We are 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. As of September 30, 2008, we owned or had an interest in 383 in-service office, industrial and retail properties, encompassing 34.8 million square feet, which includes six in-service office, industrial and retail development properties that had not yet reached 95% stabilized occupancy aggregating 1.3 million square feet, and 514 rental residential units. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Iowa, Kansas, Maryland, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Virginia. Additional information about us can be found on our website at www.highwoods.com. Information on our website is not part of this Quarterly Report.

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

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 and under the heading "Business." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement:

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

• the financial condition of our tenants could deteriorate;

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

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

• difficulties in obtaining additional capital to satisfy our future cash needs or increases in interest rates could adversely impact our ability to fund important business initiatives and 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;

• in light of the current dislocations in the credit markets, one or more of our banking partners could suffer unexpected financial difficulties that cause them to default on their obligations under our existing revolving credit facility and/or revolving construction facility, which would make it difficult for us to meet our short- and long-term liquidity needs;

• we could lose key executive officers; and

• our southeastern and midwestern markets may suffer 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 2007 Annual Report on Form 10-K.

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.

In accordance with SFAS No. 144 and as described in Note 9 to the Consolidated Financial Statements, we reclassified the operations and/or gain/(loss) from disposal of certain properties to discontinued operations for all periods presented if the operations and cash flows have been or will be eliminated from our ongoing operations and we will not have any significant continuing involvement in the operations after the disposal transaction and the properties were either sold during 2007 and the first nine months of 2008 or were held for sale at September 30, 2008. There were no properties sold during 2007 and the first nine months of 2008 that did not meet the conditions as stipulated by SFAS No. 144.

Three Months Ended September 30, 2008 and 2007



The following table sets forth information regarding our unaudited results of
operations for the three months ended September 30, 2008 and 2007 ($ in
millions):



                                                     Three Months Ended
                                                       September 30,               2008 to 2007
                                                     2008          2007       $ Change    % of Change
Rental and other revenues                         $    116.2    $    107.6   $      8.6           8.0 %
Operating expenses:
Rental property and other expenses                      42.2          38.7          3.5           9.0
Depreciation and amortization                           32.1          31.9          0.2           0.6
Impairment of assets held for use                          -           0.8         (0.8 )      (100.0 )
General and administrative                               8.9           9.6         (0.7 )        (7.3 )
Total operating expenses                                83.2          81.0          2.2           2.7
Interest expenses:
Contractual                                             23.0          23.7         (0.7 )        (3.0 )
Amortization of deferred financing costs                 0.7           0.6          0.1          16.7
Financing obligations                                    0.7           1.0         (0.3 )       (30.0 )
                                                        24.4          25.3         (0.9 )        (3.6 )
Other income:
Interest and other income                                1.0           1.4         (0.4 )       (28.6 )
                                                         1.0           1.4         (0.4 )       (28.6 )
Income before disposition of property, minority
interest and equity
in earnings of unconsolidated affiliates                 9.6           2.7          6.9         255.6
Net gains on disposition of property                     1.7           1.3          0.4          30.8
Minority interest                                       (0.8 )        (0.3 )       (0.5 )      (166.7 )
Equity in earnings of unconsolidated affiliates          1.2           1.2            -             -
Income from continuing operations                       11.7           4.9          6.8         138.8
Discontinued operations:
Income from discontinued operations, net of
minority
interest                                                 0.1           0.8         (0.7 )       (87.5 )
Net gains on sales of discontinued operations,
net of minority
interest                                                 2.9           6.2         (3.3 )       (53.2 )
Release of FASB FIN 48 tax liability                       -           1.5         (1.5 )      (100.0 )
                                                         3.0           8.5         (5.5 )       (64.7 )
Net income                                              14.7          13.4          1.3           9.7
Dividends on preferred stock                            (2.4 )        (2.7 )        0.3          11.1
Excess of preferred stock redemption/repurchase
cost over
carrying value                                         (0.1)          (0.8 )        0.7          87.5
Net income available for common stockholders      $     12.2    $      9.9   $      2.3          23.2 %

Rental and Other Revenues

While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing our office properties. Economic growth in Florida, Georgia, North Carolina and Tennessee is and will continue to be an important determinative factor in predicting our future operating results.

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.

Rental and other revenues increased $8.6 million in the third quarter of 2008 compared to 2007 primarily as a result of the contribution from developed properties placed in service in 2007 and the first nine months of 2008 and higher same property rental revenue, driven by higher average occupancy, in certain locations in 2008 as compared to 2007.

Operating Expenses

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 expenses that vary somewhat, 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. 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.

