UNITED STATES SECURITIES AND EXCHANGECOMMISSION

 

Washington, D.C. 20549

 

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**Form10-K**

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**                                       x              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

** OF THE SECURITIES EXCHANGE ACT OF 1934Forthe fiscal year ended December 31, 2004OR**

**                                        o            TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934Forthe transition period from           to          Commission file number 1-11533**

**Parkway Properties, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **Maryland**                      | **74-2123597**      |
|-----------------------------------|---------------------|
| (State or other jurisdiction      | (I.R.S. Employer    |
| of incorporation or organization) | Identification No.) |

 

**One Jackson Place Suite 1000188 East Capitol Street Jackson, Mississippi 39201-2195**(Address of principal executiveoffices) (Zip Code) **(601) 948-4091**Registrant's telephone number:

**www.pky.com**Registrant's website: Securities registered pursuant to Section 12(b) of the Act: **Common Stock, $.001 Par Value8.00% Series D Cumulative Redeemable Preferred Stock $.001 Par ValueNew York Stock Exchange**Securities registered pursuant toSection 12(g) of the Act: **None**

      Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes  x   No  o

      Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.o     

      Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes  x   No  o

      State the aggregate market value of thevoting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold, or the averagebid and asked price of such common equity, as of the last business day of theregistrant's most recently completed second fiscal quarter:  $468,316,000.

      The number of shares outstanding in theregistrant's class of common stock as of March 1, 2005 was14,066,954.

**DOCUMENTS INCORPORATED BY REFERENCE**

      Portionsof the Registrant's Proxy Statement for the 2005 Annual Meeting of Shareholdersare incorporated by reference into Part III.

** **

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

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| **PART I.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Business                                                                                                                                   | 3        |
| Item 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Properties                                                                                                                                      | 7        |
| Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Legal Proceedings                                                              | 12       |
| Item 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                             | 12       |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                            |     |
| **PART II.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Market for Registrant's Common  Equity, Related Stockholder Matters and Issuer Purchases                                                                                                                                                                                                                                                                                                        |          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | of Equity Securities                                                                                                                                                                                                                                                                                                                                                                            | 13       |
| Item 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Selected Financial Data                                                                                                                                                                                                                                                                                                                                                                         | 15       |
| Item 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Management's Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                          | 16       |
| Item 7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                     | 30       |
| Item 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Financial Statements and  Supplementary Data                                                                                                                                                                                                                                                                                                                                                    | 31       |
| Item 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                                                                                                                                                                                                                                                                                           | 65       |
| Item 9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                         | 65       |
| Item 9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Other Information                                                                                                                                                                                                                                                                                                                                                                               | 67       |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                            |     |
| **PART III.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Directors and Executive  Officers of the Registrant                                                                                                                                                                                                                                                                                                                                             | 67       |
| Item 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                          | 67       |
| Item 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                                                                                                                                                                                                                                                                                                 | 67       |
| Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certain Relationships and  Related Transactions                                                                                                                                                                                                                                                                                                                                                 | 67       |
| Item 14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Principal Accountant Fees and  Services                                                                                                                                                                                                                                                                                                                                                         | 67       |
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| **PART IV.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibits and Financial  Statement Schedules                                                                                                                                                                                                                                                                                                                                                     | 67       |
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| **SIGNATURES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                 |
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**PART I**

**ITEM 1.  *Business*.**

*Overview*

       Parkway Properties, Inc.("Parkway" or the "Company") is a real estate investmenttrust ("REIT") specializing in the operations, acquisition,ownership, management, and leasing of office properties.  The Company isself-administered, in that it provides its own investment and administrativeservices internally through its own employees.  The Company is alsoself-managed, as it internally provides the management, maintenance and otherreal estate services that its properties require through its own employees,such as property managers and engineers and in some cases, leasingprofessionals.  In addition Parkway is self-leased for renewal leases for themajority of its office property portfolio.  The Company is geographicallyfocused on the Southeastern and Southwestern United States and Chicago. Parkway and its predecessors have been public companies engaged in the realestate business since 1971, and its present senior management has been withParkway since the 1980's.  The management team has had experience managing apublic real estate company through all phases of the real estate businesscycle.  At January 1, 2005, Parkway owned or had an interest in 62 officeproperties located in 11 states with an aggregate of approximately 11.6 millionsquare feet of leasable space.

       Parkway evaluates individual officeassets for purchase considering a number of factors such as current marketrents, vacancy rates and capitalization rates.  As part of this strategy, sinceJuly 1995, the Company has (i) completed the acquisition of 69 officeproperties, encompassing 12.2 million net rentable square feet, for a totalpurchase price of $1.2 billion; (ii) sold or is in the process of selling allof its non-core assets; (iii) sold 12 office properties, encompassingapproximately 1.3 million net rentable square feet primarily in markets thatposed increasing risks and redeployed these funds; (iv) sold joint ventureinterests in seven office properties encompassing 2.3 million net rentablesquare feet; and (v) implemented self-management and self-leasing at most ofits properties to promote a focus on customer retention and superior service inmeeting the needs of its customers.  Parkway defines total investment in officeproperties as purchase price plus estimated closing costs and anticipatedcapital expenditures during the first 24 months of ownership for tenantimprovements, commissions, upgrades and capital improvements to bring thebuilding up to the Company's standards.

*Industry Segments*

       Parkway'sprimary business is the ownership and operation of office properties. The Companyaccounts for each office property or groups of related office properties as anindividual operating segment.  Parkway has aggregated its individual operatingsegments into a single reporting segment due to the fact that the individualoperating segments have similar operating and economic characteristics.  

       Theindividual operating segments exhibit similar economic characteristics such asbeing leased by the square foot, sharing the same primary operating expensesand ancillary revenue opportunities and being cyclical in the economicperformance based on current supply and demand conditions.  The individualoperating segments are also similar in that revenues are derived from theleasing of office space to customers and each office property is managed andoperated consistently in accordance with Parkway's standard operatingprocedures.  The range and type of customer uses of our properties is similarthroughout our portfolio regardless of location or class of building and theneeds and priorities of our customers do not vary from building to building. Therefore, Parkway's management responsibilities do not vary from location tolocation based on the size of the building, geographic location or class.

*Operating Properties*

*       *Parkway generally seeks toacquire and operate well-located Class A, A- or B+ (as classified within theirrespective markets) multi-story office buildings which are located in primaryor secondary markets in the Southeastern and Southwestern United States andChicago, ranging in size from 100,000 to 1,500,000 net rentable square feet andwhich have current and projected occupancy levels in excess of 70% and adequateparking to accommodate full occupancy  The Company targets buildings which areoccupied by a major customer that accounts for at least 30% of the building'stotal rental revenue and has at least five years remaining on its lease. Parkway's focus on new property acquisitions is on higher barrier-to-entrysub-markets in both central business districts and suburban markets.  Parkwaystrives to purchase office buildings at minimum initial unleveraged annualyields on its total investment of 8%.  The Company defines initial unleveragedyield as net operating 

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income ("NOI") divided by total investment (aspreviously defined), where NOI represents budgeted cash operating income forthe current year at current occupancy rates and at rental rates currently inplace with no adjustments for anticipated expense savings, increases in rentalrates, additional leasing or straight line rent.  The Company also generallyseeks to acquire properties whose total investment per net rentable square footis at least 20% below estimated replacement cost.  Although the Company seeksto acquire properties which meet all of the acquisition criteria, specificproperty acquisitions are evaluated individually and may fail to meet one ormore of the acquisition criteria at the date of purchase.

**       **During 2004, the Companyacquired three office properties with approximately 897,000 net rentable squarefeet for a total purchase price of $150 million, or approximately $167 per netrentable square foot.  The properties purchased are located in Orlando, Atlantaand Phoenix.  Consistent with the qualification requirements of a REIT, theCompany intends to hold and operate its portfolio of office buildings forinvestment purposes, but may determine to sell properties that no longer meetits investment criteria.

*Dispositions*

       Parkway has also pursued a strategyof liquidating its non-core assets and office building investments that nolonger meet the Company's investment criteria and/or the Company has determinedvalue will be maximized by selling and redeploying the proceeds. The Companyroutinely evaluates changes in market conditions that indicate an opportunityor need to sell properties within those markets in order to maximizeshareholder value and allocate capital judiciously.

       Since January 1, 1995, Parkway hassold non-core assets with a book value of approximately $45 million forapproximately $68 million, resulting in an aggregate gain for financialreporting purposes of approximately $23 million.  The book value of allremaining non-office building real estate assets, all of which are availablefor sale, was $3.5 million as of December 31, 2004.

