872    |  
|Deferred financing and leasing costs, net                                                                                                                                  |  |               | 60,601    |   |                  |   | 59,487    |  
|Prepaid expenses and other                                                                                                                                                 |  |               | 13,310    |   |                  |   | 13,284    |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Total Assets                                                                                                                                                               |  | $             | 2,811,289 |   |                  | $ | 2,901,858 |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Liabilities, Minority Interest, Redeemable Operating Partnership Units and Partners Capital:                                                                              |  |               |           |   |                  |   |           |  
|Mortgages and notes payable                                                                                                                                                |  | $             | 1,450,251 |   |                  | $ | 1,471,616 |  
|Accounts payable, accrued expenses and other liabilities                                                                                                                   |  |               | 120,896   |   |                  |   | 127,427   |  
|Financing obligations                                                                                                                                                      |  |               | 34,282    |   |                  |   | 34,154    |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Total Liabilities                                                                                                                                                          |  |               | 1,605,429 |   |                  |   | 1,633,197 |  
|Minority interest                                                                                                                                                          |  |               | 2,342     |   |                  |   |          |  
|Redeemable operating partnership units:                                                                                                                                    |  |               |           |   |                  |   |           |  
|Common Units, 5,400,941 and 5,450,088 units issued and outstanding at March 31, 2006 and December 31, 2005,
respectively                                                   |  |               | 182,174   |   |                  |   | 155,055   |  
|Series A Preferred Units (liquidation preference $1,000 per unit), 104,945 units issued and outstanding at March 31, 2006 and
December 31, 2005                            |  |               | 104,945   |   |                  |   | 104,945   |  
|Series B Preferred Units (liquidation preference $25 per unit), 3,700,000 and 5,700,000 units issued and outstanding at
March 31, 2006 and December 31, 2005, respectively |  |               | 92,500    |   |                  |   | 142,500   |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Total Redeemable Operating Partnership Units                                                                                                                               |  |               | 379,619   |   |                  |   | 402,500   |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Partners Capital:                                                                                                                                                         |  |               |           |   |                  |   |           |  
|Common Units:                                                                                                                                                              |  |               |           |   |                  |   |           |  
|General partner Common Units, 591,340 and 590,698 units issued and outstanding at March 31, 2006 and December 31, 2005,
respectively                                       |  |               | 8,260     |   |                  |   | 8,724     |  
|Limited partner Common Units, 53,141,689 and 53,029,000 units issued and outstanding at March 31, 2006 and
December 31, 2005, respectively                                 |  |               | 817,674   |   |                  |   | 863,585   |  
|Deferred compensation  restricted stock and stock options                                                                                                                 |  |               |          |   |                  |   | (3,936    | )
|Accumulated other comprehensive loss                                                                                                                                       |  |               | (2,035    | ) |                  |   | (2,212    | )
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Total Partners Capital                                                                                                                                                    |  |               | 823,899   |   |                  |   | 866,161   |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Total Liabilities, Minority Interest, Redeemable Operating Partnership Units and Partners Capital                                                                         |  | $             | 2,811,289 |   |                  | $ | 2,901,858 |  
|                                                                                                                                                                           |  |               |           |   |                  |   |           |  

See accompanying notes to condensed consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statements of Income

(Unaudited and in thousands, except per unit amounts)



|                                                                                                                                     |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                     |  | Three Months EndedMarch 31, |        
|                                                                                                                                     |  | 2006                        |         |   | 2005 |  
|Rental and other revenues                                                                                                            |  | $                           | 104,249 |   |      | $ | 102,166 |  
|                                                                                                                                     |  |                            
|Operating expenses:                                                                                                                  |  |                             |         |   |      |   |         |  
|Rental property and other expenses                                                                                                   |  |                             | 36,997  |   |      |   | 34,869  |  
|Depreciation and amortization                                                                                                        |  |                             | 28,705  |   |      |   | 29,649  |  
|Impairment of assets held for use                                                                                                    |  |                             |        |   |      |   | 2,572   |  
|General and administrative                                                                                                           |  |                             | 8,757   |   |      |   | 8,167   |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Total operating expenses                                                                                                             |  |                             | 74,459  |   |      |   | 75,257  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Interest expense:                                                                                                                    |  |                             |         |   |      |   |         |  
|Contractual                                                                                                                          |  |                             | 23,913  |   |      |   | 25,394  |  
|Amortization of deferred financing costs                                                                                             |  |                             | 744     |   |      |   | 847     |  
|Financing obligations                                                                                                                |  |                             | 942     |   |      |   | 1,647   |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                                     |  |                             | 25,599  |   |      |   | 27,888  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Other income/(expense):                                                                                                              |  |                             |         |   |      |   |         |  
|Interest and other income                                                                                                            |  |                             | 1,834   |   |      |   | 1,961   |  
|Loss on debt extinguishment                                                                                                          |  |                             |        |   |      |   | (27     | )
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                                     |  |                             | 1,834   |   |      |   | 1,934   |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Income before disposition of property, minority interest and equity in earnings of unconsolidated affiliates                         |  |                             | 6,025   |   |      |   | 955     |  
|                                                                                                                                     |  |                            
|Gains on disposition of property, net                                                                                                |  |                             | 4,310   |   |      |   | 403     |  
|Minority interest                                                                                                                    |  |                             | (91     | ) |      |   |        |  
|Equity in earnings of unconsolidated affiliates                                                                                      |  |                             | 1,962   |   |      |   | 2,692   |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Income from continuing operations                                                                                                    |  |                             | 12,206  |   |      |   | 4,050   |  
|                                                                                                                                     |  |                            
|Discontinued operations:                                                                                                             |  |                             |         |   |      |   |         |  
|Income from discontinued operations                                                                                                  |  |                             | 708     |   |      |   | 3,322   |  
|Gains, net of impairments, on sales of discontinued operations, including a gain from a related party transaction of $ 3,864 in
2005 |  |                             | 1,483   |   |      |   | 15,724  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|                                                                                                                                     |  |                             | 2,191   |   |      |   | 19,046  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income                                                                                                                           |  |                             | 14,397  |   |      |   | 23,096  |  
|Distributions on Preferred Units                                                                                                     |  |                             | (4,724  | ) |      |   | (7,713  | )
|Excess of Preferred Unit redemption cost over carrying value                                                                         |  |                             | (1,803  | ) |      |   |        |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income available for common unitholders                                                                                          |  | $                           | 7,870   |   |      | $ | 15,383  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income per common unitbasic:                                                                                                    |  |                             |         |   |      |   |         |  
|Income/(loss) from continuing operations                                                                                             |  | $                           | 0.09    |   |      | $ | (0.06   | )
|Income from discontinued operations                                                                                                  |  |                             | 0.04    |   |      |   | 0.32    |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income                                                                                                                           |  | $                           | 0.13    |   |      | $ | 0.26    |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Weighted average common units outstandingbasic                                                                                      |  |                             | 58,826  |   |      |   | 59,227  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income per common unitdiluted:                                                                                                  |  |                             |         |   |      |   |         |  
|Income/(loss) from continuing operations                                                                                             |  | $                           | 0.09    |   |      | $ | (0.06   | )
|Income from discontinued operations                                                                                                  |  |                             | 0.04    |   |      |   | 0.32    |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Net income                                                                                                                           |  | $                           | 0.13    |   |      | $ | 0.26    |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Weighted average common units outstandingdiluted                                                                                    |  |                             | 60,179  |   |      |   | 59,227  |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  
|Distributions declared per common unit                                                                                               |  | $                           | 0.425   |   |      | $ | 0.425   |  
|                                                                                                                                     |  |                             |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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HIGHWOODS REALTY LIMITED PARTNERSHIP

Consolidated Statement of Partners Capital

For the Three Months Ended March 31, 2006

(Unaudited and in thousands, except unit amounts)



|                                                                                          |  |                          |       |   |                          |   |         |                                    |  |   |        |                       |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------ | ----- | - | ------------------------ | - | ------- | ---------------------------------- |  | - | ------ | --------------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                          |  | Common Unit              |       |   |                          |   |         | Accumulated OtherComprehensiveLoss |  |   |        |                      
|                                                                                          |  | General PartnersCapital |       |   | Limited PartnersCapital |   |         | DeferredCompensation               |  |   |        | TotalPartnersCapital | 
|Balance at December 31, 2005                                                              |  | $                        | 8,724 |   |                          | $ | 863,585 |                                    |  | $ | (3,936 | )                     |  | $ | (2,212 | ) |  | $ | 866,161 |  
|Reversal of unvested deferred compensation as a result of the adoption of SFAS No. 123(R) |  |                          | (40   | ) |                          |   | (3,896  | )                                  |  |   | 3,936  |                       |  |   |       |   |  |   |        |  
|Issuance of Common Units                                                                  |  |                          | 3     |   |                          |   | 307     |                                    |  |   |       |                       |  |   |       |   |  |   | 310     |  
|Redemption of Common Units                                                                |  |                          | (15   | ) |                          |   | (1,482  | )                                  |  |   |       |                       |  |   |       |   |  |   | (1,497  | )
|Distributions paid on Common Units                                                        |  |                          | (251  | ) |                          |   | (24,812 | )                                  |  |   |       |                       |  |   |       |   |  |   | (25,063 | )
|Distributions paid on Preferred Units                                                     |  |                          | (47   | ) |                          |   | (4,677  | )                                  |  |   |       |                       |  |   |       |   |  |   | (4,724  | )
|Net income                                                                                |  |                          | 144   |   |                          |   | 14,253  |                                    |  |   |       |                       |  |   |       |   |  |   | 14,397  |  
|Adjustment of redeemable Common Units to fair value                                       |  |                          | (266  | ) |                          |   | (26,441 | )                                  |  |   |       |                       |  |   |       |   |  |   | (26,707 | )
|Other comprehensive income                                                                |  |                          |      |   |                          |   |        |                                    |  |   |       |                       |  |   | 177    |   |  |   | 177     |  
|Amortization of restricted stock and stock options                                        |  |                          | 8     |   |                          |   | 837     |                                    |  |   |       |                       |  |   |       |   |  |   | 845     |  
|                                                                                          |  |                          |       |   |                          |   |         |                                    |  |   |        |                       |  |   |        |   |  |   |         |  
|Balance at March 31, 2006                                                                 |  | $                        | 8,260 |   |                          | $ | 817,674 |                                    |  | $ |       |                       |  | $ | (2,035 | ) |  | $ | 823,899 |  
|                                                                                          |  |                          |       |   |                          |   |         |                                    |  |   |        |                       |  |   |        |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

Condensed Consolidated Statements of Cash Flows

(Unaudited and in thousands)



|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                                                                                                                           |  | Three Months EndedMarch 31, |         
|                                                                                                                                                                                           |  | 2006                        |          |   | 2005 |  
|Operating activities:                                                                                                                                                                      |  |                             |          |   |      |   |         |  
|Net income                                                                                                                                                                                 |  | $                           | 14,397   |   |      | $ | 23,096  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                                                                          |  |                             |          |   |      |   |         |  
|Depreciation and amortization                                                                                                                                                              |  |                             | 28,744   |   |      |   | 35,250  |  
|Amortization of lease incentives                                                                                                                                                           |  |                             | 163      |   |      |   | 234     |  
|Amortization of equity-based compensation                                                                                                                                                  |  |                             | 845      |   |      |   | 613     |  
|Amortization of deferred financing costs                                                                                                                                                   |  |                             | 744      |   |      |   | 847     |  
|Amortization of accumulated other comprehensive loss                                                                                                                                       |  |                             | 177      |   |      |   | 176     |  
|Equity in earnings of unconsolidated affiliates                                                                                                                                            |  |                             | (1,962   | ) |      |   | (2,692  | )
|Gains, net of impairments on disposition of property                                                                                                                                       |  |                             | (5,793   | ) |      |   | (16,127 | )
|Minority interest                                                                                                                                                                          |  |                             | 91       |   |      |   |        |  
|Impairment of assets held for use                                                                                                                                                          |  |                             |         |   |      |   | 2,572   |  
|Changes in financing obligation                                                                                                                                                            |  |                             | 128      |   |      |   | (306    | )
|Distributions of earnings from unconsolidated affiliates                                                                                                                                   |  |                             | 2,232    |   |      |   | 1,983   |  
|Changes in operating assets and liabilities                                                                                                                                                |  |                             | 84       |   |      |   | (14,796 | )
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Net cash provided by operating activities                                                                                                                                                  |  |                             | 39,850   |   |      |   | 30,850  |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Investing activities:                                                                                                                                                                      |  |                             |          |   |      |   |         |  
|Additions to real estate assets and deferred leasing costs                                                                                                                                 |  |                             | (34,783  | ) |      |   | (33,919 | )
|Proceeds from disposition of real estate assets                                                                                                                                            |  |                             | 158,083  |   |      |   | 54,227  |  
|Distributions of capital from unconsolidated affiliates                                                                                                                                    |  |                             | 1,178    |   |      |   | 687     |  
|Net repayments in notes receivable                                                                                                                                                         |  |                             | 513      |   |      |   | 1,595   |  
|Contributions to unconsolidated affiliates                                                                                                                                                 |  |                             | (100     | ) |      |   |        |  
|Cash assumed upon consolidation of unconsolidated affiliate                                                                                                                                |  |                             | 645      |   |      |   |        |  
|Other investing activities                                                                                                                                                                 |  |                             | (624     | ) |      |   | 107     |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Net cash provided by investing activities                                                                                                                                                  |  |                             | 124,912  |   |      |   | 22,697  |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Financing activities:                                                                                                                                                                      |  |                             |          |   |      |   |         |  
|Distributions paid on Common Units                                                                                                                                                         |  |                             | (25,063  | ) |      |   | (25,269 | )
|Distributions of earnings to minority interest partner in consolidated affiliate                                                                                                           |  |                             | (127     | ) |      |   |        |  
|Distributions paid on Preferred Units                                                                                                                                                      |  |                             | (4,724   | ) |      |   | (7,713  | )
|Net proceeds from the sale of Common Units                                                                                                                                                 |  |                             | 310      |   |      |   | 2,199   |  
|Redemption of Preferred Units                                                                                                                                                              |  |                             | (50,000  | ) |      |   |        |  
|Redemption of Common Units                                                                                                                                                                 |  |                             | (1,497   | ) |      |   | (989    | )
|Borrowings on revolving credit facilities                                                                                                                                                  |  |                             | 92,000   |   |      |   | 37,000  |  
|Repayments of revolving credit facilities                                                                                                                                                  |  |                             | (104,500 | ) |      |   | (27,000 | )
|Borrowings on mortgages and notes payable                                                                                                                                                  |  |                             |         |   |      |   | 6,696   |  
|Repayments of mortgages and notes payable                                                                                                                                                  |  |                             | (48,829  | ) |      |   | (6,924  | )
|Additions to deferred financing costs and other financing activities                                                                                                                       |  |                             | 369      |   |      |   | (565    | )
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Net cash used in financing activities                                                                                                                                                      |  |                             | (142,061 | ) |      |   | (22,565 | )
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Net increase in cash and cash equivalents                                                                                                                                                  |  |                             | 22,701   |   |      |   | 30,982  |  
|Cash and cash equivalents at beginning of the period                                                                                                                                       |  |                             | 970      |   |      |   | 24,000  |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Cash and cash equivalents at end of the period                                                                                                                                             |  | $                           | 23,671   |   |      | $ | 54,982  |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                                                                                                                          |  |                             |          |   |      |   |         |  
|Cash paid for interest, net of amounts capitalized (excludes cash distributions to owners of sold properties accounted for as financings of
$482 and $900 for 2006 and 2005, respectively) |  | $                           | 21,316   |   |      | $ | 22,687  |  
|                                                                                                                                                                                           |  |                             |          |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