Rental property and other expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $3.5 million in the third quarter of 2008 compared to the third quarter of 2007, primarily as a result of the additional operating expenses of developed properties placed in service in 2007 and the nine months ended September 30, 2008 and general inflationary increases in certain operating expenses, such as utility costs, insurance costs and real estate taxes.

Rental and other revenues less rental property and other expenses increased $5.1 million in 2008 compared to 2007. This is primarily the result of higher margins on development properties and higher revenues from higher average occupancy.

In the third quarter of 2007, one land parcel had indicators of impairment where the carrying value exceeded the sum of estimated undiscounted future cash flows. Therefore, impairment of assets held for use of $0.8 million was recorded in the third quarter of 2007.

The $0.7 million decrease in general and administrative expenses is primarily related to lower external audit and legal fees and a decrease in the adjustment related to our deferred compensation liability.

Interest Expenses

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.

The $0.7 million decrease in contractual interest expense is primarily the result of a decrease in average borrowings in 2008 compared to 2007 and a decrease in weighted average interest rates on outstanding debt, offset

by a decrease in capitalized interest of $0.6 million for the third quarter of 2008 compared to the third quarter of 2007.

Net Gains on Disposition of Property

Net gains on dispositions of properties not classified as discontinued operations was $1.7 million and $1.3 million for the three months ended September 30, 2008 and 2007, respectively. Gains are dependent on the specific assets sold, their historical cost basis and other factors, and can vary significantly from period to period.

Discontinued Operations

In accordance with SFAS No. 144, we classified net income of $3.0 million and $8.5 million, net of minority interest, as discontinued operations for the three months ended September 30, 2008 and 2007, respectively. These amounts relate to 1.8 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and the nine months ended September 30, 2008. These amounts include net gains on the sale of these properties of $2.9 million and $6.2 million, net of minority interest, in the three months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2007, we recorded $1.5 million for the release of a liability recorded in accordance with FIN 48.

Nine Months Ended September 30, 2008 and 2007



The following table sets forth information regarding our unaudited results of
operations for the nine months ended September 30, 2008 and 2007 ($ in
millions):



                                                     Nine Months Ended
                                                       September 30,              2008 to 2007
                                                     2008         2007       $ Change    % of Change
Rental and other revenues                         $    346.2    $   318.2   $     28.0           8.8 %
Operating expenses:
Rental property and other expenses                     122.6        113.9          8.7           7.6
Depreciation and amortization                           94.4         90.5          3.9           4.3
Impairment of assets held for use                          -          0.8         (0.8 )      (100.0 )
General and administrative                              29.4         31.4         (2.0 )        (6.4 )
Total operating expenses                               246.4        236.6          9.8           4.1
Interest expenses:
Contractual                                             69.8         69.5          0.3           0.4
Amortization of deferred financing costs                 2.0          1.8          0.2          11.1
Financing obligations                                    2.3          3.0         (0.7 )       (23.3 )
                                                        74.1         74.3         (0.2 )        (0.3 )
Other income:
Interest and other income                                3.4          5.1         (1.7 )       (33.3 )
                                                         3.4          5.1         (1.7 )       (33.3 )
Income before disposition of property,
insurance gain, minority
interest and equity in earnings of
unconsolidated affiliates                               29.1         12.4         16.7         134.7
Net gains on disposition of property                     1.9         20.4        (18.5 )       (90.7 )
Gain from property insurance settlement                    -          4.1         (4.1 )      (100.0 )
Minority interest                                       (2.3 )       (3.2 )        0.9          28.1
Equity in earnings of unconsolidated affiliates          4.7         12.9         (8.2 )       (63.6 )
Income from continuing operations                       33.4         46.6        (13.2 )       (28.3 )
Discontinued operations:
Income from discontinued operations, net of
minority
interest                                                 0.8          2.7         (1.9 )       (70.4 )
Net gains on sales of discontinued operations,
net of minority
interest                                                11.1         24.5        (13.4 )       (54.7 )
Release of FASB FIN 48 tax liability                       -          1.5         (1.5 )      (100.0 )
                                                        11.9         28.7        (16.8 )       (58.5 )
Net income                                              45.3         75.3        (30.0 )       (39.8 )
Dividends on preferred stock                            (8.1 )      (10.6 )        2.5          23.6
Excess of preferred stock redemption/repurchase
cost over carrying value                                (0.1 )       (2.3 )        2.2          95.7
Net income available for common stockholders      $     37.1    $    62.4   $    (25.3 )       (40.5 )%

Rental and Other Revenues

Rental and other revenues increased $28.0 million in the first nine months of 2008 compared to 2007 primarily as a result of the contribution from developed properties placed in service in 2007 and the first nine months of 2008 and higher same property rental revenue, driven by higher average occupancy, in certain locations in 2008 as compared to 2007.