       Since January 1, 1998, the Companyhas sold 12 office properties, encompassing approximately 1.3 million netrentable square feet for net proceeds of $128 million, resulting in aggregategains for financial reporting purposes of $18 million.  Currently, the Companyis considering the sale of its property in Greenville, South Carolina,primarily because the Company does not own sufficient office space in thismarket to justify self-management and self-leasing.  This investment decisionwill be based upon the Company's analysis of existing markets and competinginvestment opportunities.

*Joint Ventures and Discretionary Fund*

       Parkway intends to continue formingjoint ventures or partnerships with select investors.  Under the terms of thejoint venture agreements, Parkway will operate, manage, and lease theproperties on a day-to-day basis, provide acquisition and constructionmanagement services to the joint venture, and receive fees for providing theseservices.  The joint venture will arrange first mortgage financing which willbe non-recourse, property specific debt.  To date, Parkway has entered intofour joint venture agreements of this nature.

**       **OnDecember 14, 2004, Parkway sold an 80% interest in three assets to RubiconAmerica Trust, an Australian listed trust, which is advised by the GreenwichGroup International (the "Rubicon Joint Venture").  The properties included inthe 550,000 square foot venture are Lakewood and Falls Pointe in Atlanta andCarmel Crossing in Charlotte. The sale values the properties at a total of$66.7 million, which equates to $121 per square foot. Parkway recognized a netacquisition fee of approximately $2 million in addition to the sales price andrecorded a gain on the sale of $3.5 million in the fourth quarter. ParkwayRealty Services will continue to manage, lease and operate the buildings.  Thejoint venture is accounted for using the equity method of accounting.

       Simultaneous withclosing the Rubicon Joint Venture, the entity that owns the properties closed a$52 million mortgage secured by the properties.  The non-recourse firstmortgage has a fixed interest rate of 4.86%, is interest only for the firstfour years, amortizes over 30 years thereafter and matures in seven years.Greenwich Group International acted as placement agent for the debt. Parkwayreceived net cash proceeds from the sale and the financing of approximately $58million, which was used to reduce short-term borrowings under the Company'slines of credit.  Parkway's share of the venture's debt is 13.85%, which isincluded in the calculation of the ratio of debt to total marketcapitalization. Also, simultaneous with closing, the Company repaid theoutstanding $4.5 million first mortgage on its Lakewood asset at a prepaymentpremium of $381,000. 

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       TheCompany has begun efforts to form a discretionary fund, which would acquireoffice properties similar to those currently held in the portfolio. Thetargeted size of the fund is $500 million comprised of $300 million in debt and$200 million of equity. The Company may contribute approximately $50 million tothe equity of the fund. Targeted potential investors are institutions, pensionfunds, state retirement systems and endowments. The Company would generate additionaleconomic returns through the asset, property and construction management feesand the leasing commissions. There is no assurance that the Company will besuccessful in its efforts to raise a fund, and even if it is successful, theeconomic benefits will most likely not be realized until 2006 or beyond. 

*Self-Management, Self-Leasing and Third Party Management*

       The Company self-managesapproximately 99.3% of its current portfolio on a net rentable square footagebasis.  In addition, the Company self-leases for renewals and currentlyself-leases approximately 87.6% of its portfolio on a net rentable squarefootage basis.  For new tenant leasing, which is a smaller portion of ourbusiness, we fully cooperate with the third party brokerage community.  TheCompany benefits from a fully integrated management infrastructure, provided byits wholly-owned management subsidiary, Parkway Realty Services LLC("Parkway Realty").  The Company believes self-management andself-leasing results in better customer service, higher customer retention andallows the Company to enhance stockholder value through the application of itshands-on operating style.  In order to provide exceptional customer service,Parkway is focused on hiring, training and retaining talented employees.  TheCompany believes that its focus on customer retention will benefit the Companyand its stockholders by maintaining a stabilized revenue stream and avoidinghigher capital expenditures and leasing commissions associated with new leases. In order to self-manage properties, the Company seeks to reach critical mass interms of square footage. Critical mass varies from market to market and isgenerally defined by the Company as owning or managing a minimum of 250,000square feet.  The Company is considering the sale of its properties that arenot self-managed because the inability to self-manage these properties limitsthe Company's ability to apply its hands-on operating strategy. In addition toits owned properties, Parkway Realty currently manages and/or leasesapproximately 2.8 million net rentable square feet for third-party owners(including joint venture interests).  The Company intends to expand its thirdparty fee business through the joint ventures and the proposed fund(s).

*Financing Strategy*

       The Company expects to continueseeking fixed rate, non-recourse mortgage financing with maturities from fiveto ten years typically amortizing over 25 to 30 years on select office buildinginvestments as additional capital is needed.  The Company targets a debt tototal market capitalization ratio at a percentage in the mid-40's.  This ratiomay vary at times pending the timing of acquisitions, sales and/or sales ofequity securities.  In addition, volatility in the price of the Company'scommon stock may affect the debt to total market capitalization ratio. However, over time the Company plans to maintain a percentage in the mid-40's. The Company monitors interest and fixed charge coverage ratios.  See Item 7. "Management's Discussion and Analysis of Financial Condition and Resultsof Operations - Financial Condition."  Parkway has no present plans toissue senior securities.  Should the opportunity present itself, Parkway hasthe ability to issue common stock periodically through its dividendreinvestment plan.

       Parkway may, in appropriatecircumstances, acquire one or more properties in exchange for Parkway's equitysecurities.  Parkway may provide financing in connection with sales of propertyif market conditions so require, but it does not presently intend to make otherloans.  Parkway has no set policy as to the amount or percentage of its assetswhich may be invested in any specific property.  Rather than a specific policy,Parkway evaluates each property in terms of whether and to what extent theproperty meets Parkway's investment criteria and strategic objectives.  Parkwayhas no present intentions of underwriting securities of other issuers.  Thestrategies and policies set forth above were determined, and are subject toreview by, Parkway's Board of Directors which may change such strategies orpolicies based upon their evaluation of the state of the real estate market,the performance of Parkway's assets, capital and credit market conditions, andother relevant factors.  Parkway provides annual reports to its stockholdersthat contain financial statements audited by Parkway's independent publicaccountants.

*Management Team*

       Parkway'smanagement team consists of experienced office property specialists with provencapabilities in office property (i) operations; (ii) leasing; (iii) management;(iv) acquisition/disposition; (v) financing; (vi) capital allocation; and (vii)re-positioning.  Parkway's eleven senior officers have an average of over21 years of real estate industry experience, and have worked together at Parkwayfor an average of over 14 years.  Management has developed a highlyservice-oriented operating

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 culture and believes that its focus on operations,proactive leasing, property management and asset management activities willresult in higher customer retention and occupancy and will continue to translateinto enhanced stockholder value.

*Administration*       The Company is self-administeredand self-managed and maintains its principal executive offices in Jackson,Mississippi.  As of January 1, 2005, the Company had 252 employees.  Theoperations of the Company are conducted from approximately 13,000 square feetof office space located at 188 East Capitol Street, One Jackson Place, Suite1000, Jackson, Mississippi.  The building is owned by Parkway and is leased by Parkwayat market rental rates.

*Available Information*

**       **Parkway makes available freeof charge on the "Investor Relations" page of its web site, www.pky.com, itsfiled and furnished reports on Form 10-K, 10-Q and 8-K and all amendments thereto,as soon as reasonably practicable after Parkway electronically files suchmaterial with, or furnishes it to, the Securities and Exchange Commission.

**       **The Company's CorporateGovernance Guidelines, Code of Business Conduct and Ethics and the Charters ofthe Audit Committee, Nominating and Corporate Governance Committee andCompensation Committee of the Board of Directors are available on the "InvestorRelations" page of Parkway's web site.  Copies of these documents are alsoavailable free of charge in print upon written request addressed to InvestorRelations, Parkway Properties, Inc., One Jackson Place Suite 1000, 188 EastCapitol Street, Jackson, Mississippi 39201-2195.