Condensed 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 asset acquisitions and dispositions subject to mortgage notes payable and other non-cash transactions:



|                                                        |  |                             |        |   |      |   |        |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Three Months EndedMarch 31, |       
|                                                        |  | 2006                        |        |   | 2005 |  
|Assets:                                                 |  |                             |        |   |      |   |        |  
|Net real estate assets                                  |  | $                           | 42,948 |   |      | $ | (5,923 | )
|Restricted cash                                         |  |                             | (1,865 | ) |      |   |       |  
|Accounts receivable                                     |  |                             | 102    |   |      |   | (363   | )
|Notes receivable                                        |  |                             |       |   |      |   | 231    |  
|Accrued straight-line rents receivable                  |  |                             | 962    |   |      |   |       |  
|Investments in unconsolidated affiliates                |  |                             | (2,066 | ) |      |   |       |  
|Deferred financing and leasing costs, net               |  |                             | 287    |   |      |   |       |  
|                                                        |  |                             |        |   |      |   |        |  
|                                                        |  | $                           | 40,368 |   |      | $ | (6,055 | )
|                                                        |  |                             |        |   |      |   |        |  
|Liabilities:                                            |  |                             |        |   |      |   |        |  
|Mortgages and notes payable                             |  | $                           | 39,964 |   |      | $ | 43     |  
|Accounts payable accrued expenses and other liabilities |  |                             | (1,652 | ) |      |   | 127    |  
|                                                        |  |                             |        |   |      |   |        |  
|                                                        |  | $                           | 38,312 |   |      | $ | 170    |  
|                                                        |  |                             |        |   |      |   |        |  
|Minority Interest and Partners Capital:                |  | $                           | 2,056  |   |      | $ | (6,225 | )
|                                                        |  |                             |        |   |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2006

(tabular dollar
amounts in thousands, except per unit data)

(Unaudited)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Highwoods Realty Limited
Partnership (the Operating Partnership) is managed by its sole general partner, Highwoods Properties, Inc., together with its consolidated subsidiaries (the Company), a fully-integrated, self-administered and self-managed
equity real estate investment trust (REIT) that operates in the southeastern and midwestern United States. The Company conducts substantially all of its activities through the Operating Partnership. Other than 22.4 acres of undeveloped
land, 30 apartment units and the Companys interest in the Kessinger/Hunter, LLC and 4600 Madison Associates, LLC joint ventures, all of the Companys assets are owned directly or indirectly by the Operating Partnership. As of
March 31, 2006, the Companys wholly owned assets included: 348 in-service office, industrial and retail properties; 96 apartment units; 896 acres of undeveloped land suitable for future development, of which 485 acres are considered
core holdings; and an additional 12 properties under development.

At March 31, 2006, the Company owned all of the preferred
partnership interests (Preferred Units) and 90.9% of the common partnership interests (Common Units) in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining
Common Units. Each Common Unit is redeemable 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 three months
ended March 31, 2006, the Company purchased 49,147 Redeemable Common Units from limited partners for cash approximating $1.5 million. Therefore the percentage of Common Units owned by the Company increased to 90.9% at
March 31, 2006 from 90.8% at December 31, 2005. Preferred Units in the Operating Partnership were issued to the Company in connection with the Companys preferred stock offerings in 1997 and 1998 (the Preferred
Stock). The net proceeds raised from each of the Preferred Stock issuances were contributed by the Company to the Operating Partnership in exchange for the Preferred Units. 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 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 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.

The Redeemable Common Units and Preferred Units are accounted for in accordance with Accounting Series Release No. 268 issued by the
Securities and Exchange Commission (SEC) because the limited partners holding the Redeemable Common Units have the right to put any and all of the Common Units to the Operating Partnership and the Company has the right to put any and all
of the Preferred Units to the Operating Partnership in exchange for their liquidation preference plus accrued and unpaid distributions in the event of a corresponding redemption by the Company of the underlying Preferred Stock.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES - Continued

Basis of Presentation

The Condensed Consolidated Financial Statements of the Operating Partnership are prepared in accordance with U.S. Generally Accepted Accounting Principles
(GAAP). As more fully described in Note 10, as required by Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144), the
Condensed Consolidated Balance Sheet at December 31, 2005 and the Consolidated Statement of Income for the three months ended March 31, 2005 were revised from previously reported amounts to reflect in real estate and other assets
held for sale and in discontinued operations the assets and operations for those properties sold or held for sale in the first quarter of 2006 which qualified for discontinued operations.

The Condensed Consolidated Financial Statements include 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 substantive participating rights or substantive kick out rights have been granted to the minority interest holders. In
accordance with EITF Issue No. 04-5, Determining Whether a General Partner or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, 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. 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(R))). All significant intercompany transactions and accounts have been eliminated.

The accompanying unaudited financial information, in the opinion of management, contains all adjustments (including normal recurring accruals) necessary
for a fair presentation of the Operating Partnerships financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the rules and
regulations of the SEC. 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 2005 Annual Report on Form 10-K.

The preparation of financial statements in accordance
with 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.

Minority Interest

Minority interest at
March 31, 2006 in the accompanying Condensed Consolidated Balance Sheet relates to the consolidation of Highwoods-Markel Associates, LLC (Markel) as a result of the Operating Partnerships adoption of EITF Issue
No. 04-5, as described below in Impact of Newly Adopted and Issued Financial Standards.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES - Continued

Income Taxes

The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
Code). As a REIT, the Company generally will not be subject to federal or state income taxes on its net income that it distributes to stockholders. Continued qualification as a REIT depends on the Companys ability to satisfy the
dividend distribution tests, stock ownership requirements and various other qualification tests prescribed in the Code. The Operating Partnership conducts certain business activities through a taxable REIT subsidiary, as permitted under the Code.
The taxable REIT subsidiary is subject to federal and state income taxes on its net taxable income and the Operating Partnership records provisions for such taxes, to the extent required, based on its income recognized for financial statement
purposes, including the effects of temporary differences between such income and the amount recognized for tax purposes. Through September 30, 2006, the taxable REIT subsidiary has not paid income taxes and has cumulative net taxable
losses of approximately $3.1 million. Because the future tax benefit of the cumulative losses is not assured, the approximate $1.2 million related deferred tax asset has been fully reserved as management does not believe that it is more likely than
not that the deferred tax asset will be recognized and no tax benefit has been recognized in the accompanying financial statements. The tax benefit of the cumulative losses could be recognized for financial reporting purposes in future periods if
the taxable REIT subsidiary generates sufficient taxable income.

Other than income taxes related to its taxable REIT subsidiary, the
Operating Partnership would not reflect any income taxes in its financial statements, since as a partnership the taxable effects of its operations are attributed to its partners.

Impact of Newly Adopted and Issued Accounting Standards

In May 2005, the FASB issued SFAS
No. 154, Accounting Changes and Error Corrections (SFAS No. 154). The Statement replaces Accounting Principles Board Opinion No. 20, Accounting Changes (APB Opinion No. 20) and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements and changes the requirements for the accounting for and reporting of a change in accounting principle. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods financial
statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Statement is effective for any accounting changes and corrections of errors made on
or after January 1, 2006.

In July 2005, the FASB issued Staff Position (FSP) SOP 78-9-1, Interaction of AICPA Statement of
Position 78-9 and EITF Issue No. 04-5. The EITF states that a general partner is presumed to control a limited partnership and should consolidate the limited partnership unless the limited partners possess substantive kick-out rights or
the limited partners possess substantive participating rights. This FSP eliminates the concept of important rights of SOP 78-9 and replaces it with the concepts of kick-out rights and substantive participating
rights as defined in Issue 04-5. This FSP is effective after June 29, 2005 for general partners of all new partnerships formed and for existing partnerships for which the partnership agreements are modified. For general partners in
all other partnerships, the guidance in this FSP is effective no later than January 1, 2006. The Operating Partnership consolidated one of its existing joint ventures, Markel, upon the adoption of this FSP effective
January 1, 2006; the Operating Partnership has treated this as a prospective change of accounting principle as permitted by EITF No. 04-5. This change resulted in the inclusion on the Consolidated Balance Sheet at January 1, 2006
of approximately $44 million of real estate assets, net of accumulated depreciation, and other assets, approximately $39.3 million in mortgages and notes payable and other liabilities, with the remaining effects to investments in unconsolidated
affiliates and to minority interest.



10



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES - Continued

The organizational documents of Markel
require the entity to be liquidated through the sale of its assets upon reaching December 31, 2100. As controlling partner, the Operating Partnership has an obligation to cause this property-owning entity to distribute proceeds of
liquidation to the minority interest partner in these partially owned properties only if the net proceeds received by the entity from the sale of its assets warrant a distribution as determined by the agreement. In accordance with the disclosure
provisions of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150), the Operating Partnership estimates the value of minority interest
distributions would have been approximately $12 million had the entity been liquidated as of March 31, 2006. This estimated settlement value is based on estimated third party consideration realizable by the entity upon a hypothetical
disposition of the properties and is net of all other assets and liabilities. The amount of any actual distributions to the minority interest holder in this entity is difficult to predict due to many factors, including the inherent uncertainty of
real estate sales. If the entitys underlying assets are worth less than the underlying liabilities on the date of such liquidation, the Operating Partnership would have no obligation to remit any consideration to the minority interest holder.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in an income tax return. The interpretation is effective for fiscal years beginning after
December 15, 2006. The Operating Partnership is currently assessing the effect of FIN 48, if any, on its financial condition and results of operations upon adoption on January 1, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 becomes effective for the Operating Partnership on January 1, 2008. The Operating Partnership is currently evaluating the impact SFAS
No. 157 may have on its financial condition and results of operations.

In September 2006, the SEC released Staff Accounting Bulletin
No. 108 (SAB No. 108), which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to
quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach is material. If, in evaluating misstatements following an approach not previously used by the Operating Partnership, the
effect of initial adoption is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative effect adjustment to beginning retained earnings. The requirements of this guidance are effective for the Operating
Partnership for the annual financial statements as of December 31, 2006. The Operating Partnership is currently evaluating what impact, if any, SAB No. 108 may have on its financial statements.

Employee Benefit Plans and Stock-Based Compensation

The Company grants restricted stock and stock options to employees. Upon exercise of a stock option, the Company will contribute the exercise price to the Operating Partnership in exchange for a Common Unit. The Operating Partnership
accounts for such restricted stock and options as if issued by the Operating Partnership.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES - Continued

The Companys officers generally receive
annual grants of stock options and restricted stock on March 1 of each year under the Amended and Restated 1994 Stock Option Plan (the Stock Option Plan). Stock options have also been granted to the Companys directors;
currently, directors do not receive annual stock option grants. Restricted stock grants are also made annually to directors and certain non-officer employees. As of March 31, 2006, 9.0 million shares of Common Stock were authorized
for issuance under the Stock Option Plan. Stock options issued prior to 2005 vest ratably over four years and remain outstanding for 10 years. Stock options issued in 2005 and 2006 continue to vest ratably over a four-year period, but remain
outstanding for seven years. The value of all options as of the date of grant is calculated using the Black-Scholes option-pricing model.

The Operating Partnership elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options issued by the
Company through December 31, 2002. During 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which provided methods of transition to the fair value based method of
accounting for stock-based employee compensation. This standard was effective for financial statements issued for fiscal years beginning after December 15, 2002. The Operating Partnership elected the prospective method as defined by SFAS
No. 148 for options issued by the Company on or after January 1, 2003. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements and forfeitures to be estimated at the grant date rather than as they occur. The Operating
Partnership based its estimated forfeiture rate on historical forfeitures of all stock option grants. The Operating Partnership adopted SFAS No. 123(R) effective January 1, 2006 using the modified-prospective method.

Using the Black-Scholes options valuation model, the weighted average fair values of options granted during the three months ended
March 31, 2006 and 2005 were $3.98 and $1.92, respectively, per option. The fair values of the options granted in 2006 and 2005 were estimated at the grant dates using the following weighted average assumptions:



|                                     |  |                             |     |  |         |  
|------------------------------------ |  | --------------------------- | --- |  | ------- | -
|                                     |  | Three Months EndedMarch 31, |    
|                                     |  | 2006                        |     |  | 2005    |  
|Risk free interest rate (1)          |  | 4.63                        | %   |  | 4.10    | %
|Common stock dividend yield(2)       |  | 5.21                        | %   |  | 6.45    | %
|Expected volatility(3)               |  | 18.89                       | %   |  | 16.30   | %
|Average expected option life (years) |  | 4.75                        | (4) |  | 6.0     |  
|Options granted                      |  | 241,151                     |     |  | 652,325 |  

---

|(1) | Represents interest rate on US Treasury Bonds having the same life as the estimated life of the Companys options.
|--- | ------------------------------------------------------------------------------------------------------------------

|(2) | The dividend yield is calculated utilizing the dividends paid for the previous one-year period and the Companys stock price on the date of grant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based on historical volatility of the Companys stock over a period relevant to the related stock option grant.
|--- | ---------------------------------------------------------------------------------------------------------------

|(4) | The average expected option life for the 2006 grant is based on an analysis of historical company data and is based on the contractual term for the 2005 grant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES - Continued

The following table illustrates the effect on
net income available to common unitholders and earnings per unit for the three months ended March 31, 2005 if a fair value based method had been applied to all outstanding and unvested stock options granted prior to
January 1, 2003:



|                                                                                                     |  |                                 |        |     
|---------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ----
|                                                                                                     |  | Three MonthsEndedMarch 31, 2005 |       
|Net income available for common unitholders  as reported                                            |  | $                               | 15,383 |     
|Add: Stock option expense included in reported net income (1)                                        |  |                                 | 82     | (1) 
|Deduct: Total stock option expense determined under fair value recognition method for all awards (1) |  |                                 | (169   | )(1)
|                                                                                                     |  |                                 |        |     
|Pro forma net income attributable to common unitholders                                              |  | $                               | 15,296 |     
|                                                                                                     |  |                                 |        |     
|Basic net income per common unit - as reported                                                       |  | $                               | 0.26   |     
|Basic net income per common unit - pro forma                                                         |  | $                               | 0.26   |     
|Diluted net income per common unit - as reported                                                     |  | $                               | 0.26   |     
|Diluted net income per common unit - pro forma                                                       |  | $                               | 0.26   |     

---

|(1) | Amounts include the effect of dividend equivalent rights.
|--- | ---------------------------------------------------------

Dividends on unvested shares of restricted stock are accounted for as compensation expense.