Operating Expenses

Rental property and other operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $8.7 million in the first nine months of 2008

compared to the first nine months of 2007, primarily as a result of the additional operating expenses of developed properties placed in service in 2007 and the nine months ended September 30, 2008 and general inflationary increases in certain operating expenses, such as utility costs, insurance costs and real estate taxes.

Rental and other revenues less rental property and other operating expenses increased $19.3 million in 2008 compared to 2007. This is primarily the result of higher margins on development properties and higher revenues from higher average occupancy.

The $3.9 million increase in depreciation and amortization is primarily a result of the contribution from development properties placed in service in 2007 and the nine months ended September 30, 2008 and an increase in building improvements, tenant improvements and deferred leasing costs related to those buildings placed in service.

In the nine months ended September 30, 2007, one land parcel had indicators of impairment where the carrying value exceeded the sum of estimated undiscounted future cash flows. Therefore, impairment of assets held for use of $0.8 million was recorded in the nine months ended September 30, 2007.

The $2.0 million decrease in general and administrative expenses is primarily related to lower external legal and audit fees, lower condominium marketing costs and a decrease in the adjustment related to our deferred compensation liability. These decreases are partially offset by higher compensation related costs.

Financing Obligation

The $0.7 million decrease in financing obligations is primarily the result of lower fair market amortization and interest expense for the first nine months of 2008 compared to the first nine months of 2007.

Other Income

The $1.7 million decrease in interest and other income is primarily related to a decrease in income from 2007 to 2008 related to our investments in marketable securities which we use to pay benefits under our deferred compensation plan, offset by interest income from our investment in TIF bonds.

Net Gains on Disposition of Property; Gain from Property Insurance Settlement; Minority Interest; Equity in Earnings of Unconsolidated Affiliates

Net gains on dispositions of properties not classified as discontinued operations was $1.9 million and $20.4 million for the nine months ended September 30, 2008 and 2007, respectively. Gains are dependent on the specific assets sold, their historical cost basis and other factors, and can vary significantly from period to period.

In the first nine months of 2007, we recorded a $4.1 million gain from finalization of a prior year insurance claim.

The decrease in minority interest expense of $0.9 million was primarily due to a corresponding decrease in the Operating Partnership's income from continuing operations, after Preferred Unit distributions.

Equity in earnings of unconsolidated affiliates decreased $8.2 million from 2007. The decrease primarily resulted from the sale of certain properties and recognition of a substantial lease termination fee in certain of our unconsolidated affiliates.

Discontinued Operations

In accordance with SFAS No. 144, we classified net income of $11.9 million and $28.7 million, net of minority interest, as discontinued operations for the nine months ended September 30, 2008 and 2007, respectively. These amounts relate to 1.8 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and the nine months ended September 30, 2008. These amounts include net gains on the sale of these properties of $11.1 million and $24.5 million, net of minority interest, in the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2007, we recorded $1.5 million for the release of a liability recorded in accordance with FIN 48.

Dividends on Preferred Stock and Excess of Preferred Stock Redemption/Repurchase Cost Over Carrying Value

Preferred stock dividends decreased $2.5 million due to the reduction in outstanding Preferred Stock balances in 2007 and 2008. In addition, net income available for common stockholders was reduced by $0.1 million and $2.3 million in the nine months ended September 30, 2008 and 2007, respectively, related to the excess of redemption cost over the net carrying value of Preferred Stock.

Because we are a REIT, we are required under the federal tax laws to distribute at least 90% of our REIT taxable income, excluding capital gains, to our 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 stockholder dividends. 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 credit facilities.

Our revolving credit facility, the term loan and the indenture that governs our outstanding notes require us to comply with customary operating covenants and various financial and operating 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 stockholders, such as repurchasing capital stock, acquiring additional assets, increasing the total amount of our debt or increasing stockholder dividends. 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.

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 stockholders 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 pay dividends to stockholders. 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 stockholders' best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying dividends.

To generate additional capital to fund our growth and other strategic initiatives and to lessen the ownership risks typically associated with owning 100.0% of a property, we may sell some of our properties or contribute them to joint ventures. When we create a joint venture with a strategic partner, we usually contribute one or more properties that we own and/or vacant land to a newly formed entity in which we retain an interest of 50.0% or less. In exchange for our equal or minority interest in the joint venture, we generally receive cash from the partner and retain 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 also may sell additional Common Stock or Preferred Stock or issue Common Units to fund additional growth or to reduce our debt. In addition, we may from time to time use available funds to redeem or repurchase Common Units and Preferred Stock for cash. In the future, we may from time to time retire some or all of our remaining outstanding Preferred Stock through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

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 nine months of 2008 as compared to the first nine months of 2007 (in thousands):