*Recent Developments*

       On January 5,2005, the Company entered into an agreement to purchase the 70% interest heldby Investcorp International, Inc., its joint venture partner, in the propertyknown as 233 North Michigan Avenue in Chicago, Illinois. The terms of theagreement place total building value at $194.3 million or $182 per square foot.The Company will close the investment in two stages. The Company closed 90% ofthe purchase on January 14, 2005. The second closing for the remainder ofInvestcorp's interest will occur followinglender and rating agency approval, which is expected within ninety days. Atclosing, the Company earned a $400,000 incentive fee from Investcorp based uponthe economic returns generated over the life of the partnership. The purchasewas funded with proceeds from the sale of 1.6 million shares of common stock toCitigroup Global Markets, Inc. on January 10, 2005 and the assumption of anexisting first mortgage on the property.

       The 70% interest in 233 NorthMichigan Avenue was acquired subject to an existing non-recourse first mortgagewith an outstanding balance of approximately $100 million, which matures July2011 and carries a fixed interest rate of 7.21%. In accordance with generallyaccepted accounting principles, the mortgage will be recorded at approximately$112 million to reflect the fair value of the financial instrument based on themarket rate of 4.94% on the date of purchase. 

       On January 10, 2005, the Company sold1,600,000 shares of common stock to Citigroup Global Markets, Inc. The Companyused the net proceeds of approximately $76 million towards the acquisition ofthe 70% interest held by its joint venture partner in the property known as 233North Michigan Avenue in Chicago, IL and to reduce outstanding variable ratedebt.

*       *In early March 2005, theCompany expects, subject to the completion of due diligence, to purchase for approximately$29.3 million two adjacent buildings in downtown Jacksonville, Florida. Inaddition to the purchase price the Company expects to invest an additional $4.3million in improvements.  The buildings, which total 305,000 square feet, areapproximately 93% leased. The purchase will be funded via the remainingproceeds from the Company's January 2005 equity offering as well as itsexisting line of credit. 

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**ITEM 2.  *Properties*.**

**General**

       The Company operates and investsprincipally in office properties in the Southeastern and Southwestern UnitedStates and Chicago, but is not limited to any specific geographical region orproperty type.  As of January 1, 2005, the Company owned or had an interest in 62office properties comprising approximately 11.6 million square feet of officespace located in 11 states.

       Property acquisitions in 2004, 2003 and2002 were funded through a variety of sources, including:

a.         Cash reserves and cash generated from operating activities,

b.         Sales of non-core assets,

c.         Sales of office properties,

d.         Sales of joint venture interests,

e.         Fixed rate, non-recourse mortgage financing with maturities rangingfrom five to ten years,

f.          Assumption of existing fixed rate, non-recourse mortgages onproperties purchased,

g.         Sales of Parkway preferred and common stock,

h.         Advances on bank lines of credit, and

i.          Issuancesof preferred membership interests to sellers.

**Office Buildings**

       Other than as discussed under"Item 1. Business", the Company intends to hold and operate itsportfolio of office buildings for investment purposes.  The Company does notpropose any program for the renovation, improvement or development of any ofthe office buildings, except as called for under the renewal of existing leasesor the signing of new leases or improvements necessary to upgrade recentacquisitions to the Company's operating standards.  During 2004, the Companybegan development of a $6.9 million, 517 space parking facility to accommodatebuilding customers at City Centre in Jackson, Mississippi.  All suchimprovements are expected to be financed by cash flow from the portfolio ofoffice properties and advances on bank lines of credit.   

       In the opinion of management, allproperties are adequately covered by insurance.  

       All office building investmentscompete for customers with similar properties located within the same marketprimarily on the basis of location, rent charged, services provided and thedesign and condition of the improvements.  The Company also competes with otherREITs, financial institutions, pension funds, partnerships, individualinvestors and others when attempting to acquire office properties.

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       Thefollowing table sets forth certain information about office properties theCompany owned or had an interest in as of January 1, 2005:

| ** **         | ** **        | ** **         | ** **    | ** **   | **Estimated** | ** **   | ** **   |
|--------------------|-------------------|--------------------|---------------|--------------|---------------|--------------|--------------|
| ** **         | ** **        | ** **         | ** **    | ** **   | **Average**   | **% of**     | ** **   |
| ** **         | **Number**        | **Total Net**      | **% of**      | **Average**  | **Market**    | **Leases**   | **%**        |
| ** **         | **Of**            | **Rentable**       | **Total Net** | **Rent Per** | **Rent Per**  | **Expiring** | **Leased**   |
| ** **         | **Office**        | **Square Feet**    | **Rentable**  | **Square**   | **Square**    | **In**       | **As of**    |
| **Location**       | **Properties(1)** | **(in thousands)** | **Feet**      | **Foot (2)** | **Foot (3)**  | **2005 (4)** | **1/1/2005** |
| Houston, TX        | 15                | 2,242              | 19.4%         | $17.70       | $16.53        | 19.9%        | 94.5%        |
| Atlanta, GA        | 9                 | 1,377              | 11.9%         | 21.10        | 20.45         | 11.9%        | 92.1%        |
| Chicago, IL        | 1                 | 1,070              | 9.3%          | 33.48        | 31.50         | 1.0%         | 93.5%        |
| Phoenix, AZ        | 3                 | 871                | 7.5%          | 24.04        | 20.43         | 12.0%        | 95.4%        |
| Columbia, SC       | 3                 | 867                | 7.5%          | 16.62        | 16.28         | 24.6%        | 89.2%        |
| Memphis, TN        | 4                 | 848                | 7.3%          | 19.28        | 17.47         | 12.6%        | 84.1%        |
| Jackson, MS        | 5                 | 843                | 7.3%          | 17.66        | 17.46         | 23.8%        | 80.0%        |
| Knoxville, TN      | 2                 | 545                | 4.7%          | 14.50        | 16.00         | 17.9%        | 94.1%        |
| Charlotte, NC      | 2                 | 511                | 4.4%          | 17.66        | 15.92         | 7.8%         | 80.2%        |
| Richmond, VA       | 6                 | 498                | 4.3%          | 16.82        | 15.97         | 19.0%        | 86.4%        |
| Orlando, FL        | 2                 | 461                | 4.0%          | 21.70        | 20.13         | 23.9%        | 97.3%        |
| Nashville, TN      | 1                 | 430                | 3.7%          | 13.49        | 16.75         | 19.6%        | 94.3%        |
| Hampton Roads, VA  | 3                 | 386                | 3.3%          | 16.56        | 15.29         | 6.4%         | 90.6%        |
| St. Petersburg, FL | 2                 | 321                | 2.8%          | 18.02        | 17.22         | 16.9%        | 96.2%        |
| Ft. Lauderdale, FL | 2                 | 215                | 1.9%          | 21.87        | 20.47         | 19.2%        | 93.3%        |
| All Others         | 2                 | 78                 | 0.7%          | 11.02        | 11.23         | 4.2%         | 100.0%       |
| ** **         | 62                | 11,563             | 100.0%        | $19.92       | $18.94        | 15.6%        | 91.0%        |

(1)    Includes 54 office properties owned directly; a32,000 square foot office property in which the Company owns a 50% interestlocated in New Orleans, Louisiana; a 1,070,000 square foot office property inwhich the Company owns a 30% interest located in Chicago, Illinois; a 481,000square foot office property in which the Company owns a 30% interest located inPhoenix, Arizona; two office properties totaling 170,000 square feet in whichthe Company owns a 20% interest located in Jackson, Mississippi; and threeoffice properties totaling 550,000 square feet in which the Company owns a 20%interest located in Atlanta, Georgia and Charlotte, North Carolina.

(2)    Average rent per square foot is defined as theweighted average current gross rental rate including expense escalations forleased office space in the building as of January 1, 2005.

(3)    Estimated average market rent per square foot isbased upon information obtained from (i) the Company's own experience in leasingspace at the properties; (ii) leasing agents in the relevant markets withrespect to quoted rental rates and completed leasing transactions forcomparable properties in the relevant markets; and (iii) publicly availabledata with respect thereto.  Estimated average market rent is weighted by thenet rentable square feet expiring in each property.

(4)    The percentage of leases expiring in 2005 representsthe ratio of square feet under leases expiring in 2005 divided by total netrentable square feet.