2. INVESTMENTS IN
UNCONSOLIDATED AND OTHER AFFILIATES

The Operating Partnership has various
joint ventures with unrelated investors and has retained minority equity interests ranging from 22.8% to 50.0% in these joint ventures. The Operating Partnership generally accounts for its unconsolidated joint ventures using the equity method of
accounting. As a result, the assets and liabilities of these joint ventures for which the Operating Partnership uses the equity method of accounting are not included on the Operating Partnerships consolidated balance sheet.

During the third quarter of 2006, three of the Operating Partnerships joint ventures made distributions aggregating $17.0 million as a result of a
refinancing of debt related to various properties held by the joint ventures. The Operating Partnership received 50.0% of such distributions. As a result of these distributions, the Operating Partnerships investment account in these joint
ventures became negative. The new debt is non-recourse; however, the Operating Partnership and its partner have guaranteed other debt and have contractual obligations to support the joint ventures, which are included in the Guarantees and Other
Obligations table in Note 12. Therefore, in accordance with SOP 78-9 Accounting for Investments in Real Estate Ventures, the Operating Partnership recorded the distributions as a reduction of the investment account and included the
resulting negative investment balances of $6.3 million in Accounts Payable, Accrued Expenses and Other Liabilities in the Consolidated Balance Sheet at September 30, 2006.

The Operating Partnership currently has three consolidated joint ventures. SF-HIW Harborview, LP is accounted for as a financing arrangement pursuant to
SFAS No. 66, as described in Note 3 to the Consolidated Financial Statements in the Operating Partnerships 2005 Annual Report on Form 10-K; The Vinings at University Center, LLC is consolidated pursuant to FIN 46(R) as described further
below; and Markel is consolidated beginning January 1, 2006 pursuant to EITF 04-5, as discussed above.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



2. INVESTMENTS IN UNCONSOLIDATED AND
OTHER AFFILIATES - Continued

Investments in unconsolidated affiliates as of March 31, 2006 and
combined summarized income statements for the Operating Partnerships unconsolidated joint ventures for the three months ended March 31, 2006 and 2005 are as follows:



|                                  |  |                                                                                   |  |                                 |     |  |                   |  
|--------------------------------- |  | --------------------------------------------------------------------------------- |  | ------------------------------- | --- |  | ----------------- | -
|Joint Venture                     |  | Location of Properties                                                            |  | Total RentableSquare Feet (000) |     |  | OwnershipInterest |  
|Board of Trade Investment Company |  | Kansas City, MO                                                                   |  | 166                             |     |  | 49.0              | %
|Dallas County Partners I, LP      |  | Des Moines, IA                                                                    |  | 641                             |     |  | 50.0              | %
|Dallas County Partners II, LP     |  | Des Moines, IA                                                                    |  | 272                             |     |  | 50.0              | %
|Dallas County Partners III, LP    |  | Des Moines, IA                                                                    |  | 7                               |     |  | 50.0              | %
|Fountain Three                    |  | Des Moines, IA                                                                    |  | 710                             |     |  | 50.0              | %
|RRHWoods, LLC                     |  | Des Moines, IA                                                                    |  | 769                             | (1) |  | 50.0              | %
|Plaza Colonnade, LLC              |  | Kansas City, MO                                                                   |  | 285                             |     |  | 50.0              | %
|Highwoods DLF 98/29, LP           |  | Atlanta, GA; Charlotte, NC;Greensboro, NC; Raleigh, NC;Orlando, FL; Baltimore, MD |  | 1,199                           |     |  | 22.8              | %
|Highwoods DLF 97/26 DLF 99/32, LP |  | Atlanta, GA; Greensboro, NC;Orlando, FL                                           |  | 822                             |     |  | 42.9              | %
|Highwoods KC Glenridge Office, LP |  | Atlanta, GA                                                                       |  | 185                             |     |  | 40.0              | %
|Highwoods KC Glenridge Land, LP   |  | Atlanta, GA                                                                       |  |                                |     |  | 40.0              | %
|HIW-KC Orlando LLC                |  | Orlando, FL                                                                       |  | 1,273                           |     |  | 40.0              | %
|Concourse Center Associates, LLC  |  | Greensboro, NC                                                                    |  | 118                             |     |  | 50.0              | %
|Weston Lakeside, LLC              |  | Raleigh, NC                                                                       |  |                                | (2) |  | 50.0              | %
|                                  |  |                                                                                   |  |                                 |     |  |                   |  
|Total                             |  |                                                                                   |  | 6,447                           | (3) |  |                   |  
|                                  |  |                                                                                   |  |                                 |     |  |                   |  

---

|(1) | Includes 75,000 square feet for an office building under development at March 31, 2006.
|--- | ---------------------------------------------------------------------------------------

|(2) | This joint venture is constructing approximately 332 rental residential units on 22.4 acres of land.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Total does not include properties held by consolidated joint ventures totaling 618,000 square feet and 156 rental residential units.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



|                                                    |  |                                     |        |      |   |       
|--------------------------------------------------- |  | ----------------------------------- | ------ | ---- | - | ------
|                                                    |  | For the Three Months EndedMarch 31,
|                                                    |  | 2006 (1)                            |        | 2005
|Income Statements:                                  |  |                                     |        |      |   |       
|Revenues                                            |  | $                                   | 30,929 |      | $ | 32,211
|                                                    |  |                                     |        |      |   |       
|Expenses:                                           |  |                                     |        |      |   |       
|Operating expenses                                  |  |                                     | 12,411 |      |   | 12,163
|Depreciation and amortization                       |  |                                     | 6,438  |      |   | 6,654 
|Interest expense and loan cost amortization         |  |                                     | 8,062  |      |   | 8,041 
|                                                    |  |                                     |        |      |   |       
|Total expenses                                      |  |                                     | 26,911 |      |   | 26,858
|                                                    |  |                                     |        |      |   |       
|Net income                                          |  | $                                   | 4,018  |      | $ | 5,353 
|                                                    |  |                                     |        |      |   |       
|The Operating Partnerships share of:               |  |                                     |        |      |   |       
|Net income (2)                                      |  | $                                   | 1,962  |      | $ | 2,692 
|                                                    |  |                                     |        |      |   |       
|Depreciation and amortization (real estate related) |  | $                                   | 2,584  |      | $ | 2,546 
|                                                    |  |                                     |        |      |   |       
|Interest expense and loan cost amortization         |  | $                                   | 3,447  |      | $ | 3,428 
|                                                    |  |                                     |        |      |   |       

---

|(1) | Amounts for 2005 include Markel, which has been consolidated beginning January 1, 2006, as described in Note 1.
|--- | ---------------------------------------------------------------------------------------------------------------

|(2) | The Operating Partnerships share of net income differs from its weighted average ownership percentage in the joint ventures net income due to the Operating
Partnerships purchase accounting and other related adjustments.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



2. INVESTMENTS IN UNCONSOLIDATED AND
OTHER AFFILIATES - Continued

On December 22, 2004, the Operating Partnership and Easlan
Investment Group, Inc. (Easlan) formed The Vinings at University Center, LLC. The Operating Partnership contributed 7.8 acres of land at an agreed upon value of $1.6 million to the joint venture in December 2004 in return for a 50%
equity interest and Easlan contributed $1.1 million, in the form of non-interest bearing promissory notes, for a 50% equity interest in the entity. The Operating Partnership has consolidated this joint venture under the provisions of FIN 46(R)
because Easlan has no at-risk equity and the Operating Partnership absorbs the majority of the joint ventures expected losses. Accordingly, the Operating Partnerships balance sheet at March 31, 2006 includes $10.3 million of
development in process and an $8.9 million construction note payable. On November 1, 2006, the joint venture sold the rental residential properties to a third party for gross proceeds of $14.3 million, paid off the construction note
payable and made cash distributions to the partners. The Operating Partnership received a distribution of $2.9 million.

For additional
information regarding the Operating Partnerships investments in unconsolidated and other affiliates, see Note 2 to the Consolidated Financial Statements in the Operating Partnerships 2005 Annual Report on Form 10-K.

3. FINANCING ARRANGEMENTS

For information regarding sale transactions that were accounted for as financing arrangements under paragraphs 25 through 29 of SFAS No. 66, see Note 5 herein and Note 3 to the Consolidated Financial Statements in the Operating
Partnerships 2005 Annual Report on Form 10-K.

4. ASSET DISPOSITIONS

During the nine months ended September 30, 2006, the Operating Partnerships dispositions consisted of the following:



|                                                |  |                        |         |              |   |                   |  |   |       
|----------------------------------------------- |  | ---------------------- | ------- | ------------ | - | ----------------- |  | - | ------
|                                                |  | For the Quarters Ended
|                                                |  | March 31,2006          |         | June 30,2006 |   | September 30,2006
|Operating properties (square feet in thousands) |  |                        | 1,999   |              |   |                  |  |   | 292   
|Land held for development (acres)               |  |                        | 60.6    |              |   | 6.6               |  |   | 11.5  
|Gross sale proceeds on operating properties     |  | $                      | 153,900 |              | $ |                  |  | $ | 22,787
|Gross sale proceeds on development land         |  | $                      | 5,490   |              | $ | 1,600             |  | $ | 4,200 

In January 2006, the Operating Partnership sold office and industrial properties in Atlanta,
Georgia, Columbia, South Carolina and Tampa, Florida in a single transaction for gross proceeds of approximately $141 million. This transaction was classified as held for sale and an impairment loss of $7.7 million was recorded in the fourth quarter
of 2005. The properties subject to this sale were classified as discontinued operations in the fourth quarter of 2005.

In March 2006, the
Operating Partnership sold an office property in Raleigh, North Carolina for gross proceeds of approximately $12.9 million. A gain of approximately $1.4 million was recorded in the first quarter of 2006. This property was classified as
discontinued operations in the first quarter of 2006.

In August 2006, the Operating Partnership sold five office properties in Raleigh,
North Carolina for gross proceeds of approximately $22.8 million. A gain of approximately $2.8 million was recorded in the third quarter of 2006. This property was classified as discontinued operations in the third quarter of 2006.

In October 2006, the Operating Partnership sold 94.6 acres of land in Atlanta, Georgia for gross proceeds of approximately $22.5 million. A gain
of approximately $7.4 million will be recorded in the fourth quarter of 2006. This land was included in real estate and other assets, net, held for sale as of September 30, 2006. The Operating Partnership also sold a retail property aggregating
105,325 rentable square feet in Kansas City, Missouri for gross proceeds of approximately $10.5 million. A gain of approximately $1.5 million will be recorded in the fourth quarter of 2006. This property was classified as discontinued operations in
the third quarter of 2006.



15



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



4. ASSET DISPOSITIONS - Continued

In November 2006, the Operating Partnership sold two office properties and 12 industrial properties aggregating 393,465 rentable square feet in
Winston-Salem and Greensboro, North Carolina for gross proceeds of approximately $16.5 million. This property will be classified as discontinued operations in the fourth quarter of 2006.

Gains, losses and impairments on disposition of properties, net, from dispositions not classified as discontinued operations, consisted of the following:



|                                               |  |                             |       |      |   |    
|---------------------------------------------- |  | --------------------------- | ----- | ---- | - | ---
|                                               |  | Three Months EndedMarch 31,
|                                               |  | 2006                        |       | 2005
|Gains on disposition of land                   |  | $                           | 3,040 |      | $ | 153
|Gains on disposition of depreciable properties |  |                             | 1,270 |      |   | 250
|                                               |  |                             |       |      |   |    
|Total                                          |  | $                           | 4,310 |      | $ | 403
|                                               |  |                             |       |      |   |    

The above gains on land and depreciable properties in the first quarter 2006 and 2005 include
minor condemnation, deferred gain recognition from prior sales and adjustments to prior sale transactions.

Net gains on sale and
impairments of discontinued operations consisted of the following:



|                                               |  |                             |       |      |   |       
|---------------------------------------------- |  | --------------------------- | ----- | ---- | - | ------
|                                               |  | Three Months EndedMarch 31,
|                                               |  | 2006                        |       | 2005
|Gains on disposition of depreciable properties |  | $                           | 1,483 |      | $ | 15,724
|                                               |  |                             |       |      |   |       

See Note 10 for information on discontinued operations and impairment of long-lived assets.

5. MORTGAGES, NOTES PAYABLE AND FINANCING OBLIGATIONS

The Operating Partnerships consolidated mortgages and notes payable consisted of the following at March 31, 2006 and
December 31, 2005:



|                       |  |               |           |     |                  |   |          
|---------------------- |  | ------------- | --------- | --- | ---------------- | - | ---------
|                       |  | March 31,2006 |           |     | December 31,2005
|Secured mortgage loans |  | $             | 712,251   | (1) |                  | $ | 721,116  
|Unsecured loans        |  |               | 738,000   |     |                  |   | 750,500  
|                       |  |               |           |     |                  |   |          
|Total                  |  | $             | 1,450,251 |     |                  | $ | 1,471,616
|                       |  |               |           |     |                  |   |          

---

|(1) | Amount includes $38.5 million from the consolidation of Markel, as described in Note 1.
|--- | ---------------------------------------------------------------------------------------

As of March 31, 2006, the Operating Partnerships outstanding mortgages and notes payable were secured by real estate assets with an aggregate undepreciated book value of approximately $1.2 billion.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



5. MORTGAGES, NOTES PAYABLE AND
FINANCING OBLIGATIONS - Continued

Refinancings and Preferred Unit Redemptions in 2005 and 2006

During 2005 and through the third quarter of 2006, the Operating Partnership paid off $196.2 million of outstanding loans, excluding any normal debt
amortization and the refinancings of the credit facility and bank term loans, which included $176.2 million of secured debt with a weighted average interest rate of 6.9% and $20 million of unsecured floating rate debt with an interest rate of 4.9%.
Included in the $176.2 million was $89.8 million of floating rate secured debt. The Operating Partnership incurred a $0.5 million loss on debt extinguishments in 2005 in connection with these loan pay-downs. Approximately $350 million of real estate
assets (based on undepreciated cost basis) became unencumbered after paying off the secured debt. The Operating Partnership also used some of the proceeds from its disposition activity to redeem, in August 2005 and February 2006, all of the
Operating Partnerships outstanding Series D Preferred Units and 3,200,000 of its outstanding Series B Preferred Units, aggregating $180.0 million plus accrued distributions. These reductions in outstanding debt and Preferred Unit balances were
funded primarily from proceeds from property dispositions that closed in 2005 and 2006. In connection with the redemption of Preferred Units, the excess of the redemption cost over the net carrying amount of the redeemed units was recorded as a
reduction to net income available for Common Unitholders. These reductions amounted to $4.3 million and $1.8 million for the third quarter of 2005 and first quarter of 2006, respectively.

In February 2006, the Operating Partnership obtained waivers from the lenders under its previous $250 million unsecured revolving credit facility and its
previous bank term loan related to timely reporting to the lenders of annual and quarterly financial statements. These waivers did not change the economic terms of the loans.

On May 1, 2006, the Operating Partnership obtained a new $350 million, three-year unsecured revolving credit facility from Bank of America,
N.A. The Operating Partnership used $273 million of proceeds from the new revolving credit facility, together with available cash, to pay off the remaining outstanding balance of $178 million under its previous revolving credit facility and a $100
million bank term loan, both of which were terminated. Loss on debt extinguishments of approximately $0.5 million was recorded in the second quarter of 2006.