----

       Thefollowing table sets forth scheduled lease expirations for properties owned asof January 1, 2005 onleases executed as of January 1, 2005,assuming no customer exercises renewal options:

| ** **     | ** ** | **Net**            |                 | **Annualized**      | **Weighted**        | **Weighted Est**    |
|----------------|------------|--------------------|-----------------|---------------------|---------------------|---------------------|
| ** **     | ** ** | **Rentable**       | **Percent of**  | **Rental**          | **Expiring Gross**  | **Avg Market**      |
| **Year of**    | **Number** | **Square Feet**    | **Total Net**   | **Amount**          | **Rental Rate Per** | **Rent Per Net**    |
| **Lease**      | **of**     | **Expiring**       | **Rentable**    | **Expiring (1)**    | **Net Rentable**    | **Rentable**        |
| **Expiration** | **Leases** | **(in thousands)** | **Square Feet** | **(in thousands)**  | **Square Foot (2)** | **Square Foot (3)** |
| 2005           | 354        | 1,798              | 15.5%           | $  34,156 | $19.00              | $17.58              |
| 2006           | 244        | 1,209              | 10.5%           | 24,341              | 20.13               | 18.16               |
| 2007           | 247        | 1,395              | 12.1%           | 26,957              | 19.32               | 17.36               |
| 2008           | 152        | 1,277              | 11.0%           | 22,968              | 17.99               | 17.31               |
| 2009           | 156        | 1,691              | 14.6%           | 36,387              | 21.52               | 21.17               |
| Thereafter     | 164        | 3,152              | 27.3%           | 64,819              | 20.57               | 20.19               |
|                | 1,317      | 10,522             | 91.0%           | $209,628            | $19.92              | $18.94              |

(1)    Annualizedrental amount expiring is defined as net rentable square feet expiringmultiplied by the weighted average expiring annual rental rate per net rentablesquare foot.

(2)    Weighted average expiring gross rental rate is theweighted average rental rate including expense escalations for office space.

(3)    Estimated average market rent is based uponinformation obtained from (i) the Company's own experience in leasing space atthe properties: (ii) leasing agents in the relevant markets with respect toquoted rental rates and completed leasing transactions for comparableproperties in the relevant markets; and (iii) publicly available data withrespect thereto.  Estimated average market rent is weighted by the net rentablesquare feet expiring in each property.

       Fixed-ratemortgage notes payable total $353,975,000 at December 31, 2004 and are securedby 32 properties in various markets with interest rates ranging from 3.67% to8.25%.  Maturity dates on these mortgage notes payable range from August 2007to October 2019 on 14 to 30 year amortizations.  See Note E - "Notes Payable" tothe consolidated financial statements.

       The majority of the Company's fixedrate secured debt contains prepayment provisions based on the greater of ayield maintenance penalty or 1.0% of the outstanding loan amount.  The yieldmaintenance penalty essentially compensates the lender for the differencebetween the fixed rate under the loan and the yield that the lender wouldreceive if the lender reinvested the prepaid loan balance in U.S. TreasurySecurities with a similar maturity as the loan.

----

**Customers**

       The office properties are leasedto approximately 1,317 customers, which are in a wide variety of industriesincluding government agencies, banking, professional services (including legal,accounting, and consulting), energy, financial services andtelecommunications.  The following table sets forth information concerning the25 largest customers of the properties owned directly or through joint venturesas of January 1, 2005 (in thousands, except square foot data):

| ** **                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Annualized**     | ** **                  | **Lease**      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------------------|----------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                  | **Square** | **Rental**         | ** **                  | **Expiration** |
| **Customer**                                                                                                                                                                                                                                                                                                                                                                | **Feet**   | **Revenue (1)**    | **Office Property**         | **Date**       |
| Blue Cross Blue Shield of  Georgia                                                                                                                                                                                                                                                                                                                                          | 265,446    | $  7,021 | Capital City Plaza          | (2)            |
| General Services  Administration (GSA)                                                                                                                                                                                                                                                                                                                                      | 365,238    | 4,944              | (3)                         | (3)            |
| Regions Financial  Corporation                                                                                                                                                                                                                                                                                                                                              | 215,526    | 4,558              | Morgan Keegan Tower         | 09/07          |
| Cox Enterprises                                                                                                                                                                                                                                                                                                                                                             | 210,820    | 4,044              | (4)                         | (4)            |
| South Carolina State  Government                                                                                                                                                                                                                         | 226,397    | 3,979              | (5)                         | (5)            |
| Nabors Industries/Nabors  Corporate Services                                                                                                                                                                                                                                                                                                                                | 173,398    | 3,634              | One Commerce Green          | (6)            |
| Bank of America, NA                                                                                                                                       | 263,439    | 3,064              | (7)                         | (7)            |
| Schlumberger Technology                                                                                                                                                                 | 155,324    | 2,806              | Schlumberger                | (8)            |
| Honeywell                                                            | 142,464    | 2,762              | Honeywell Building          | 07/08          |
| Progress Energy                                                                                                                                                                                                                                                                                                                                                             | 133,279    | 2,446              | Central Station             | 05/08          |
| General Electric                                                                                                                                                                                                                                                                                                                                                            | 111,525    | 2,428              | (9)                         | (9)            |
| Akerman, Senterfitt &  Eidson, PA                                                                                                                                                                                                                                                                                                                                       | 90,046     | 2,140              | Citrus Center               | (10)           |
| DHL Airways                                                                                   | 98,649     | 1,888              | One Commerce Green          | 11/05          |
| MeadWestvaco Corporation                                                                                                                                                                                         | 100,457    | 1,809              | Westvaco Building           | 01/06          |
| Charles Schwab & Co.                                                                                                                                       | 82,548     | 1,765              | (11)                        | (11)           |
| PGS Tensor Geophysical, Inc.                                                                                                                                                                                                    | 91,960     | 1,730              | Tensor Building             | 03/05          |
| Forman, Perry, Watkins,  Krutz & Tardy                                                                                                                                                                                                                                                                                                                                  | 94,868     | 1,716              | (12)                        | (12)           |
| First Tennessee Bank, NA                                                                                                                                                                          | 111,756    | 1,580              | First Tennessee Plaza       | (13)           |
| URS Corporation                                                                                                                                                                                                                                                                                                                                                             | 56,164     | 1,467              | Squaw Peak Corporate Center | 11/08          |
| Viad Corporation                                                                                                       | 158,222    | 1,410              | Viad Corporate Center       | (14)           |
| Louisiana-Pacific  Corporation                                                                                                                                                                                                                                                                                                                                              | 76,861     | 1,300              | Bank of America Plaza       | 12/15          |
| Young & Rubicam                                                                                                              | 122,078    | 1,274              | 233 North Michigan          | (15)           |
| United Healthcare Services                                                                                                                                                                        | 102,177    | 1,253              | (16)                        | (16)           |
| Lennar Homes of Texas                                                                                                                                                                                                                                                                                                                                                       | 55,643     | 1,183              | 550 Greens Parkway          | 10/09          |
| Boult, Cummings, Conners,  & Berry, PLLC                                                                                                                                                                                                                                                                                             | 79,086     | 1,107              | Bank of America Plaza       | (17)           |
|                                                                                                                                                                                                                                                                                                                                                                             | 3,583,371  | $63,308            |                             |                |
| Total Rental Square Footage  (1)                                                                                                                                                                                                                                                                                                                                            | 11,562,590 |                    |                             |                |
| Total Annualized Rental  Revenue (1)                                                                                                                                                                                                                                                                                                                                        | $165,368   |                    |                             |                |

(1)    AnnualizedRental Revenue represents the gross rental rate (including escalations) persquare foot as of January 1, 2005, multiplied by the number of square feetleased by the customer.  Annualized rent for customers in unconsolidated jointventures is calculated based on Parkway's ownership interest.  However, leasedsquare feet represents 100% of square feet leased through direct ownership orthrough joint ventures.

(2)    Blue Cross Blue Shield of Georgia, Inc. occupies265,446 square feet expiring in June 2014 with a cancellation option in June2012.

----

(3)    GSAleases 365,238 square feet in 13 properties under separate leases that expireas follows:

| ** **            | ** ** | **Lease**         |
|-----------------------|------------|-------------------|
| ** **            | **Square** | **Expiration**    |
| **Office Property**   | **Feet**   | **Date**          |
|                       |            |                   |
| 233 North Michigan    | 189,316    | 11/09*            |
| One Jackson Place     | 25,726     | 07/10   |
| Moorefield I and II   | 24,461     | 06/05   |
| First Tennessee Plaza | 22,069     | 03/08   |
| Carmel Crossing       | 21,384     | 05/10   |
| Carmel Crossing       | 20,618     | 09/12   |
| Falls Building        | 20,051     | 01/13   |
| Greenbrier II         | 13,971     | 01/10   |
| Morgan Keegan Tower   | 8,603      | 06/13   |
| City Centre           | 5,471      | 10/12   |
| Moorefield III        | 5,370      | 03/05   |
| Town Point Center     | 5,155      | 11/11   |
| 111 Capitol Building  | 3,043      | 04/14   |
|                       | 365,238    |                   |

*Cancellation option in 11/06, limited to 33,609 square feet.

(4)    Cox Enterprises, Inc. leases 210,820 square feet andthe leases expire as follows:

|                             |            | **Lease**         |
|-----------------------------|------------|-------------------|
| ** **                  | **Square** | **Expiration**    |
| **Office Property**         | **Feet**   | **Date**          |
| Peachtree Dunwoody Pavilion | 96,757     | 08/10   |
| Peachtree Dunwoody Pavilion | 72,137     | 12/08   |
| Peachtree Dunwoody Pavilion | 22,990     | 09/10*            |
| Moorefield I                | 18,936     | 06/10   |
|                             | 210,820    |                   |

*Cancellation option beginning in 12/04.

(5)    South Carolina State Government Agencies lease 226,397square feet and the leases expire as follows:

|                      |            | **Lease**         |
|----------------------|------------|-------------------|
| ** **           | **Square** | **Expiration**    |
| **Office Property**  | **Feet**   | **Date**          |
| Capitol Center       | 159,303    | 06/05*            |
| Capitol Center       | 46,902     | 06/09   |
| Capitol Center       | 15,711     | 06/11   |
| Atrium at Stoneridge | 4,481      | 04/05        |
|                      | 226,397    |                   |

*Cancellation option available every June 30th.

(6)    Nabors Industries/Nabors Corporate Services occupies173,398 square feet expiring in December 2007 with a cancellation optionbeginning December 31, 2006.

(7)    Bank of America, NA leases 263,439 square feet intwo properties under separate leases that expire as follows:  180,530 squarefeet in March 2012 at Bank of America Plaza in Nashville, TN and 82,909 squarefeet in June 2006 at Bank of America Tower in Columbia, SC.

(8)    Schlumberger Technology leases 155,324 square feetexpiring in April 2007 with a cancellation option beginning May 1, 2003, withtwelve months written notice.

(9)    General Electric occupies 111,525 square feet in twoproperties under separate leases that expire as follows: 91,200 square feet inApril 2015 at Toyota Center and 20,325 square feet in April 2008 at CharlottePark with a cancellation option in May 2006.

(10)  Akerman, Senterfitt & Edison, PA leases 90,046 square feetexpiring as follows:  67,979 square feet in December 2005, 17,186 square feetin March 2008 and 4,881 square feet in February 2008. 

(11)  Charles Schwab & Co. leases 82,548 square feet in twoproperties under separate leases that expire as follows: 79,223 square feet inNovember 2010 at Maitland 200 and 3,325 square feet in August 2005 at CitrusCenter.

(12)  Forman, Perry, Watkins, Krutz & Tardy ("FPWKT") leases 94,868square feet expiring as follows:  69,341 square feet in December 2008 in One  Jackson Place, 14,903 square feet in December 2011 in City Centre and 10,624square feet in July 2009 in 1717 St. James with a cancellation option afterJuly 2006.  Subsequent to January 1, 2004, FPWKT signed a lease for 159,000square feet in City Centre commencing upon completion of the improvements tothe space between August 2004 and May 2005.  FPWKT will occupy the spacethrough December 31, 2011, subject to certain termination rights beginning July2007.  The firm is consolidating employees from two buildings in Jackson, Mississippi andwill vacate 69,341 square feet in One Jackson Place.

(13)  First Tennessee Bank leases 111,756 square feet expiring inSeptember 2014.  The lease contains two, one-time contraction options inOctober 2006 and October 2008 for approximately 17,000 square feet each. 

(14)  ViadCorporation leases 158,222 square feet in the Viad Corporate Center underseparate leases that expire as follows:  156,364 square feet in August 2011 and1,858 square feet in April 2008.

(15)  Young & Rubicam leases 122,078 square feet expiring inNovember 2011 with a cancellation option beginning in November 2006, limited to34,000 square feet. 

(16)  United Healthcare Services leases 102,177 square feetexpiring as follows:  100,542 square feet in November 2009 in 233 NorthMichigan with a cancellation option on 67,131 square feet at any time withwritten notice; and 1,635 square feet in December 2006 in Cedar Ridge. 

(17)  Boult, Cummings, Conners & Berry, PLLC leases 98,813 squarefeet expiring in May 2009.  The lease contains a cancellation option if Bank ofAmerica relocates and for any other reason in each of the first three yearsfollowing September 2002.

Non-CoreAssets

       Since January 1, 1995, Parkway haspursued a strategy of liquidating its non-core assets and using the proceedsfrom such sales to acquire office properties, pay down short-term debt and repurchaseits own stock.  The Company defines non-core assets as all assets other thanoffice and parking properties, which at December 31, 2004 consisted ofundeveloped land.  The book value of all remaining non-office building realestate assets, all of which are for sale, was $3,528,000 as of December 31, 2004 with a carrying cost of approximately $30,000 annually. 

**ITEM 3.  *Legal Proceedings.***

       The Company and its subsidiaries are,from time to time, parties to litigation arising from the ordinary course oftheir business.  Management of Parkway does not believe that any suchlitigation will materially affect the financial position or operations ofParkway.

**ITEM 4.  *Submission of Matters to a Vote of Security Holders.***

       None.

----

**PART II**

**ITEM 5.  *Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.***

       The Company's common stock ($.001 parvalue) is listed and trades on the New York Stock Exchange under the symbol "PKY". The number of record holders of the Company's common stock at January 1, 2005,was approximately 2,788.

       As of March 1, 2005, the lastreported sales price per common share on the New York Stock Exchange was $47.83. The following table sets forth, for the periods indicated, the high and lowlast reported sales prices per share of the Company's common stock and the pershare cash distributions paid by Parkway during each quarter.

| ** **        | **Year Ended**                   | ** ** | **Year Ended**         |
|-------------------|----------------------------------|------------|------------------------|
| ** **        | **December 31,  2004**           | ** ** | **December 31,  2003** |
| **Quarter Ended** | **    High** | **Low**    | **Distributions**      | ** ** | **    High** | **Low** | **Distributions** |
| March 31          | $47.95                           | $41.95     | $  .65       |  | $37.80 | $33.37 | $  .65 |
| June 30           | 47.35                            | 37.65      | .65                    |  | 42.05 | 37.85 | .65 |
| September 30      | 48.13                            | 42.85      | .65                    |  | 45.22 | 42.53 | .65 |
| December 31       | 51.36                            | 46.52      | .65                    |  | 45.30 | 41.30 | .65 |
|                   |                                  |            | $2.60                  |  |  |  | $2.60 |

       Common stock distributions during 2004and 2003 ($2.60 per share) were taxable as follows for federal income taxpurposes:

| ** **                      | **Year  Ended**  |
|---------------------------------|------------------|
| ** **                      | **December  31** |
| ** **                      | **2004**         | **2003** |
| Ordinary income                 | $2.00            | $2.32 |
| Post May 5, 2003  capital gain  | .04              | .16 |
| Unrecaptured Section  1250 gain | .14              | .12 |
| Return of capital               | .42              | - |
| ** **                      | $2.60            | $2.60 |

       Additionally, through the Company'sDividend Reinvestment and Stock Purchase Plan ("DRIP Plan"), 296,173 commonshares were sold during 2004.  Net proceeds received on the issuance of shareswere $11,515,000, which equates to an average net price per share of $38.88 ata discount of 2.3%.  The proceeds were used to reduce amounts outstanding underthe Company's short-term lines of credit.