On August 8, 2006, the Operating Partnerships revolving credit facility was amended and restated as part of a syndication with a group of 15 banks. The revolving credit facility was also upsized from
$350 million to $450 million. The Operating Partnerships revolving credit facility is initially scheduled to mature on May 1, 2009. Assuming no default exists, the Operating Partnership has an option to extend the maturity date by
one additional year and, at any time prior to May 1, 2008, may request increases in the borrowing availability under the credit facility by up to an additional $50 million. The interest rate is LIBOR plus 80 basis points and the annual
base facility fee is 20 basis points. The revolving credit facility has up to $182.8 million of additional availability as of November 9, 2006.

Financing Obligations

The Operating Partnerships financing obligations consisted of the following at
March 31, 2006 and December 31, 2005:



|                                           |  |               |        |                  |   |       
|------------------------------------------ |  | ------------- | ------ | ---------------- | - | ------
|                                           |  | March 31,2006 |        | December 31,2005
|SF-HIW Harborview, LP financing obligation |  | $             | 15,111 |                  | $ | 14,983
|Tax increment financing obligation (1)     |  |               | 19,171 |                  |   | 19,171
|                                           |  |               |        |                  |   |       
|Total                                      |  | $             | 34,282 |                  | $ | 34,154
|                                           |  |               |        |                  |   |       

---

|(1) | In connection with tax increment financing for construction of a public garage related to an office building constructed by the Operating Partnership in 2000, the Operating
Partnership is obligated to pay fixed special assessments over a 20-year period. The net present value of these assessments, discounted at 6.9% at the inception of the obligation, is shown as a financing obligation in the balance sheet. The
Operating Partnership also receives special tax revenues and property tax rebates, which are intended, but not guaranteed, to provide funds to pay the special assessments.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



6. STOCK-BASED COMPENSATION

Stock Options

The following table summarizes
information about the Companys stock option activity during the three months ended March 31, 2006:



|                              |  |                     |   |  |                              |      
|----------------------------- |  | ------------------- | - |  | ---------------------------- | -----
|                              |  | Options Outstanding
|                              |  | Number of Shares    |   |  | WeightedAverageExercisePrice
|Balances at December 31, 2005 |  | 5,153,648           |   |  |                              | 24.23
|Options granted               |  | 241,151             |   |  |                              | 32.37
|Options forfeited             |  |                    |   |  |                              |     
|Options cancelled             |  | (32,057             | ) |  |                              | 25.99
|Options exercised             |  |                    |   |  |                              |     
|                              |  |                     |   |  |                              |      
|Balances at March 31, 2006    |  | 5,362,742           |   |  | $                            | 24.59
|                              |  |                     |   |  |                              |      

Cash received from options exercised was $2.0 million for the three months ended
March 31, 2005. There were no options exercised for the three months ended March 31, 2006. The total intrinsic value of options exercised during the three months ended March 31, 2005 was $1.0 million. The total
intrinsic value of options outstanding at March 31, 2006 was $49.1 million.

The Company generally does not permit the net cash
settlement of exercised stock options, but does permit net share settlement for certain qualified exercises.

The portion of stock option
expense recorded at March 31, 2006 related to unvested awards granted prior to January 1, 2003 was immaterial.

The
following tables set forth additional information about stock options outstanding and exercisable at March 31, 2006.



|                                |  |                            |  |                                     |  |                              |       |                            |       |                                     |     |                              |   |      
|------------------------------- |  | -------------------------- |  | ----------------------------------- |  | ---------------------------- | ----- | -------------------------- | ----- | ----------------------------------- | --- | ---------------------------- | - | -----
|                                |  | Stock Options Outstanding  |  | Stock Options Exercisable          
|Exercise Price of Stock Options |  | NumberOutstanding(in 000s) |  | WeightedAverageRemainingLife(years) |  | WeightedAverageExercisePrice |       | NumberExercisable(in 000s) |       | WeightedAverageRemainingLife(years) |     | WeightedAverageExercisePrice
|$10.00 to $15.00                |  | 105                        |  | 3.9                                 |  | $                            | 11.63 |                            | 105   |                                     | 3.9 |                              | $ | 11.63
|$15.01 to $20.00                |  | 39                         |  | 4.0                                 |  | $                            | 18.38 |                            | 39    |                                     | 3.9 |                              | $ | 18.38
|$20.01 to $25.00                |  | 2,587                      |  | 4.3                                 |  | $                            | 22.30 |                            | 2,466 |                                     | 4.5 |                              | $ | 22.36
|$25.01 to $30.00                |  | 2,267                      |  | 5.8                                 |  | $                            | 26.94 |                            | 1,518 |                                     | 5.5 |                              | $ | 26.98
|$30.01 to $35.00                |  | 365                        |  | 5.1                                 |  | $                            | 32.36 |                            | 123   |                                     | 1.5 |                              | $ | 32.35



|               |  |                           |  |                              |       |                                  |   |       
|-------------- |  | ------------------------- |  | ---------------------------- | ----- | -------------------------------- | - | ------
|               |  | Stock Options Exercisable
|               |  | Number of Shares          |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue (in000s)
|March 31, 2005 |  | 3,735,803                 |  | $                            | 23.80 |                                  | $ | 37,131
|March 31, 2006 |  | 4,251,438                 |  | $                            | 23.96 |                                  | $ | 41,569



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



6. STOCK-BASED COMPENSATION - Continued

Restricted Stock Grants

The Company generally makes
annual grants of time-based restricted stock under its Stock Option Plan to its directors, officers and other employees. Restricted stock issued prior to 2005 generally vests 50.0% three years from the date of grant and the remaining 50.0% five
years from date of grant. Shares of time-based restricted stock that were issued in 2005 will vest one-third on the third anniversary, one-third on the fourth anniversary and one-third on the fifth anniversary of the date of grant. Shares of
time-based restricted stock that were issued in 2006 will vest 25% on the first, second, third and fourth anniversary dates, respectively. Shares of time-based restricted stock issued to directors generally vest 25% at the end of the first, second,
third and fourth anniversary dates, respectively. The value of grants of time-based restricted stock is based on the market value of Common Stock as of the date of grant.

During 2005 and 2006, the Company also issued shares of restricted stock to officers under its Stock Option Plan that will vest if the Companys total shareholder return exceeds the average total returns of a
selected group of peer companies over a three-year period. If the Companys total shareholder return does not exceed such average total returns, none of the total return-based restricted stock will vest. The 2006 grants also contain a provision
allowing for partial vesting if the annual return in any given year exceeds 9%. The fair values of each such share of total return-based restricted stock were determined by an outside consultant to be approximately 76% and 87% of the market value of
a share of Common Stock as of the grant dates for the 2005 and 2006 grants, respectively. The total grant date fair value of these shares of total-return based restricted stock is being amortized to expense on a straight-line method over the
three-year period.

During 2005 and 2006, the Company also issued shares of performance-based restricted stock to officers under its Stock
Option Plan that will vest pursuant to company-wide performance-based criteria. The performance-based criteria are based on whether or not the Company meets or exceeds four operating and financial goals established under its Strategic Management
Plan by the end of 2007 and 2008, respectively. To the extent actual performance equals or exceeds threshold performance goals, the portion of shares of performance-based restricted stock that vest can range from 50% to 100%. If actual performance
does not meet such threshold goals, none of the performance-based restricted stock will vest. The fair value of performance-based restricted share grants is based on the market value of Common Stock as of the date of grant and the estimated
performance to be achieved at the end of the three-year period. Such fair value is being amortized to expense during the period from grant date to December 31, 2007 and 2008, respectively, adjusting for the expected level of vesting that
will occur at those dates.

Up to 100% of additional total return-based restricted stock and up to 50% of additional performance-based
restricted stock may be issued at the end of the three-year periods if actual performance exceeds certain levels of performance. Such additional shares, if any, would be fully vested when issued. The Operating Partnership will also accrue and record
expense for additional performance-based shares during the three-year period to the extent issuance of the additional shares is expected based on the Companys current and projected actual performance. In accordance with GAAP, no expense is
recorded for additional shares of total return-based restricted stock that may be issued at the end of the three-year period since that possibility is already reflected in the grant date fair value.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



6. STOCK-BASED COMPENSATION - Continued

The following table summarizes activity in the three months ended March 31, 2006 for all time-based restricted stock grants:



|                                                                            |  |                                  |     |  |                              |      
|--------------------------------------------------------------------------- |  | -------------------------------- | --- |  | ---------------------------- | -----
|                                                                            |  | Three Months EndedMarch 31, 2006
|                                                                            |  | Numberof Shares                  |     |  | WeightedAverageIssuancePrice
|Restricted shares outstanding at December 31, 2005                          |  | 268,409                          | (1) |  | $                            | 24.51
|Number of restricted shares awarded and issued                              |  | 58,532                           |     |  |                              | 32.40
|Number of restricted grants awarded, but shares not yet issued              |  | 13,590                           |     |  |                              | 32.66
|Restricted shares vested (2)                                                |  | (48,704                          | )   |  |                              | 23.09
|Restricted shares forfeited                                                 |  | (10,139                          | )   |  |                              | 24.47
|Restricted shares surrendered for payment of withholding taxes upon vesting |  | (16,862                          | )   |  |                              | 21.23
|                                                                            |  |                                  |     |  |                              |      
|Restricted shares outstanding at March 31, 2006                             |  | 264,826                          |     |  | $                            | 27.14
|                                                                            |  |                                  |     |  |                              |      

---

|(1) | Amount includes 20,396 shares granted during the blackout period in 2005. These shares were issued in 2006 and are included in the Consolidated Statement of Partners Capital
at March 31, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The total fair value of restricted shares that vested during the three months ended March 31, 2006 and 2005 was $1.6 million and $1.0 million, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes activity in the three months ended March 31, 2006 for all performance-based and
total return-based restricted stock grants:



|                                                                            |  |                                  |   |  |                              |      
|--------------------------------------------------------------------------- |  | -------------------------------- | - |  | ---------------------------- | -----
|                                                                            |  | Three Months EndedMarch 31, 2006
|                                                                            |  | Numberof Shares                  |   |  | WeightedAverageIssuancePrice
|Restricted shares outstanding at December 31, 2005                          |  | 62,576                           |   |  | $                            | 23.55
|Number of restricted shares awarded and issued                              |  | 52,154                           |   |  |                              | 29.40
|Number of restricted grants awarded, but shares not yet issued              |  |                                 |   |  |                              |     
|Restricted shares vested                                                    |  |                                 |   |  |                              |     
|Restricted shares forfeited                                                 |  | (2,626                           | ) |  |                              | 23.55
|Restricted shares surrendered for payment of withholding taxes upon vesting |  |                                 |   |  |                              |     
|                                                                            |  |                                  |   |  |                              |      
|Restricted shares outstanding at March 31, 2006                             |  | 112,104                          |   |  | $                            | 26.27
|                                                                            |  |                                  |   |  |                              |      

During the three months ended March 31, 2006 and 2005, the Operating Partnership
recognized approximately $845,000 and $613,000, respectively, of stock-based compensation expense. As of March 31, 2006 and 2005, there was $6.7 million and $7.1 million, respectively, of total unrecognized stock-based compensation costs,
which will be recognized over a weighted average remaining contractual term of 2.9 years for both periods.



20



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



6. STOCK-BASED COMPENSATION - Continued

Retirement Plan

Effective for 2006, the Company
adopted a retirement plan applicable to all employees, including executive officers, who, at the time of retirement, have at least 30 years of continuous qualified service or are at least 55 years old and have at least 10 years of continuous
qualified service. Subject to advance retirement notice and execution of a non-compete agreement with the Company, eligible retirees would be entitled to receive a pro rata amount of the annual bonus earned during the year of retirement. Stock
options and time-based restricted stock granted by the Company to such eligible retiree during his or her employment would be non-forfeitable and become exercisable according to the terms of their original grants. Eligible retirees would also be
entitled to receive a pro rata amount of any performance-based and total return-based restricted stock originally granted to such eligible retiree during his or her employment that subsequently vests after the retirement date according to the terms
of their original grants. The benefits of this retirement plan apply only to restricted stock and stock option grants beginning in 2006 and will be phased in 25% on March 1, 2006 and 25% on each anniversary thereof. For employees eligible
for these benefits as of the date of grant after March 1, 2006, 25% of their grants were fully expensed at the grant date, which increased compensation expense by approximately $0.2 million in the first quarter of 2006. Grants made prior
to 2006 are unaffected.

Deferred Compensation

The Company has a deferred compensation plan pursuant to which each executive officer and director can elect to defer a portion of base salary and/or annual bonus (or director fees) for investment in various unrelated mutual funds. Prior to
January 1, 2006, executive officers and directors also could elect to defer cash compensation for investment in units of phantom stock. At the end of each calendar quarter, any executive officer and director who deferred compensation into
phantom stock was credited with units of phantom stock at a 15.0% discount. Dividends on the phantom units are assumed to be issued in additional units of phantom stock at a 15.0% discount. If an officer that deferred compensation under this plan
leaves the Companys employ voluntarily or for cause within two years after the end of the year in which such officer deferred compensation for units of phantom stock, at a minimum, the 15.0% discount and any deemed dividends are forfeited.
Over the two-year vesting period, the Operating Partnership records additional compensation expense equal to the 15.0% discount, the accrued dividends and any changes in the market value of Common Stock from the date of the deferral, which
aggregated $0.6 million and $0.0 million for the three months ended March 31, 2006 and 2005, respectively. Cash payments from the plan for the three months ended March 31, 2006 and 2005 were $0.5 million and $0.0 million,
respectively.

7. RELATED PARTY TRANSACTIONS

As more fully described in Note 8 to the Consolidated Financial Statements in the Operating Partnerships 2005 Annual Report on Form 10-K, the
Operating Partnership purchased land in 2005 from GAPI, Inc., an entity owned by a current director of the Company, and also sold certain buildings in 2005 to a director who subsequently retired from the Board of Directors on
December 31, 2005.

8. DERIVATIVE FINANCIAL INSTRUMENTS

Accumulated Other Comprehensive Loss (AOCL) at March 31, 2006 and December 31, 2005 was $2.0 million and $2.2 million,
respectively, and consisted of deferred gains and losses from past cash flow hedging instruments which are being recognized as interest expense over the terms of the related debt (see Note 9). The Operating Partnership expects that the portion of
the cumulative loss recorded in AOCL at March 31, 2006 associated with these derivative instruments, which will be recognized as interest expense within the next 12 months, will be approximately $0.7 million.



21



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



8. DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The land purchase agreement with GAPI, Inc. described in Note 8 to the Consolidated Financial Statements in the Operating Partnerships 2005 Annual
Report on Form 10-K included an embedded derivative feature due to the price for the land parcels being determined by the fair value of Common Units, which was accounted for in accordance with SFAS No. 133.