       The following table shows the high andlow Series D preferred share prices and per share distributions paid for eachquarter of 2004 reported by the New York Stock Exchange.

| ** **        | **Year  Ended**        | ** ** | **Year  Ended**        |
|-------------------|------------------------|------------|------------------------|
| ** **        | **December  31, 2004** | ** ** | **December  31, 2003** |
| **Quarter Ended** | **High**               | **Low**    | **Distributions**      | ** ** | **High** | **Low** | **Distributions** |
| March 31          | $27.90                 | $26.35     | $  .50       |  | $        - | $        - | $     -  |
| June 30           | 26.75                  | 24.75      | .50                    |  | 26.60 | 26.60 | .02 |
| September 30      | 26.65                  | 25.41      | .50                    |  | 27.00 | 25.75 | .50 |
| December 31       | 26.65                  | 25.74      | .50                    |  | 26.75 | 25.98 | .50 |
|                   |                        |            | $2.00                  |  |  |  | $1.02 |

----

       Asof January 1, 2005,there were approximately 6 holders of record of the Company's 2,400,000outstanding shares of Series D preferred stock.  Series D preferred stockdistributions during 2004 and 2003 were taxable as follows for federal incometax purposes:

|                                 | **Year  Ended December 31** |
|---------------------------------|-----------------------------|
|                                 | **2004**                    | **2003** |
| Ordinary  income                | $1.86                       | $1.01 |
| Post  May 5, 2003 capital gain  | .03                         | .01 |
| Unrecaptured  Section 1250 gain | .11                         | - |
|                                 | $2.00                       | $1.02 |

      In 2001, the Company issued 2,142,857shares of 8.34% Series B Cumulative Convertible Preferred stock to Rothschild/FiveArrows.  In addition to the issuance of Series B preferred stock, Parkwayissued a warrant to Five Arrows to purchase 75,000 shares of the Company'scommon stock at a price of $35 for a period of seven years.  During 2004, 1,139,358shares of Series B preferred stock were converted into 1,139,358 shares ofParkway common stock.  As of December 31, 2004, there were 803,499 shares ofSeries B preferred stock outstanding.  Dividends of $5,186,000 and $6,091,000 weredeclared on the stock in 2004 and 2003, respectively.  There is no publicmarket for Parkway's Series B Cumulative Convertible Preferred stock. 

Equity Compensation Plans

       The following table sets forth thesecurities authorized for issuance under Parkway's equity compensation plans asof December 31, 2004:
|                           | (a)                          | (b)                       | (c)                          |
|---------------------------|------------------------------|---------------------------|------------------------------|
| ** **                | ** **                   | ** **                | **Number of  securities**    |
| ** **                | ** **                   | ** **                | **remaining  available for** |
| ** **                | ** **                   | ** **                | **future issuance  under**   |
| ** **                | **Number of  securities to** | **Weighted-average**      | **equity  compensation**     |
| ** **                | **be issued upon  exercise** | **exercise price  of**    | **plans (excluding**         |
| ** **                | **of outstanding  options,** | **outstanding  options,** | **securities  reflected in** |
| **Plan category**         | **warrants and  rights**     | **warrants and  rights**  | **column (a)**               |
| Equity compensation plans |                              | `                         |                              |
| approved by security      |                              |                           |                              |
| holders                   | 485,644                      | $30.92                    | 309,209                      |
|                           |                              |                           |                              |
| Equity compensation plans |                              |                           |                              |
| not approved by security  |                              |                           |                              |
| holders                   |                              |                           |                              |
|                           | -                            | -                         | -                            |
| Total                     | 485,644                      | $30.92                    | 309,209                      |

       EffectiveJanuary 1, 2003, the stockholders of the Company approved Parkway's 2003 EquityIncentive Plan that authorized the grant of up to 200,000 equity based awards toemployees of the Company.  At present, it is Parkway's intention to grantrestricted stock and/or deferred incentive share units instead of stock optionsto employees of the Company, although the 2003 Plan authorizes various forms ofincentive awards, including options.  As of December 31, 2004, 143,500shares of incentive restricted stock have been issued to certain officers of theCompany in connection with the VALUESQUAREplan. The restricted shares issued are valued at $5,162,000, and vest at the end of 7years or December 31, 2005 if certain goals of the VALUESQUARE plan are achieved.  Additionally, 9,487deferred incentive share units were granted to employees of the Company.   Thedeferred incentive share units are valued at $436,000, and vest at the end of 4years.  Compensation expense related to the restricted stock and deferredincentive share units of $783,000 and $694,000 was recognized in 2004 and 2003,respectively.

**Purchase of Equity Securities**

      Currently, Parkway doesnot have an authorized share repurchase program and did not purchase anyParkway common stock during 2004.  In 2003, 10,830 shares were purchased at anaverage price per share of $33.76.  

----

**ITEM6.  *Selected Financial Data.***
|                                                                                            | **Year  Ended  12/31/04**                       | **Year  Ended  12/31/03**                       | **Year  Ended  12/31/02**                       | **Year  Ended  12/31/01**                       | **Year  Ended  12/31/00**                       |
|--------------------------------------------------------------------------------------------|-------------------------------------------------|-------------------------------------------------|-------------------------------------------------|-------------------------------------------------|-------------------------------------------------|
|                                                                                            | (In thousands, except per share data)           |
| **Operating  Data**:                                                                       |                                                 |                                                 |                                                 |                                                 |                                                 |
| Revenues                                                                                   |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Income  from office and parking properties                   | $160,506                                   | $142,196                                   | $152,442                                   | $135,968                                   | $118,970                                   |
|      Other  income                                                | 3,869                                      | 3,854                                      | 2,818                                      | 2,767                                      | 3,507                                      |
| Total  revenues                                                                            | 164,375                                    | 146,050                                    | 155,260                                    | 138,735                                    | 122,477                                    |
| Expenses                                                                                   |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Operating  expenses:                                         |                                                 |                                                 |                                                 |                                                 |                                                 |
|           Office  and parking properties | 73,487                                     | 63,362                                     | 65,942                                     | 57,465                                     | 49,397                                     |
|           Non-core  assets               | 22                                         | 37                                         | 34                                         | 39                                         | 60                                         |
|           Interest  expense              | 21,580                                     | 16,319                                     | 19,839                                     | 21,828                                     | 16,371                                     |
|           Depreciation  and amortization | 36,843                                     | 28,030                                     | 27,412                                     | 23,788                                     | 19,651                                     |
|      Interest  expense on bank notes                              | 4,237                                      | 3,399                                      | 6,647                                      | 5,497                                      | 6,927                                      |
|      General  and administrative and other                        | 4,822                                      | 4,592                                      | 5,445                                      | 5,240                                      | 4,689                                      |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Income  before gain (loss), minority interest, and                                         |                                                 |                                                 |                                                 |                                                 |                                                 |
|      discontinued  operations                                     | 23,384                                     | 30,311                                     | 29,941                                     | 24,878                                     | 25,382                                     |
| Equity  in earnings of unconsolidated joint ventures                                       | 1,697                                      | 2,212                                      | 824                                        | 62                                         | 47                                         |
| Gain  (loss) on note receivable, joint venture interests,                                  |                                                 |                                                 |                                                 |                                                 |                                                 |
|      real  estate and real estate equity securities               | 4,309                                      | 10,661                                     | (2,068)                                         | 1,611                                      | 9,471                                      |
| Minority  interest - unit holders                                                          | (2)                                             | (3)                                             | (2)                                             | (3)                                             | (4)                                             |
| Minority  interest - real estate partnerships                                              | 127                                        | -                                               | -                                               | -                                               | -                                               |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Income  before discontinued operations                                                     | 29,515                                     | 43,181                                     | 28,695                                     | 26,548                                     | 34,896                                     |
| Income  from discontinued operations                                                       | -                                          | -                                          | 47                                         | -                                          | -                                          |
| Gain  on sale of real estate from discontinued operations                                  | -                                          | -                                          | 770                                        | -                                          | -                                          |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Net  income                                                                                | 29,515                                     | 43,181                                     | 29,512                                     | 26,548                                     | 34,896                                     |
| Original  issue costs associated with redemption                                           |                                                 |                                                 |                                                 |                                                 |                                                 |
|      of  preferred stock                                          | -                                          | (2,619)                                         | -                                               | -                                               | -                                               |
| Dividends  on preferred stock                                                              | (4,800)                                         | (5,352)                                         | (5,797)                                         | (5,797)                                         | (5,797)                                         |
| Dividends  on convertible preferred stock                                                  | (5,186)                                         | (6,091)                                         | (6,257)                                         | (3,249)                                         | -                                          |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Net  income available to common stockholders                                               | $  19,529                        | $  29,119                        | $  17,458                        | $  17,502                        | $  29,099                        |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Net  income per common share:                                                              |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Basic:                                                       |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Income  before  discontinued operations                 | $      1.73  | $      2.85  | $      1.78  | $      1.87  | $      2.96  |
|      Discontinued  operations                                     | -                                          | -                                          | .09                                        | -                                          | -                                          |
|      Net income                                                   | $      1.73  | $      2.85  | $      1.87  | $      1.87  | $      2.96  |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Diluted:                                                     |                                                 |                                                 |                                                 |                                                 |                                                 |
| **     **Income before discontinued operations                    | $      1.70  | $      2.79  | $      1.75  | $      1.85  | $      2.93  |
|      Discontinued  operations                                     | -                                          | -                                          | .09                                        | -                                          | -                                          |
|      Net income                                                   | $      1.70  | $      2.79  | $      1.84  | $      1.85  | $      2.93  |
|                                                                                            |                                                 |                                                 |                                                 |                                                 |                                                 |
| Book value per common share (at end of  year)                                              | $    26.44             | $    26.09             | $    25.10             | $    25.33             | $    26.51             |
| Dividends per common share                                                                 | $      2.60  | $      2.60  | $      2.56  | $      2.45  | $      2.12  |
| Weighted average shares outstanding:                                                       |                                                 |                                                 |                                                 |                                                 |                                                 |
|      Basic                                                        | 11,270                                     | 10,224                                     | 9,312                                      | 9,339                                      | 9,825                                      |
|      Diluted                                                      | 11,478                                     | 10,453                                     | 9,480                                      | 9,442                                      | 9,926                                      |
| **Balance Sheet Data**:                                                                    |                                                 |                                                 |                                                 |                                                 |                                                 |
| **     **Office and parking  investments, net of depreciation     | $820,807                                   | $728,695                                   | $706,551                                   | $795,860                                   | $596,109                                   |
| **     **Real estate equity  securities                           | -                                          | -                                          | -                                          | -                                          | 23,281                                     |
| **     **Investment in  unconsolidated joint ventures             | 25,294                                     | 20,026                                     | 15,640                                     | 412                                        | 384                                        |
| **     **Total assets                                             | 931,188                                    | 802,308                                    | 763,937                                    | 840,612                                    | 655,237                                    |
|      Notes  payable to banks                                      | 104,618                                    | 110,075                                    | 141,970                                    | 126,044                                    | 81,882                                     |
|      Mortgage  notes payable                                      | 353,975                                    | 247,190                                    | 209,746                                    | 304,985                                    | 225,470                                    |
|      Total liabilities                                            | 511,802                                    | 394,287                                    | 387,116                                    | 465,031                                    | 329,488                                    |
|      Preferred  stock                                             | 57,976                                     | 57,976                                     | 66,250                                     | 66,250                                     | 66,250                                     |
|      Convertible  preferred stock                                 | 28,122                                     | 68,000                                     | 75,000                                     | 75,000                                     | -                                          |
|      Stockholders'  equity                                        | 415,648                                    | 407,980                                    | 376,821                                    | 375,581                                    | 325,749                                    |

----

**ITEM 7.  *Management's Discussion andAnalysis of Financial Condition and Results of Operation.***

**Overview**

       Parkway is a self-administered andself-managed REIT specializing in the acquisition, operations and leasing ofoffice properties.  The Company is geographically focused on the Southeasternand Southwestern United States and Chicago.  As of January 1, 2005 Parkwayowned or had an interest in 62 office properties located in eleven states withan aggregate of approximately 11.6 million square feet of leasable space.  TheCompany generates revenue primarily by leasing office space to its customersand providing management and leasing services to third-party office propertyowners (including joint venture interests).  The primary drivers behind Parkway'srevenues are occupancy, rental rates and customer retention.  

*Occupancy.*  Parkway's revenues are dependent on the occupancy of itsoffice buildings.  As a result of job losses and over supply of officeproperties, vacancy rates increased nationally and in Parkway's markets.  Theoffice sector is beginning to recover from high vacancy rates due to animproving economy.  As of January 1, 2005, occupancy of Parkway's officeportfolio was 91.0% compared to 90.7% as of October 1, 2004 and 87.9% as of January1, 2004.  Not included in the January 1, 2005 occupancy rate are 37 signedleases totaling 150,000 square feet, which commence during the first through thirdquarters of 2005 and will raise our percentage leased to 92.3%.  To combatrising vacancy, Parkway utilizes innovative approaches to produce new leases.  Theseinclude the Broker Bill of Rights, a short-form lease and customer advocacyprograms which are models in the industry and have helped the Company maintainoccupancy around 90% during a time when the national occupancy rate isapproximately 84%.  Parkway projects occupancy ranging from 91% to 94% during2005 for its office properties.

*Rental Rates.*  An increase in vacancy rateshas the effect of reducing market rental rates and vice versa.  Parkway'sleases typically have three to seven year terms.  As leases expire, the Companyreplaces the existing leases with new leases at the current market rental rate,which today is often lower than the existing lease rate.  Customer retention isincreasingly important in controlling costs and preserving revenue.  

*Customer Retention.*  Keeping our existing customers is important as highcustomer retention leads to increased occupancy, less downtime between leases,and reduced leasing costs.  Parkway estimates that it costs five to six timesmore to replace an existing customer with a new one than to retain the customer. In making this estimate, Parkway takes into account the sum of revenue lostduring downtime on the space plus leasing costs, which rise as market vacanciesincrease.  Therefore, Parkway focuses a great deal of energy on customerretention.  Parkway's operating philosophy is based on the premise that we arein the customer retention business.  Parkway seeks to retain its customers bycontinually focusing on operations at its office properties.  The Companybelieves in providing superior customer service; hiring, training, retainingand empowering each employee; and creating an environment of open communicationboth internally and externally with our customers and our stockholders.  Overthe past eight years, Parkway maintained an average 74.3% customer retentionrate.  Parkway's customer retention for the year ending December 31, 2004 was 69.8%compared to 58.1% for the year ending December 31, 2003.  

       In 2003,customer retention was below the Company's historical average primarily as aresult of the loss of two major customers effective December 31, 2003: Burlington Industries, which occupied 137,000 square feet at 400 North Belt inHouston, Texas and Skytel, a subsidiary of MCI/WorldCom, Inc. ("WorldCom"),which occupied 156,000 square feet at the Skytel Centre in Jackson,Mississippi.

**       **Subsequent to December 31, 2003, Parkway has leased approximately 86% of the former Burlington space at400 North Belt to several customers including Cal Dive International, ECFMG,Grant Prideco and MMI.  This additional leasing has raised the occupancy at 400Northbelt to 88.4%.  Also subsequent to December 31, 2003, the Company renamedthe Skytel Centre to City Centre, signed leases which raise the City Centrebuilding occupancy to approximately 93.4% and began the development of a $6.9million, 517-space parking facility to accommodate building customers.  Thelargest lease at City Centre was signed with Forman Perry Watkins Krutz &Tardy LLP for 159,000 square feet, commencing upon completion of the improvementsto the space between August 2004 and May 2005.  Forman Perry will occupy thespace through December 31, 2011, subject to certain termination rightsbeginning July 2007.  The firm is consolidating employees from two buildings inJackson and will vacate approximately 69,000 square feet in One Jackson Place,another Parkway-owned asset.  The other large new customers at City Centre includeEntergy Mississippi, Inc. and Ross & Yerger, which leased 19,500 and 14,500square feet, respectively**.**

*Strategic Planning.*  For many years, Parkway has been engaged in a processof strategic planning and goal setting.  The material goals and objectives ofParkway's earlier strategic plans have been achieved, and benefited Parkway'sstockholders 

----

through increased FFOand dividend payments per share.  Effective January 1, 2003, the Companyadopted a three-year strategic plan referred to as VALUESQUARE(Value Square).  This plan reflects the employees' commitment to createvalue for its shareholders while holding firm to the core values as espoused inthe Parkway Commitment to Excellence.  The Company plans to create value by Venturingwith best partners, Asset recycling, Leverage neutral growth, Uncompromisingfocus on operations and providing an Equity return to its shareholdersthat is 10% greater than that of its peer group, the National Association ofReal Estate Investment Trusts ("NAREIT") office index.  Equity return isdefined as growth in funds from operations ("FFO") per diluted share.