9. OTHER COMPREHENSIVE INCOME

Other comprehensive income represents net income plus the changes in certain amounts deferred in accumulated other comprehensive income/(loss) related to hedging activities not reflected in the Consolidated Statements
of Income. The components of other comprehensive income are as follows:



|                                                                                |  |                             |        |      |   |        |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                                                |  | Three Months EndedMarch 31, |       
|                                                                                |  | 2006                        |        | 2005 |  
|Net income                                                                      |  | $                           | 14,397 |      | $ | 23,096 |  
|Other comprehensive income:                                                     |  |                             |        |      |   |        |  
|Unrealized derivative losses on cash-flow hedges                                |  |                             |       |      |   | (37    | )
|Amortization of hedging gains and losses included in other comprehensive income |  |                             | 177    |      |   | 176    |  
|                                                                                |  |                             |        |      |   |        |  
|Total other comprehensive income                                                |  |                             | 177    |      |   | 139    |  
|                                                                                |  |                             |        |      |   |        |  
|Total comprehensive income                                                      |  | $                           | 14,574 |      | $ | 23,235 |  
|                                                                                |  |                             |        |      |   |        |  

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

As part of its business
strategy, the Operating Partnership will from time to time selectively dispose of non-core properties and use the net proceeds for investments or other purposes. The table below sets forth the net operating results and net carrying value of those
assets classified as discontinued operations. The assets classified as discontinued operations comprise 6.6 million square feet of office and industrial properties and 17 apartment units sold during 2005 and the first quarter of 2006. These
long-lived assets relate to disposal activities that were initiated subsequent to the effective date of SFAS No. 144, or that met certain stipulations prescribed by SFAS No. 144. The operations of these assets have been reclassified from
the ongoing operations of the Operating Partnership to discontinued operations, and the Operating Partnership does not or will not have any significant continuing involvement in the operations after the disposal transactions:



|                                                                          |  |                             |       |      |   |       
|------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ------
|                                                                          |  | Three Months EndedMarch 31,
|                                                                          |  | 2006                        |       | 2005
|Rental and other revenues                                                 |  | $                           | 1,177 |      | $ | 15,413
|Operating expenses:                                                       |  |                             |       |      |   |       
|Rental property and other expenses                                        |  |                             | 439   |      |   | 6,239 
|Depreciation and amortization                                             |  |                             | 39    |      |   | 5,601 
|General and administrative                                                |  |                             |      |      |   | 71    
|                                                                          |  |                             |       |      |   |       
|Total operating expenses                                                  |  |                             | 478   |      |   | 11,911
|Interest expense                                                          |  |                             |      |      |   | 226   
|Other income                                                              |  |                             | 9     |      |   | 46    
|                                                                          |  |                             |       |      |   |       
|Income before net gains on sale and impairment of discontinued operations |  |                             | 708   |      |   | 3,322 
|Net gains on sale and impairment of discontinued operations               |  |                             | 1,483 |      |   | 15,724
|                                                                          |  |                             |       |      |   |       
|Total discontinued operations                                             |  | $                           | 2,191 |      | $ | 19,046
|                                                                          |  |                             |       |      |   |       

The net book value of property classified as discontinued operations that was sold during 2005 and
through the quarter ended March 31, 2006 aggregated approximately $444.4 million.



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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



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

Certain other
assets were sold during 2005 that did not meet the criteria of SFAS No. 144 to be classified as discontinued operations due to the magnitude of the Operating Partnerships ongoing management and/or leasing services on behalf of the new
owners.

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 three months ended March 31, 2006 and 2005, there were no properties held for sale which had a carrying value that was greater than fair value less cost to sell; therefore, no impairment losses
related to assets sold or held for sale were recognized in the Consolidated Statements of Income for the three months ended March 31, 2006 and 2005.

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. One land parcel had indicators of impairment
where the carrying value exceeded the sum of estimated undiscounted future cash flows. Therefore, an impairment loss of $2.6 million was recorded in the quarter ended March 31, 2005. No indicators of impairment existed for assets
classified as held for use for the quarter ended March 31, 2006.

The following table includes the major classes of assets and
liabilities of the properties classified as held for sale as of March 31, 2006 and December 31, 2005:



|                                                               |  |               |       |                  |   |         |  
|-------------------------------------------------------------- |  | ------------- | ----- | ---------------- | - | ------- | -
|                                                               |  | March 31,2006 |       | December 31,2005 |  
|Land                                                           |  | $             |      |                  | $ | 25,254  |  
|Land held for development                                      |  |               | 7,377 |                  |   | 10,058  |  
|Buildings and tenant improvements                              |  |               |      |                  |   | 141,532 |  
|Development in process                                         |  |               |      |                  |   | (28     | )
|Accumulated depreciation                                       |  |               |      |                  |   | (32,975 | )
|                                                               |  |               |       |                  |   |         |  
|Net real estate assets                                         |  |               | 7,377 |                  |   | 143,841 |  
|Deferred leasing costs, net                                    |  |               | 1     |                  |   | 2,075   |  
|Accrued straight line rents receivable                         |  |               |      |                  |   | 2,085   |  
|Prepaid expenses and other                                     |  |               | 1     |                  |   | 28      |  
|                                                               |  |               |       |                  |   |         |  
|Total assets                                                   |  | $             | 7,379 |                  | $ | 148,029 |  
|                                                               |  |               |       |                  |   |         |  
|Tenant security deposits, deferred rents and accrued costs (1) |  | $             | 4     |                  | $ | 1,005   |  
|                                                               |  |               |       |                  |   |         |  
|Mortgages payable (2)                                          |  | $             |      |                  | $ | 1,873   |  
|                                                               |  |               |       |                  |   |         |  

---

|(1) | Included in accounts payable, accrued expenses and other liabilities.
|--- | ---------------------------------------------------------------------

|(2) | Included in mortgages and notes payable.
|--- | ----------------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



11. EARNINGS PER COMMON UNIT

The following table sets forth the computation of basic and diluted earnings per unit:



|                                                                                                           |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                           |  | Three Months EndedMarch 31, |       
|                                                                                                           |  | 2006                        |        |   | 2005 |  
|Basic income/(loss) per unit:                                                                              |  |                             |        |   |      |   |        |  
|Numerator:                                                                                                 |  |                             |        |   |      |   |        |  
|Income from continuing operations                                                                          |  | $                           | 12,206 |   |      | $ | 4,050  |  
|Preferred Unit distributions                                                                               |  |                             | (4,724 | ) |      |   | (7,713 | )
|Excess of Preferred Unit redemption costs over carrying value                                              |  |                             | (1,803 | ) |      |   |       |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Income/(loss) from continuing operations attributable to common unitholders                                |  |                             | 5,679  |   |      |   | (3,663 | )
|Income from discontinued operations                                                                        |  |                             | 2,191  |   |      |   | 19,046 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Net income attributable to common unitholders                                                              |  | $                           | 7,870  |   |      | $ | 15,383 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Denominator:                                                                                               |  |                             |        |   |      |   |        |  
|Denominator for basic earnings/(loss) per unit - weighted-average units                                    |  |                             | 58,826 |   |      |   | 59,227 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Basic earnings per unit:                                                                                   |  |                             |        |   |      |   |        |  
|Income/(loss) from continuing operations                                                                   |  | $                           | 0.09   |   |      | $ | (0.06  | )
|Income from discontinued operations                                                                        |  |                             | 0.04   |   |      |   | 0.32   |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Net income                                                                                                 |  | $                           | 0.13   |   |      | $ | 0.26   |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Diluted income/(loss) per unit:                                                                            |  |                             |        |   |      |   |        |  
|Numerator:                                                                                                 |  |                             |        |   |      |   |        |  
|Income from continuing operations                                                                          |  | $                           | 12,206 |   |      | $ | 4,050  |  
|Preferred Unit distributions                                                                               |  |                             | (4,724 | ) |      |   | (7,713 | )
|Excess of Preferred Unit redemption costs over carrying value                                              |  |                             | (1,803 | ) |      |   |       |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Income/(loss) from continuing operations attributable to common unitholders                                |  |                             | 5,679  |   |      |   | (3,663 | )
|Income from discontinued operations                                                                        |  |                             | 2,191  |   |      |   | 19,046 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Net income attributable to common unitholders                                                              |  | $                           | 7,870  |   |      | $ | 15,383 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Denominator:                                                                                               |  |                             |        |   |      |   |        |  
|Denominator for basic earnings/(loss) per unit - weighted-average units                                    |  |                             | 58,826 |   |      |   | 59,227 |  
|Add:                                                                                                       |  |                             |        |   |      |   |        |  
|Employee stock options                                                                                     |  |                             | 1,198  |   |      |   |       |  
|Unvested restricted stock                                                                                  |  |                             | 155    |   |      |   |       |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Denominator for diluted earnings/(loss) per unit  adjusted weighted average units and assumed conversions |  |                             | 60,179 |   |      |   | 59,227 |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Diluted earnings per unit (1):                                                                             |  |                             |        |   |      |   |        |  
|Income/(loss) from continuing operations                                                                   |  | $                           | 0.09   |   |      | $ | (0.06  | )
|Income from discontinued operations                                                                        |  |                             | 0.04   |   |      |   | 0.32   |  
|                                                                                                           |  |                             |        |   |      |   |        |  
|Net income                                                                                                 |  | $                           | 0.13   |   |      | $ | 0.26   |  
|                                                                                                           |  |                             |        |   |      |   |        |  

---

|(1) | Pursuant to SFAS No. 128, income/(loss) from continuing operations, after preferred distributions and Preferred Unit redemption charge, is the controlling number in determining
whether potential Common Units are dilutive or antidilutive. Because such potential Common Units would be antidilutive to loss from continuing operations allocable to common unitholders, diluted earnings per unit is the same as basic earnings per
unit for the three months ended March 31, 2005. Potential Common Units include the Companys stock options, warrants and unvested restricted shares, which would have amounted to approximately 0.6 million additional units in the
three months ended March 31, 2005. In addition, potential Common Units that would have been antidilutive due to the option or warrant exercise price being less than the average stock price of the Company for the periods reported were
approximately 1.0 million and 3.3 million units at March 31, 2006 and 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



12. COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

The Operating
Partnership maintains its cash and cash equivalent investments and its restricted cash at financial institutions. The combined account balances at each institution typically exceed 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.

Land Leases

Certain properties in the Operating Partnerships wholly owned portfolio are subject to land leases expiring through 2082. Rental payments on these
leases are adjusted annually based on either the consumer price index (CPI) or on a pre-determined schedule. Land leases subject to increases under a pre-determined schedule are accounted for under the straight-line method.

For three properties owned at March 31, 2006, the Operating Partnership has the option to purchase the leased land during the lease term at the
greater of 85.0% of appraised value or approximately $30,000 per acre.

As of March 31, 2006, the Operating Partnerships
payment obligations for future minimum payments on operating leases (which include scheduled fixed increases, but exclude increases based on CPI) were as follows:



|                  |  |   |       
|----------------- |  | - | ------
|Remainder of 2006 |  | $ | 773   
|2007              |  |   | 1,011 
|2008              |  |   | 1,027 
|2009              |  |   | 1,067 
|2010              |  |   | 1,085 
|Thereafter        |  |   | 35,787
|                  |  |   |       
|                  |  | $ | 40,750
|                  |  |   |       

Capital Expenditures

The Operating Partnership incurs capital expenditures to lease space to its customers, maintain the quality of its existing properties and build new properties. Capital expenditures include tenant improvements,
building improvements, new building completion costs and land infrastructure costs. Tenant improvements are the costs required to customize space for the specific needs of first-generation and second-generation customers. Building improvements are
recurring capital costs not related to a specific customer to maintain existing buildings. New building completion costs are expenses for the construction of new buildings. Land infrastructure costs are expenses to prepare development land for
future development activity that is not specifically related to a single building. Excluding recurring capital expenditures for leasing costs and tenant improvements and for normal building improvements, the Operating Partnerships expected
future capital expenditures for started and/or committed new development projects as of November 9, 2006 are approximately $260 million, which includes several projects started or committed after December 31, 2005. A significant
portion of these future expenditures are currently subject to binding contractual arrangements.

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 Condensed
Consolidated Financial Statements.



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



12. COMMITMENTS AND CONTINGENCIES - Continued

Joint Ventures

Most of the Operating
Partnerships joint venture agreements 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.

Guarantees and Other Obligations

The following is a tabular presentation and related discussion of various guarantees and other obligations as of March 31, 2006:



|                                                  |  |                                       |  |                         |       |                       |                       
|------------------------------------------------- |  | ------------------------------------- |  | ----------------------- | ----- | --------------------- | ----------------------
|Entity or Transaction                             |  | Type of Guarantee or Other Obligation |  | AmountRecorded/Deferred |       | Date GuaranteeExpires
|Des Moines Joint Ventures (1),(6)                 |  | Debt                                  |  | $                       |      |                       | Various through11/2015
|RRHWoods, LLC (2),(7)                             |  | Debt                                  |  | $                       |      |                       | 8/2006                
|Plaza Colonnade(2),(8)                            |  | Indirect Debt (4)                     |  | $                       | 51    |                       | 12/2009               
|SF-HIW Harborview, LP (3),(5)                     |  | Rent and tenant improvement (4)       |  | $                       |      |                       | 9/2007                
|Eastshore (Capital One) (3),(9)                   |  | Rent (4)                              |  | $                       | 7,351 |                       | 11/2007               
|Industrial (3),(10)                               |  | Rent(4)                               |  | $                       | 372   |                       | 12/2006               
|Industrial Environmental(3),(10)                  |  | Environmental costs (4)               |  | $                       | 125   |                       | UntilRemediated       
|Highwoods DLF 97/26 DLF 99/32, LP(2),(11)         |  | Rent (4)                              |  | $                       | 798   |                       | 6/2008                
|RRHWoods, LLC and Dallas County Partners (2),(12) |  | Indirect Debt (4)                     |  | $                       | 104   |                       | 6/2014                
|RRHWoods, LLC (2),(14)                            |  | Indirect Debt (4)                     |  | $                       | 63    |                       | 11/2009               
|HIW-KC Orlando, LLC (3),(13)                      |  | Rent (4)                              |  | $                       | 491   |                       | 4/2011                
|HIW-KC Orlando, LLC (3),(13)                      |  | Leasing Costs                         |  | $                       | 528   |                       | 12/2024               

---

|(1) | Represents guarantees entered into prior to the January 1, 2003 effective date of FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (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 because 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 for these guarantees assumes the Operating Partnership pays the maximum possible liability under the guaranty with no
offsets or reductions. With respect to the rent guarantee, if the space is leased, it assumes the existing tenant defaults at March 31, 2006 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 to the Consolidated Financial Statements in the Operating Partnerships 2005 Annual Report on Form 10-K, in 2002 the Operating Partnership
granted its partner in SF-HIW Harborview, LP a put option and entered into a master lease arrangement for five years covering vacant space in the building owned by the partnership. The Operating Partnership also 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 was $0.6 million as of March 31, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



12. COMMITMENTS AND CONTINGENCIES - Continued



|(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 have been required to make under the guarantees was $19.4 million at March 31, 2006. 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 March 31, 2006 averaged approximately 3.2%, and mature in 2015. A guarantee of $5.5 million will expire upon an industrial building becoming 95% leased or when the related loan matures. As of
March 31, 2006, this building was 87.0% leased. The remaining $5.3 million in guarantees relate to loans that were refinanced by the Des Moines joint ventures on July 31, 2006 with a new non-recourse loan. As a result, the
guarantees totaling $5.3 million were eliminated. If the joint ventures are unable to repay the outstanding balances under the loans that remain outstanding, the Operating Partnership will be required, under the terms of the agreements, to repay the
outstanding balances. 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 partners. The joint ventures currently generate sufficient cash flow to
cover the debt service required by the loans.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 the Operating Partnerships proportionate share. The property
collateralizing the bonds is 100% 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 Consolidated Balance
Sheet.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Effective August 1, 2006, RRHWoods, LLC replaced its guarantee of $6.2 million described above with a $3.1
million guarantee and master lease agreement in favor of a new bank that will provide a replacement of the $6.2 million letter of credit. The term of the letter of credit and corresponding master lease is four years. The agreement requires the
Operating Partnership to pay under a contingent master lease if the cash flows from the building securing the letter of credit do not cover at least 50% of the minimum debt service. The letters of credit along with the building secure the industrial
revenue bonds used to finance the property. These bonds mature in 2015. Recourse provisions exist such that the Operating Partnership could recover some or all of the payments made under the letter of credit guarantee from the joint ventures
assets. At September 30, 2006, the Operating Partnership recorded a $0.7 million deferred charge included in other assets and liabilities on its Consolidated Balance Sheet with respect to this guarantee. The Operating Partnerships
maximum potential exposure under this guarantee is $3.1 million.

|(8) | The Plaza Colonnade, LLC joint venture has a $50 million non-recourse mortgage that bears a fixed interest rate of 5.7%, requires monthly principal and interest payments and matures
on January 31, 2017. The Operating Partnership and its joint venture partner have signed a contingent master lease limited to 30,772 square feet for five years. The Operating Partnerships maximum exposure under this master lease was
$1.6 million at March 31, 2006. However, the current occupancy level of the building is sufficient to cover all debt service requirements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 was obligated to build certain public improvements. The net bond proceeds were $18.1 million and
will be used for project and debt service costs. The joint venture has recorded this obligation on its balance sheet. Cash proceeds from tax increment financing revenue generated by the building and its tenants are expected to be sufficient in the
future to pay the required debt service on the bonds.

|(9) | As more fully described in Note 3 to the Consolidated Financial Statements in our 2005 Annual Report on Form 10-K, 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 (through November 2007). The Operating
Partnerships maximum exposure to loss under these agreements as of March 31, 2006 was $7.4 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. This transaction had been accounted for as a financing transaction and was recorded as a completed sale transaction in the third quarter of 2005 when the maximum exposure to loss
under these guarantees became less than the related deferred gain; gain is being recognized beginning in the third quarter of 2005 as the maximum exposure under the guarantees is reduced.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



12. COMMITMENTS AND CONTINGENCIES - Continued



|(10) | 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
feet of the industrial property, which is occupied by two tenants. The total gain as a result of the transaction was $6.0 million. Because the terms of the notes required only interest payments to be made by the buyer until 2005, in accordance with
SFAS No. 66, the entire $6.0 million gain was deferred and offset against the note receivable on the balance sheet and the cost recovery method was being used for this transaction. On June 30, 2005, the Operating Partnership agreed to
modify the note receivable to reduce the amount due by $0.3 million. The modified note balance and all accrued interest, aggregating $6.2 million, was paid in full on July 1, 2005. Because the maximum exposure to loss from the rent
guarantee at July 1, 2005 was $0.8 million, that amount of gain was deferred and $4.3 million of the deferred gain was recognized at that date. As of March 31, 2006, $0.4 million remains deferred, which represents the
Operating Partnerships contingent liability with respect to the guarantee. Additionally, as part of the sale, the Operating Partnership agreed to indemnify and hold the buyer harmless with respect to environmental concerns on the property of
up to $0.1 million. As a result, $0.1 million of the gain was deferred at the time of sale and will remain deferred until the environmental concerns are remediated.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | 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 on 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 included allowing the tenant to vacate the premises on January 1, 2006, reducing the rent obligation by 50% and converting the net lease to a
full service lease with the tenant liable for 50% of these costs at that time. In turn, the Operating Partnership agreed to compensate the joint venture for any economic losses incurred as a result of these lease modifications. As of
March 31, 2006, the Operating Partnership has recorded approximately $0.8 million in other liabilities and $0.8 million as a deferred charge in other assets on its Consolidated Balance Sheet to account for the lease guarantee. 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 regard to this guarantee as of March 31, 2006 is $1.1 million. No recourse provisions exist to enable the Operating Partnership to recover any amounts paid to the joint venture under this lease guarantee arrangement.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | 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 ten-year loan from a lender. As an inducement to make the loan at a 6.3% long-term rate, the Operating Partnership and its partner agreed to master lease the vacant space and each guaranteed $0.8 million of the debt with limited recourse. As
leasing improves, the guarantee obligations under the loan agreement diminish. As of March 31, 2006, no master lease payments were necessary. The Operating Partnership currently has recorded $0.1 million in other liabilities and $0.1
million as a deferred charge included in other assets on its Condensed 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 $3.2 million as of March 31, 2006. The likelihood of the Operating Partnership paying on its $0.8 million guarantee is remote since the joint venture currently satisfies the minimum debt coverage
ratio and should the Operating Partnership have to pay its portion of the guarantee, it would be entitled to recover the $0.8 million from other joint venture assets.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | 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 the initial leasing costs, originally estimated at $4.1 million, for approximately 11% of the total square feet of the property owned by the joint venture.
The Operating Partnership has paid $0.1 million in the first quarter of 2006, $1.1 million in 2005 and $2.4 million in 2004 under this guarantee, and $0.5 million is estimated to remain under the guarantee at March 31, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



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##### Table of Contents

HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



12. COMMITMENTS AND CONTINGENCIES - Continued



|(14) | In connection with the RRHWoods, LLC joint venture, the Operating Partnership and its partner each guaranteed $2.9 million to a bank. This guarantee expires in November 2009 and can
be renewed, at the joint ventures option, through November 2011. The bank provides a letter of credit securing industrial revenue bonds, which mature in November 2015. The joint ventures industrial building secures the bonds. 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 to recover from the joint ventures assets. The property
collateralizing the bonds generates sufficient cash flow to cover the debt service required by the bond financing. In addition to the direct guarantee, the Operating Partnership is committed to a master lease for 50% of the debt service should the
cash flow from the property not be able to pay the debt service of the bonds. As a result of this master lease, the Operating Partnership has recorded approximately $60,000 in other liabilities and as a deferred charge in other assets on its
Consolidated Balance Sheet at March 31, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Currently, RRHWoods, LLC is developing a new office building. In
October 2006, the joint venture entered into a commitment to finance the development with a $4.1 million ten-year loan from a lender. As part of the agreement, the Operating Partnership and its partner agreed to each guarantee $0.7 million until the
building becomes 93.0% leased or when the related loan matures. Under the terms of the agreement, the Operating Partnership will be required to pay on its guarantee should the joint venture be unable to repay the outstanding loan balance. However,
the joint venture currently generates sufficient cash flows to cover the debt service required by the loan. Although the Operating Partnership is still evaluating the impact of the guarantee, the Operating Partnership does not expect a significant
effect on its financial condition and results of operations.

Litigation, Claims and Assessments

The Operating Partnership is from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of its
business. The Operating Partnership regularly assesses the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that the Operating Partnership has incurred
or will incur a loss and the loss or range of loss can be reasonably estimated, reserves are recorded in the Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range
of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or assessments is expected to have a material adverse effect on the Operating
Partnerships business, financial condition or results of operations.

In June, August, September and October 2006, the Operating
Partnership received assessments for state excise taxes and related interest amounting to approximately $4.5 million, related to periods 2002 through 2004, and may receive additional assessments for later periods, which the Operating Partnership
estimates could aggregate an additional approximate $1.1 million. The Operating Partnership believes that it is not subject to such taxes and intends to vigorously dispute the assessment. Based on advice of counsel, the Operating Partnership
currently believes that any exposure for such taxes is not probable, and accordingly no provision for such taxes is reflected in its financial statements.

As previously disclosed, the SECs Division of Enforcement issued a confidential formal order of investigation in connection with the Companys previous restatement of its financial results. In November
2006, the SECs Division of Enforcement informed the Company that this investigation has been closed, and that it is not taking any action with respect to this matter.



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HIGHWOODS REALTY LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(tabular
dollar amounts in thousands, except per unit data)



13. 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 within the various property types.

All operations are within
the United States and, at March 31, 2006, no tenant of the Wholly Owned Properties comprised more than 6.9% of the Operating Partnerships consolidated revenues. The following table summarizes the rental income, net operating income
and assets for each reportable segment for the three months ended March 31, 2006 and 2005:



|                                                                                                                                |  |                             |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                |  | Three Months EndedMarch 31, |          
|                                                                                                                                |  | 2006                        |           |   | 2005             |  
|Rental and Other Revenues: (1)                                                                                                  |  |                             |           |   |                  |   |           |  
|Office segment                                                                                                                  |  | $                           | 85,861    |   |                  | $ | 84,366    |  
|Industrial segment                                                                                                              |  |                             | 7,375     |   |                  |   | 7,350     |  
|Retail segment                                                                                                                  |  |                             | 10,738    |   |                  |   | 10,183    |  
|Apartment segment                                                                                                               |  |                             | 275       |   |                  |   | 267       |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|Total Rental and Other Revenues                                                                                                 |  | $                           | 104,249   |   |                  | $ | 102,166   |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|Net Operating Income: (1)                                                                                                       |  |                             |           |   |                  |   |           |  
|Office segment                                                                                                                  |  | $                           | 54,101    |   |                  | $ | 54,765    |  
|Industrial segment                                                                                                              |  |                             | 5,706     |   |                  |   | 5,464     |  
|Retail segment                                                                                                                  |  |                             | 7,281     |   |                  |   | 6,946     |  
|Apartment segment                                                                                                               |  |                             | 164       |   |                  |   | 122       |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|Total Net Operating Income                                                                                                      |  |                             | 67,252    |   |                  |   | 67,297    |  
|Reconciliation to income before disposition of property, minority interest and equity in earnings of unconsolidated
affiliates: |  |                             |           |   |                  |   |           |  
|Depreciation and amortization                                                                                                   |  |                             | (28,705   | ) |                  |   | (29,649   | )
|Interest expense                                                                                                                |  |                             | (25,599   | ) |                  |   | (27,888   | )
|Impairment of assets held for use                                                                                               |  |                             |          |   |                  |   | (2,572    | )
|General and administrative expense                                                                                              |  |                             | (8,757    | ) |                  |   | (8,167    | )
|Interest and other income                                                                                                       |  |                             | 1,834     |   |                  |   | 1,961     |  
|Loss on debt extinguishment                                                                                                     |  |                             |          |   |                  |   | (27       | )
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|Income before disposition of property, minority interest and equity in earnings of unconsolidated affiliates                    |  | $                           | 6,025     |   |                  | $ | 955       |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|                                                                                                                                |  |                            
|                                                                                                                                |  | March 31,2006               |           |   | December31, 2005 |  
|Total Assets: (2)                                                                                                               |  |                             |           |   |                  |   |           |  
|Office segment                                                                                                                  |  | $                           | 2,166,315 |   |                  | $ | 2,243,116 |  
|Industrial segment                                                                                                              |  |                             | 207,705   |   |                  |   | 226,199   |  
|Retail segment                                                                                                                  |  |                             | 254,371   |   |                  |   | 256,730   |  
|Apartment segment                                                                                                               |  |                             | 20,860    |   |                  |   | 19,538    |  
|Corporate and other                                                                                                             |  |                             | 162,038   |   |                  |   | 156,275   |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  
|Total Assets                                                                                                                    |  | $                           | 2,811,289 |   |                  | $ | 2,901,858 |  
|                                                                                                                                |  |                             |           |   |                  |   |           |  

---

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

|(2) | Real estate and other assets held for sale are included in this table according to the segment type.
|--- | ----------------------------------------------------------------------------------------------------



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the accompanying Condensed Consolidated Financial Statements
and related notes contained elsewhere in this Quarterly Report.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this Quarterly Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section. 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;
| | - |  | --------------------------------------------------------------------------------------------



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



| |  |  | we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or to repay or refinance
outstanding debt upon maturity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in
Business  Risk Factors set forth in our 2005 Annual Report.

Given these uncertainties, you should not place undue
reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements 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
fully integrated, self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for our properties and for third parties. The Company conducts substantially all of its
activities through the Operating Partnership. Other than 22.4 acres of undeveloped land, 30 apartment units and the Companys interest in the Kessinger/Hunter, LLC and 4600 Madison Associates, LLC joint ventures, all of the Companys
assets are owned directly or indirectly by the Operating Partnership. As of March 31, 2006, the Companys wholly owned assets included: 348 in-service office, industrial and retail properties; 96 apartment units; 896 acres of
undeveloped land suitable for future development, of which 485 acres are considered core holdings; and an additional 12 properties under development. The Company is based in Raleigh, North Carolina, and its properties and development land are
located in Florida, Georgia, Iowa, Kansas, Maryland, Missouri, North Carolina,



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South Carolina, Tennessee and Virginia. Additional information about the Company can be found on its website at
www.highwoods.com. Information on the Companys website is not part of this Quarterly Report.

Results of Operations

Although we operate in the industrial, retail and apartment segments, our operating results depend heavily on our office segment. Furthermore, since more
than a majority of our office properties are located in Florida, Georgia and North Carolina, economic growth in those states is and will continue to be an important determinative factor in predicting our future operating results. Accordingly, most
of the analysis and comments below focus on our office segment properties.

The key components affecting our rental revenue stream are
dispositions, acquisitions, new developments placed in service, average occupancy and rental rates. 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. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service
directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the
expected lease expirations of our portfolio. 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. Whether or not our
rental revenue tracks average occupancy proportionally depends upon whether rents under new leases signed are higher or lower than the rents under the previous leases.

Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. Rental property expenses are expenses associated with our ownership
and operation of rental properties and include variable expenses, such as common area maintenance and utilities, and relatively fixed expenses, such as property taxes and insurance. Some of these variable expenses may be lower when our average
occupancy declines. Fixed expenses remain relatively constant regardless of average occupancy. 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 over fixed lives. General and administrative expenses, net of amounts capitalized, consist primarily of management and employee salaries and other personnel
costs, corporate and division overhead and long-term incentive compensation. Interest expense depends primarily upon the amount of our borrowings, the weighted average interest rates on our debt and the amount of interest capitalized on development
projects.

We record in equity in earnings of unconsolidated affiliates our proportionate share of net income or loss, adjusted
for purchase accounting effects, of our unconsolidated joint ventures.

Additionally, 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 that qualify as discontinued operations under SFAS No. 144 separately as income from discontinued
operations. As a result, we separately record revenues and expenses from these qualifying properties. As also required by SFAS No. 144, prior period results are reclassified to reflect the operations for such properties in discontinued
operations.

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 the customer for the space. Lease incentives are costs paid to or on behalf of tenants to induce them to enter into leases and that do not relate to customizing the space for the
tenants specific needs. 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 expenditures than reletting to new customers. However, market conditions such as supply of available space in 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 initial term of the lease and building improvements are depreciated over



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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, excluding capital gains, to its stockholders. We generally use rents received from customers and proceeds from sales of non-core development land to fund our operating expenses, recurring
capital expenditures and unitholder distributions. To fund property acquisitions, development activity or building renovations, we may sell other assets and may incur debt from time to time. Our debt generally consists of mortgage debt, unsecured
debt securities and borrowings under our revolving credit facility.

Our revolving credit facility and the indenture governing our
outstanding long-term unsecured debt securities 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 unitholder
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. Any unwaived event of
default 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.

To generate additional capital to fund our growth and other strategic initiatives and to lessen the risks typically associated with owning all of the
interests in a property, we may sell or contribute some of our properties to joint ventures. When we create a joint venture with a strategic partner, we usually contribute one or more properties and/or vacant land to a newly formed entity in which
we retain an equal or less than a majority interest. In exchange for our interest in the joint venture, we generally receive cash from the partner and retain some or 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. Such borrowings are
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.

We have historically
also sold additional Common Units or Preferred Units to fund additional growth or to reduce our debt, but we have limited those efforts since 1998 because funds generated from our capital recycling program in recent years have provided sufficient
funds to satisfy our liquidity needs. In addition, we have recently used funds from our capital recycling program to redeem Common Units and Preferred Units for cash.



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RESULTS OF OPERATIONS

In accordance with SFAS No. 144 and
as described in Note 10 to the Condensed 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 2005 and the first quarter of 2006 or
were held for sale at March 31, 2006. Accordingly, any properties sold during 2005 and the first quarter of 2006 that did not meet certain conditions as stipulated by SFAS No. 144 were not reclassified to discontinued operations.

The following table sets forth information regarding our unaudited results of operations for the three months ended
March 31, 2006 and 2005 (in millions):



|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | - | -------- | - | ----- | ----------- |  | - | ----- | - |  | ------ | --
|                                                                                                             |  | Three Months EndedMarch 31, |       |   | $ Change |   |       | % of Change | 
|                                                                                                             |  | 2006                        |       |   | 2005     |   |       |            
|Rental and other revenues                                                                                    |  | $                           | 104.2 |   |          | $ | 102.2 |             |  | $ | 2.0   |   |  | 2.0    | % 
|Operating expenses:                                                                                          |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Rental property and other expenses                                                                           |  |                             | 37.0  |   |          |   | 34.9  |             |  |   | 2.1   |   |  | 6.0    |   
|Depreciation and amortization                                                                                |  |                             | 28.7  |   |          |   | 29.6  |             |  |   | (0.9  | ) |  | (3.0   | ) 
|Impairment of assets held for use                                                                            |  |                             |      |   |          |   | 2.6   |             |  |   | (2.6  | ) |  | (100.0 | ) 
|General and administrative                                                                                   |  |                             | 8.7   |   |          |   | 8.2   |             |  |   | 0.5   |   |  | 6.1    |   
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Total operating expenses                                                                                     |  |                             | 74.4  |   |          |   | 75.3  |             |  |   | (0.9  | ) |  | (1.2   | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Interest expense:                                                                                            |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Contractual                                                                                                  |  |                             | 23.9  |   |          |   | 25.4  |             |  |   | (1.5  | ) |  | (5.9   | ) 
|Amortization of deferred financing costs                                                                     |  |                             | 0.8   |   |          |   | 0.8   |             |  |   |      |   |  |       |   
|Financing obligations                                                                                        |  |                             | 0.9   |   |          |   | 1.7   |             |  |   | (0.8  | ) |  | (47.1  | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                             |  |                             | 25.6  |   |          |   | 27.9  |             |  |   | (2.3  | ) |  | (8.2   | ) 
|Other income:                                                                                                |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Interest and other income                                                                                    |  |                             | 1.8   |   |          |   | 2.0   |             |  |   | (0.2  | ) |  | (10.0  | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                             |  |                             | 1.8   |   |          |   | 2.0   |             |  |   | (0.2  | ) |  | (10.0  | ) 
|Income before disposition of property, minority interest and equity in earnings of unconsolidated affiliates |  |                             | 6.0   |   |          |   | 1.0   |             |  |   | 5.0   |   |  | 500.0  |   
|                                                                                                             |  |                             |       |  
|Gains on disposition of property, net                                                                        |  |                             | 4.3   |   |          |   | 0.4   |             |  |   | 3.9   |   |  | 975.0  |   
|Minority interest                                                                                            |  |                             | (0.1  | ) |          |   |      |             |  |   | (0.1  | ) |  | (100.0 | ) 
|Equity in earnings of unconsolidated affiliates                                                              |  |                             | 2.0   |   |          |   | 2.7   |             |  |   | (0.7  | ) |  | (25.9  | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Income from continuing operations                                                                            |  |                             | 12.2  |   |          |   | 4.1   |             |  |   | 8.1   |   |  | 197.6  |   
|Discontinued operations:                                                                                     |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Income from discontinued operations                                                                          |  |                             | 0.7   |   |          |   | 3.3   |             |  |   | (2.6  | ) |  | (78.8  | ) 
|Gains, net of impairments, on sales of discontinued operations                                               |  |                             | 1.5   |   |          |   | 15.7  |             |  |   | (14.2 | ) |  | (90.4  | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|                                                                                                             |  |                             | 2.2   |   |          |   | 19.0  |             |  |   | (16.8 | ) |  | (88.4  | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Net income                                                                                                   |  |                             | 14.4  |   |          |   | 23.1  |             |  |   | (8.7  | ) |  | (37.6  | ) 
|Distribution on Preferred Units                                                                              |  |                             | (4.7  | ) |          |   | (7.7  | )           |  |   | 3.0   |   |  | 39.0   |   
|Excess of Preferred Unit redemption cost over carrying value                                                 |  |                             | (1.8  | ) |          |   |      |             |  |   | (1.8  | ) |  | (100.0 | ) 
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   
|Net income available for common unitholders                                                                  |  | $                           | 7.9   |   |          | $ | 15.4  |             |  | $ | (7.5  | ) |  | (48.7  | )%
|                                                                                                             |  |                             |       |   |          |   |       |             |  |   |       |   |  |        |   

Rental and Other Revenues

The increase in rental and other revenues from continuing operations was primarily the result of higher average occupancy in 2006 as compared to 2005 and
the contribution from developed properties placed in service in the later part of 2005. These increases were partly offset by a decrease in lease termination fees from 2005 to 2006 and the disposition of certain properties that did not meet the
criteria to be classified as discontinued operations.

Operating Expenses

Rental and other operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other
property-related expenses) increased $2.1 million in the first quarter of 2006 compared to



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the first quarter of 2005, primarily as a result of general inflationary increases in certain operating expenses, such as
salaries, benefits, utility costs and real estate taxes, and expenses of developed properties placed in service in the second half of 2005.

In the first quarter of 2005, an impairment loss of $2.6 million was recognized in connection with 46 acres of land that did not meet the criteria to be classified as held for sale, but whose carrying value was greater than its fair value.

Interest Expense

The decrease
in contractual interest was primarily due to a decrease in average borrowings from $1.6 billion in the three months ended March 31, 2005 to $1.4 billion in the three months ended March 31, 2006, partially offset by an increase in
weighted average interest rates on outstanding debt from 6.6% in the three months ended March 31, 2005 to 6.9% in the three months ended March 31, 2006. In addition, capitalized interest in 2006 was approximately $0.2 million
higher compared to 2005 due to increased development activity and higher average construction and development costs.

The decrease in
interest from financing obligations was a result of the completed sale of three buildings in Richmond, Virginia (the Eastshore transaction) in the third quarter of 2005 and the elimination of the related financing obligation.

Gains on Disposition of Property; Minority Interest; Equity in Earnings of Unconsolidated Affiliates

Net gains on dispositions of properties not classified as discontinued operations were $4.3 million in the three months ended March 31, 2006
compared to $0.4 million for the three months ended March 31, 2005. Gains are dependent on the specific assets sold, their historical cost basis and other factors, and can vary significantly from period to period.

Minority interest in continuing operations, after Preferred Unit distributions, was $(0.1) million of income for the three months ended
March 31, 2006 due to the consolidation of Markel as of January 1, 2006 as a result of the adoption of EITF Issue No. 04-5, as described in Note 1 to the Consolidated Financial Statements. We had no minority interest in
continuing operations for the three months ended March 31, 2005.

The decrease in equity in earnings from continuing operations
of unconsolidated affiliates was primarily a result of the Plaza Colonnade, LLC joint venture, which provided an additional $0.3 million in earnings during the first quarter of 2005 due to the cumulative effect of applying FAS 67 and adjustments for
capitalized interest. In addition, the Markel joint venture contributed $0.2 million to earnings during the first quarter of 2005; the accounting for this joint venture changed from equity method to consolidation effective January 1, 2006,
as described in Note 1 to the Consolidated Financial Statements. Furthermore, the RRHWoods joint venture provided $0.2 million lower earnings during the first quarter of 2006 as opposed to the first quarter of 2005 due to an increase in operating
expenses, a decrease in recovery income and an increase in interest expense resulting from rising interest rates on variable rate loans and interest expense on $7.6 million of additional borrowings.

Discontinued Operations

In accordance with
SFAS No. 144, we classified net income of $2.2 million and $19.0 million as discontinued operations for the three months ended March 31, 2006 and 2005, respectively. These amounts relate to 6.6 million square feet of office and
industrial property and 17 apartment units sold during 2005 and the first quarter of 2006. These amounts include net gains on the sale of these properties of $1.5 million and $15.7 million in the three months ended March 31, 2006 and 2005,
respectively.

Net Income

We
recorded net income in the three months ended March 31, 2006 of $14.4 million, compared to $23.1 million in the three months ended March 31, 2005, resulting from the various factors described above.



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Preferred Distributions

Preferred distributions decreased $3.0 million due to Preferred Unit redemptions of $130 million and $50 million in the third quarter of 2005 and the first quarter of 2006, respectively. The excess of redemption cost
over carrying value of $1.8 million in 2006 relates to the $50 million Preferred Unit redemption in that quarter.

Net Income Available for Common
Unitholders

We recorded net income available for Common Unitholders in the three months ended March 31, 2006 of $7.9
million, compared to $15.4 million in the three months ended March 31, 2005; this decrease is the net result of the various factors described above.



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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 our cash flows in the first three months of 2006 as compared to the first three months of 2005 (in thousands):



|                                      |  |                             |          |   |      |   |         |        |  |   |          |  
|------------------------------------- |  | --------------------------- | -------- | - | ---- | - | ------- | ------ |  | - | -------- | -
|                                      |  | Three Months EndedMarch 31, |          |   |      |  
|                                      |  | 2006                        |          |   | 2005 |   |         | Change | 
|Cash Provided By Operating Activities |  | $                           | 39,850   |   |      | $ | 30,850  |        |  | $ | 9,000    |  
|Cash Provided By Investing Activities |  |                             | 124,912  |   |      |   | 22,697  |        |  |   | 102,215  |  
|Cash Used In Financing Activities     |  |                             | (142,061 | ) |      |   | (22,565 | )      |  |   | (119,496 | )
|                                      |  |                             |          |   |      |   |         |        |  |   |          |  
|Total Cash Flows                      |  | $                           | 22,701   |   |      | $ | 30,982  |        |  | $ | (8,281   | )
|                                      |  |                             |          |   |      |   |         |        |  |   |          |  

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 above 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 consists of cash received upon the sale of properties and distributions of capital from our joint ventures.

Cash used in financing activities generally relates to distributions on Common Units, incurrence and repayment of debt and sales, repurchases or redemptions 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
credit facility for working capital purposes, which means that during any given period, in order to minimize interest expense associated with balances outstanding under our revolving credit facility, we will likely record significant repayments and
borrowings under our revolving credit facility.

The increase of $9.0 million in cash provided by operating activities in the first quarter
of 2006 compared to the first quarter of 2005 was primarily the result of a $14.9 million increase from net changes in operating assets and liabilities partially offset by lower cash flows from net income adjusted for changes in depreciation and
gains and impairments.

The increase of $102.2 million in cash provided by investing activities in the first quarter of 2006 compared to
the first quarter of 2005 was primarily a result of a $103.9 million increase in proceeds from dispositions of real estate assets, partially offset by an a $0.9 million increase in additions to real estate assets and deferred leasing costs.

The increase of $119.5 million in cash used in financing activities in the first quarter of 2006 compared to the first quarter of 2005 was
primarily the result of $50.0 million used to redeem Preferred Units in the first quarter of 2006, a net $22.5 million reduction in the revolving credit facility, and a $48.6 million reduction in secured mortgage debt.

In 2006, we continued our capital recycling program of selectively disposing of non-core properties in order to use the net proceeds for investments or
other purposes. At March 31, 2006, we had 34.4 acres of land classified as held for sale pursuant to SFAS No. 144 with a carrying value of $7.4 million.



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Capitalization

Our total indebtedness at March 31, 2006 was approximately $1.5 billion and was comprised of $712 million of secured indebtedness with a weighted average interest rate of 6.9% and $738 million of unsecured
indebtedness with a weighted average interest rate of 6.8%. As of March 31, 2006, our outstanding mortgages and notes payable were secured by real estate assets with an aggregate undepreciated book value of approximately $1.2 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.

Contractual Obligations

See our 2005 Annual
Report on Form 10-K for a table setting forth a summary of our known contractual obligations at December 31, 2005.

Refinancings and Preferred
Unit Redemptions in 2005 and 2006

During 2005 and the first quarter of 2006, we paid off $196.2 million of outstanding loans, excluding
any normal debt amortization and the refinancings of the credit facility and bank term loans, which included $176.2 million of secured debt with a weighted average interest rate of 6.9% and $20 million of unsecured floating rate debt with an
interest rate of 4.9%. Included in the $176.2 million was $89.8 million of floating rate secured debt. Approximately $350 million of real estate assets (based on undepreciated cost basis) became unencumbered after paying off the secured debt. We
also used some of the proceeds from our disposition activity to redeem, in August 2005 and February 2006, all of our outstanding Series D Preferred Units and 3,200,000 of our outstanding Series B Preferred Units, aggregating $180.0 million plus
accrued distributions. These reductions in outstanding debt and Preferred Unit balances were funded primarily from proceeds from property dispositions that closed in 2005 and 2006. In connection with the redemption of Preferred Units, the excess of
the redemption cost over the net carrying amount of the redeemed units was recorded as a reduction to net income available for common unitholders. These reductions amounted to $4.3 million and $1.8 million for the third quarter of 2005 and first
quarter of 2006, respectively.

Unsecured Indebtedness

In February 2006, we obtained waivers from the lenders under our previous $250 million unsecured revolving credit facility and our previous bank term loan related to timely reporting to the lenders of annual and
quarterly financial statements. These waivers did not change the economic terms of the loans.

On May 1, 2006, we obtained a new
$350 million, three-year unsecured revolving credit facility from Bank of America, N.A. We used $273 million of proceeds from the new revolving credit facility, together with available cash, to pay off the remaining outstanding balance of $178
million under our previous revolving credit facility and the $100 million bank term loan, both of which were terminated on May 1, 2006. In connection with these payoffs, we wrote off approximately $0.5 million in unamortized deferred
financing costs in the second quarter of 2006 as a loss on debt extinguishment.

On August 8, 2006, our revolving credit facility
was amended and restated as part of a syndication with a group of 15 banks. The revolving credit facility was also upsized from $350 million to $450 million. Our revolving credit facility is initially scheduled to mature on May 1, 2009.
Assuming no default exists, we have an option to extend the maturity date by one additional year and, at any time prior to May 1, 2008, may request increases in the borrowing availability under the credit facility by up to an additional
$50 million. The interest rate is LIBOR plus 80 basis points and the annual base facility fee is 20 basis points.

Our revolving credit
facility requires us to comply with customary operating covenants and various financial and operating ratios, which we believe are less stringent and more appropriately reflect our current and future business prospects than the requirements under
our previous revolving credit facility. While we expect to remain in compliance with these provisions of our revolving credit facility, depending upon our future operating performance and property and financing transactions and general economic
conditions, we cannot assure you that no circumstance will arise in the future that would render us unable to comply with any of these covenants.



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If any of our lenders ever accelerated outstanding debt due to an event of default, we would not be able
to borrow any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations. If our debt cannot be paid, refinanced or extended at maturity or upon acceleration, 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 would 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 would restrict our ability to take actions that would otherwise be in our unitholders best interest, such as funding
new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions.

As of the end of the
period covered by this Quarterly Report, the Operating Partnership had not satisfied the requirement under the indenture governing its outstanding notes to file timely SEC reports. Under the indenture, the notes may be accelerated if the trustee or
25% of the holders provide written notice of a default and such default remains uncured after 60 days. If the Operating Partnership failed to file its delinquent SEC reports prior to expiration of the 60-day cure period after receipt of any such
default notice, the lender under our revolving credit facility would also have the ability to accelerate amounts outstanding under the revolving credit facility. Neither the trustee nor any holder sent us any such default notice. During the period
covered by this Quarterly Report, the Operating Partnership was otherwise in compliance with all other covenants under the indenture and was current on all payments required thereunder. As of the date of this filing, the Operating Partnership has
filed all such delinquent SEC reports and is now in compliance with all covenants under the indenture.

Current and Future Cash Needs

Rental revenue, together with construction management, maintenance, leasing and management fees, is our 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 improvement costs and lease commissions
related to any releasing of vacant space.

We expect to fund our short-term liquidity needs through a combination of available working
capital, property dispositions, cash flows from operations and the following:



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



| |  |  | borrowings under our revolving credit facility (which has up to $182.8 million of availability as of November 9, 2006) and under our existing $50 million secured revolving
construction loan (all of which was available at November 9, 2006);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
would have the net effect of generating additional capital through such sale or contributions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the issuance of secured debt; and
| | - |  | ---------------------------------



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

Our long-term
liquidity needs generally include the funding of capital expenditures to lease space to our customers, maintain the quality of our existing properties and build new properties. Capital expenditures include tenant improvements, building improvements,
new building completion costs and land infrastructure costs. Tenant improvements are the costs required to customize space for the specific needs of first-generation and second-generation customers. Building improvements are recurring capital costs
not related to a specific customer to maintain existing buildings. New building completion costs are expenses for the construction of new buildings. Land infrastructure costs are expenses to prepare development land for future development activity
that is not specifically related to a single building. Excluding recurring capital expenditures for leasing costs and tenant improvements and for normal building improvements, our expected future capital expenditures for started and/or committed new
development projects as of November 9, 2006 are approximately $260 million. A significant portion of these future expenditures are currently subject to binding contractual arrangements.

Additionally, $110 million of 7.0% unsecured notes will mature in December 2006 and approximately $63 million of 8.2% secured debt will mature in
February 2007. We expect to repay this debt with borrowings under our credit facility, proceeds from pending and future disposition activity and the issuance of additional secured or unsecured debt. We also have a significant pool of unencumbered
assets that could serve as collateral for additional secured debt. Although we expect to repay or refinance all of this outstanding debt on or prior to their respective maturity dates, no assurances can be given that we will be able to do so on
favorable terms or at all.

Our long-term liquidity needs also include the funding of development commitments, selective asset acquisitions
and the retirement of mortgage debt, amounts outstanding under our revolving credit facility and long-



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term unsecured debt. Our goal is to maintain a conservative and flexible balance sheet. 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,
(3) borrowings under other secured construction loans that we may enter into and (4) 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 repayments of borrowings under our revolving credit facility. 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 or from proceeds from sales of properties. The Company may also from time to time retire outstanding Preferred Units upon the retirement of outstanding
Preferred Stock through redemptions, open market acquisitions, in privately-negotiated acquisitions or a combination of the foregoing.

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

We have 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 risks typically associated with owning
all of the interests in 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 equal or less than a majority interest. In exchange
for an equal or minority interest in the joint venture, we generally receive cash from the partner and frequently retain the management income relating to the properties in the joint venture. For financial reporting purposes, certain assets we sold
have been accounted for as financing arrangements.

As of March 31, 2006, our unconsolidated joint ventures had $735.5 million of
total assets and $551.3 million of total liabilities as reflected in their financial statements. At March 31, 2006, our weighted average equity interest based on the total assets of these unconsolidated joint ventures was 41.1%. During the
three months ended March 31, 2006, these unconsolidated joint ventures earned $4.0 million of total net income of which our share, after appropriate purchase accounting and other adjustments, was $2.0 million. For additional information
about our unconsolidated joint venture activity, see Note 2 to the Condensed Consolidated Financial Statements.

As of
March 31, 2006, our unconsolidated joint ventures had $528.2 million of outstanding mortgage debt. 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 Note 12 to the Condensed Consolidated Financial Statements. The following table sets forth the scheduled maturities of our
share of the outstanding debt of our unconsolidated joint ventures, based on our ownership interests, as of March 31, 2006 (in thousands):



|                  |  |   |        
|----------------- |  | - | -------
|Remainder of 2006 |  | $ | 3,977  
|2007              |  |   | 12,219 
|2008              |  |   | 12,366 
|2009              |  |   | 14,243 
|2010              |  |   | 10,975 
|Thereafter        |  |   | 172,666
|                  |  |   |        
|                  |  | $ | 226,446
|                  |  |   |        

For information regarding our off-balance sheet arrangements as of December 31, 2005,
see Managements Discussion and Analysis of Financial Condition and Results of Operations  Off Balance Sheet Arrangements in our 2005 Annual Report on Form 10-K.



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Financing Arrangements

For information regarding sales transactions that were accounted for as financing arrangements at December 31, 2005, see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Financing and Profit-Sharing Arrangements in our 2005 Annual Report on Form 10-K.

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 credit facility 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
loans 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 objectives are 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 may 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.

The
interest rate on all of our variable rate debt is adjusted at one and three month intervals, subject to settlements under interest rate hedge 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. We currently have no outstanding interest rate hedge contracts.

CRITICAL ACCOUNTING POLICIES

There were no changes to the
critical accounting policies made by management in the three months ended March 31, 2006, except as set forth in Note 1 to the Condensed Consolidated Financial Statements in section Impact of Newly Adopted and Issued Accounting
Standards. For a description of our critical accounting estimates, see Managements Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates in our 2005 Annual Report on Form
10-K.



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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 Financial Condition and Results of Operations  Liquidity and Capital Resources and the Notes to Condensed 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 credit facility 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 loans 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 objectives are 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. We had no interest rate hedge contracts in effect at March 31, 2006.

As of March 31, 2006, we had approximately $1,160 million of fixed rate debt outstanding. The estimated aggregate fair market
value of this debt at March 31, 2006 was approximately $1,205 million. If interest rates increase by 100 basis points, the aggregate fair market value of our fixed rate debt as of March 31, 2006 would decrease by approximately
$48.5 million. If interest rates decrease by 100 basis points, the aggregate fair market value of our fixed rate debt as of March 31, 2006 would increase by approximately $52.3 million.

As of March 31, 2006, we had approximately $290 million of variable rate debt outstanding. If the weighted average interest rate on this
variable rate debt is 100 basis points higher or lower during the 12 months ended March 31, 2007, our interest expense would be increased or decreased approximately $2.9 million.



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ITEM 4. CONTROLS AND PROCEDURES

GENERAL

The purpose of this section is to discuss the effectiveness of our disclosure controls and procedures and recent changes in our internal control over
financial reporting. The statements in this section represent the conclusions of Edward J. Fritsch, the Companys President and Chief Executive Officer, and Terry L. Stevens, the Companys Vice President and Chief Financial Officer.

The Companys CEO and CFO evaluations of our disclosure controls and procedures include a review of the controls objectives and
design, the controls implementation by the Operating Partnership and the effect of the controls on the information generated for use in this Quarterly Report. We seek to identify control deficiencies and, if necessary, confirm that appropriate
corrective action, including process improvements, is undertaken. Our disclosure controls and procedures are also evaluated on an ongoing basis by or through the following:



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



| |  |  | quarterly sub-certifications by representatives from appropriate business and accounting functions to support the CEO and CFOs evaluation of our controls and procedures;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------

The Companys management, including the CEO and CFO, do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, 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.

CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING

Since the
Operating Partnership is not an accelerated filer, it has not yet been required under Section 404 of the Sarbanes-Oxley Act of 2002 to report on the effectiveness of its internal control over financial reporting. However, because the Company is
the general partner of the Operating Partnership and conducts substantially all of its operations through the Operating Partnership, material weaknesses in the Companys internal control over financial reporting could directly or indirectly
cause a material misstatement of the Operating Partnerships financial statements.

In Item 9A of the Companys 2005 Annual
Report on Form 10-K, management reported that the Companys internal control over financial reporting was not effective as of December 31, 2005 due to material weaknesses that existed as of such date in: (1) the Companys
real estate asset and lease incentive accounting processes, which in turn could affect the equity in earnings of unconsolidated affiliates in the Companys Consolidated Financial Statements for those joint ventures for which the Company is
primarily responsible for the preparation of their financial statements; and (2) the Companys journal entry approval and financial statement close processes. Subsequent to September 30, 2006, management discovered an additional
deficiency relating to the effectiveness of controls over the classification of assets held for sale under SFAS No. 144 that existed at September 30, 2006 that could have resulted in a material misstatement of the Companys
financial statements had it not been discovered prior to the filing of the Companys Quarterly Report on Form 10-Q for the period ended September 30, 2006. Although management was not required to, nor did it, undertake the procedures
necessary to include a managements report on the effectiveness of the Companys internal control over financial reporting as of September 30, 2006, management believes that such a control deficiency constitutes a material
weakness. Subsequent to the financial close process for the third quarter of 2006, management determined that two separate assets aggregating $14.5 million, which had been originally recorded in real estate assets, net, on the Companys balance
sheet in managements initial draft of its third quarter 2006 financial statements, should have been recorded as assets held for sale. The Companys internal control over financial reporting did not properly ensure the proper
classification of these assets under SFAS No. 144 prior to the completion of the Companys financial statement close process. Prior to the finalization of the Companys third quarter financial statements and the filing of its
Quarterly Report on Form 10-Q for the period ended September 30, 2006, management determined that such assets should



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be classified as assets held for sale. Such assets are properly reflected as assets held for sale in the financial statements included as part of this
Quarterly Report.

Changes in the Companys internal control over financial reporting also constitute changes in the Operating
Partnerships internal control over financial reporting. The changes described below that occurred during 2006 through the date of this filing are intended to materially improve both the Companys internal control over financial reporting
and the Operating Partnerships internal control over financial reporting.

During the nine months ended September 30, 2006
and through the date of this filing, we implemented various changes and improvements to our internal control over financial reporting relative to our real estate asset and lease incentive accounting processes and to our journal entry approval and
financial statement close process. We eliminated our use of and dependence upon manually prepared spreadsheets in accumulating and consolidating restatement adjustments recorded in connection with our historical financial statements by recording in
our general ledger all of the restatement adjustments related to our amended 2003 Annual Report and our 2004 Annual Report on Form 10-K (including ongoing effects of such adjustments to 2005 balances), which should reduce the likelihood of errors in
our future consolidated financial statements by lessening our reliance upon such manually prepared spreadsheets in the financial statement close process. We have implemented improvements to our journal entry review and approval processes and
enhanced controls over the recording and deleting of journal entries in our general ledger system which should reduce the likelihood of potential errors in future financial statements. We have also implemented revised approval procedures over
signing of construction contracts and change orders to provide reasonable assurance that such matters are approved by management at appropriate levels in the Company.

We are also developing and implementing a Company-wide policy and procedures manual for use by our divisional and accounting staff, intended to reasonably assure consistent and appropriate assessment and application
of GAAP. The first phase of this longer-term project has focused on the preparation of formal written policies and procedures with respect to accounting for building and tenant improvements. We have conducted and plan to provide additional training
for our accounting staff and employees in our various divisional operating offices to educate our personnel with respect to the accounting adjustments that were made to the historical financial statements in our 2004 Annual Report and in our amended
2003 Annual Report and to the material weaknesses and other control deficiencies in our internal control over financial reporting that existed as of December 31, 2005. We also engaged a search firm to assist us with the process of hiring a
Chief Accounting Officer (new position). During the fourth quarter of 2006, we plan to develop and implement additional procedures to ensure the proper classification of assets held for sale under SFAS No. 144 prior to the completion of our
financial statement close process.

Since the Company has not yet completed or evaluated all of its planned remediation activities nor been
required to undertake an evaluation of its internal control over financial reporting since December 31, 2005, we cannot conclude that the material weaknesses described above have been sufficiently remediated as of the date of this filing.
The Companys management is working closely with the audit committee to monitor the ongoing remediation of these material weaknesses.



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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. As defined in Rule 13a-15(e) under the Exchange Act, 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. Since the Company has not yet completed or evaluated all of its planned remediation activities relating to the material weaknesses described above, the CEO and CFO of the Company do not believe that
our disclosure controls and procedures were effective at the end of the period covered by this Quarterly Report.



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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are from time to time a party to a variety of legal proceedings, claims and
assessments arising in the ordinary course of our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that we have
incurred or will incur a loss and the loss or range of loss can be reasonably estimated, reserves are recorded in the Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount
or range of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of any such matters, none of these proceedings, claims or assessments is expected to have a material adverse effect on our business,
financial condition and results of operations.

In June, August, September and October 2006, we received assessments for state excise taxes
and related interest amounting to approximately $4.5 million, related to periods 2002 through 2004, and may receive additional assessments for later periods, which we estimate could aggregate an additional approximate $1.1 million. We believe that
we are not subject to such taxes and intend to vigorously dispute the assessment. Based on advice of counsel, we currently believe that any exposure for such taxes is not probable, and accordingly no provision for such taxes is reflected in our
financial statements.

As previously disclosed, the SECs Division of Enforcement issued a confidential formal order of investigation
in connection with the Companys previous restatement of its financial results. In November 2006, the SECs Division of Enforcement informed the Company that this investigation has been closed, and that it is not taking any action with
respect to this matter.

ITEM 6. EXHIBITS



|            |  |                                                                
|----------- |  | ---------------------------------------------------------------
|Exhibit No. |  | Description                                                    
|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



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##### Table of Contents

SIGNATURES

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



HIGHWOODS REALTY LIMITED PARTNERSHIPBy:

Highwoods Properties Inc., as sole general partnerBy:

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

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


Date: November 29, 2006



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