The highlights of2003 and 2004 reflect the strategy set forth in VALUESQUAREasdescribed below:
    -         ***Venture with Best Partners.***  During 2003 and 2004,we sold joint venture interests in six office properties.  Parkway continues toevaluate its existing portfolio for joint venture candidates and anticipatesjoint venturing more properties, as well as purchasing new properties with theintention of joint venturing them. 
    -       ***Asset Recycling.***  In 2003, the Company sold oneoffice property, while maintaining a 10-year non-cancelable managementcontract, and a .74 acre parcel of land.  Using the proceeds from the jointventures, property sales, stock offerings and bank lines of credit, Parkwaypurchased four office buildings totaling $125 million in 2003 and three officebuildings totaling $150 million in 2004. 
    -        ***Leverage Neutral Growth.***  Parkway began 2003 with a debt tototal market capitalization of 45% and operated 2003 and 2004 at an average of41%.  The decrease in debt to total market capitalization is a result oftiming delays in reinvesting proceeds from joint ventures, asset sales and stockofferings in addition to a rising stock price.  The Company anticipatesthat the debt to total market capitalization will average around 45% for thethree years of VALUESQUARE.  During 2003, the Company assumedone mortgage for $20 million in connection with the Citrus Center purchase in Orlando,closed four mortgages for approximately $97 million, issued 690,000 commonshares for a net $24 million, redeemed 2,650,000 shares of 8.75% Series APreferred stock and issued 2.4 million shares of 8.0% Series D Preferred stock.  During 2004, Parkway assumed two mortgages totaling $78 million in connection withthe Capital City Plaza purchase in Atlanta and the Squaw Peak Corporate Centerpurchase in Phoenix and placed three mortgages totaling $81 million.  As ofDecember 31, 2004, the Company's debt-to-total market capitalization ratio was 41.4%as compared to 46.1% as of September 30, 2004 and 41.2% as of December 31,2003. 
    -      ***Uncompromising Focus on Operations***.  Recognizingthat in this difficult real estate environment, operating efficiently andconsistently is more important than ever, Parkway implemented theUncompromising Focus on Operations ("UFO") program in the first quarter of2003, whereby Parkway's Customer Advocate grades each property in all areas ofconsistency and high standards.  This is done in conjunction with the CustomerAdvocate interviews with each customer each year.  Parkway continues to focuson the basics of our business:  customer retention, leasing, and controllingoperating expenses and capital expenditures, to maintain our occupancy, all of whichhave the effect of maintaining and increasing net operating income.   
    -        ***Equity Returns to Shareholders 10% Greater than the NAREITOffice Index***.  Parkway is two-thirds of the way through the VALUESQUAREplan and achieved this financial goal for the first two years of the plan. FFO growth for the first 24 months of VALUESQUAREwas .9% for theCompany, which exceeded the FFO growth of the NAREIT Office Index by more than10%. 

*Discretionary Fund.*  The Company has begun efforts to form adiscretionary fund, which would acquire office properties similar to thosecurrently held in the portfolio. The targeted size of the fund is $500 millioncomprised of $300 million in debt and $200 million of equity. The Company maycontribute approximately $50 million to the equity of the fund. Targeted potentialinvestors are institutions, pension funds, state retirement systems andendowments. The Company would generate additional economic returns through theasset, property and construction management fees and the leasing commissions. Thereis no assurance that the Company will be successful in its efforts to raise afund, and even if it is successful, the economic benefits will most likely notbe realized until 2006 or beyond. 

----

**Financial Condition**

***Comments are for the balance sheet dated December 31, 2004 compared to thebalance sheet dated December 31, 2003.***

       *Office and Parking Properties. * In2004, Parkway continued the application of its strategy of operating andacquiring office properties, joint venturing interests in office assets, aswell as liquidating non-core assets and office assets that no longer meet theCompany's investment criteria and/or the Company has determined value will bemaximized by selling.  During the year ended December 31, 2004, the Companypurchased three office properties, and sold a joint venture interest in threeoffice properties.  Total assets increased $128,880,000, and office and parkingproperties and parking development (before depreciation) increased $119,545,000or 14.2%.

**Purchases and Improvements**

       Parkway's direct investment in officeand parking properties increased $92,112,000 net of depreciation, to a carryingamount of $820,807,000 at December 31, 2004 and consisted of 55 operatingproperties.  During the year ending December 31, 2004, Parkway purchased three officeproperties as follows (in thousands):

| ** **                      | ** **   | ** **      | **Date**      | **Purchase**        |
|---------------------------------|--------------|-----------------|---------------|---------------------|
| **Office Property**             | **Location** | **Square Feet** | **Purchased** | **Price**           |
| Maitland 200                    | Orlando, FL  | 203             | 01/29/04      | $  26,295 |
| Capital City Plaza (a)          | Atlanta, GA  | 407             | 04/02/04      | 76,330              |
| Squaw Peak Corporate Center (b) | Phoenix, AZ  | 287             | 08/24/04      | 46,906              |
| Total                           |              | 897             |               | $149,531            |

(a)  Parkway assumed a $43,692,000 first mortgage with a 6.75%interest rate as part of the Capital City Plaza purchase.  The mortgage hasbeen recorded at $49,073,000 to reflect the fair value of the financialinstrument based on the rate of 3.67% on the date of purchase.

(b)  Parkway assumed a $33,869,000 first mortgage with an 8.16%interest rate as part of the Squaw Peak Corporate Center purchase.  Themortgage has been recorded at $39,604,000 to reflect the fair value of thefinancial instrument based on the rate of 4.92% on the date of purchase.

       During the year ending December 31,2004, the Company capitalized building improvements, development costs andadditional purchase expenses of $30,749,000 and recorded depreciation expenseof $31,251,000 related to its office and parking properties.

       *Investment in Unconsolidated JointVentures*.  In accordance with the Company's three-year strategic plan,VALUESQUARE,Parkway is committed to forming joint ventures with best partners for thepurpose of acquiring office assets in the Southeastern and Southwestern United States and Chicago.  We believe these investments result in a higher return onequity than 100% owned assets.  Parkway will operate, manage and lease theproperties on a day-to-day basis, provide acquisition and constructionmanagement services to the joint venture, and receive fees for providing theseservices.   The joint venture partner will provide 70 to 80% of the jointventure capital, with Parkway to provide the balance. In 2004, investment inunconsolidated joint ventures increased $5,268,000 or 26.3%.  The primaryreason for the increase is the result of Parkway entering into a joint ventureagreement with respect to three office properties.  See detailed informationregarding the 2004 joint venture transaction under the caption "Joint Ventures"appearing in Item 1. "Business".  The 2004 joint venture transaction is summarizedin the following table (in thousands).

| ** **            | **Interest** | ** **      | **Square** | **Date** | **Gross Sales** |
|-----------------------|--------------|-----------------|------------|----------|-----------------|
| **Property**          | **Sold**     | **Location**    | **Feet**   | **Sold** | **Price**       |
| Falls Point, Lakewood |              | Atlanta, GA and |            |          |                 |
| and Carmel  Crossing  | 80%          | Charlotte, NC   | 550        | 12/14/04 | $53,360         |

       *Land Available for Sale. *At December 31, 2004, non-core assets, totaled $3,528,000.  The Companyexpects to continue its efforts to liquidate its remaining non-core assets.

       *Note Receivable from MooreBuilding Associates LP.*  In accordance with FASB Interpretation No. 46R,"Consolidation of Variable Interest Entities" ("FIN 46R"), Parkway beganconsolidating Moore Building Associates LP ("MBALP") effective 

----

January 1,2004.  Accordingly, the note receivable from MBALP reported in the financialstatements at December 31, 2003 in the amount of $5,926,000 has been eliminatedin consolidation at December 31, 2004.

       *Interest, Rents Receivable andOther Assets.*  Interest, rents receivable and other assets increased $7,376,000for the year ending December 31, 2004.  The increase is primarily attributableto the increase in unamortized lease costs due to the purchase of officeproperties in 2004 and an increase in escrow bank account balances.  Theincrease in unamortized lease costs represents the portion of office property purchaseprices allocated to lease costs.  In 2004, the total purchase price allocatedto lease costs was $2.8 million.  The increase in escrow bank account balancesof $3.2 million is primarily attributable to an increase in capital expenditurereserve requirements for mortgages assumed in connection with 2004 officeproperty purchases.

       *Intangible Assets, Net.* During 2004, intangible assets net of related amortization increased$30,302,000 and was primarily attributable to the allocation of the purchaseprice of 2004 office property purchases to above market in-place leases and thevalue of in-place leases.  In 2004, the total purchase price allocated to abovemarket in-place lease and the value of in-place leases was $2,416,000 and$33,130,000, respectively.  Additionally, in connection with the Rubicon JointVenture, intangible assets disposed totaled $2,926,000.  Parkway accounts forits acquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, "Business Combinations" ("SFAS141"), whichrequires the fair value of the real estate acquired to be allocated to acquiredtangible and intangible assets.

       *Notes Payable to Banks*. Notespayable to banks decreased $5,457,000 or 5% for the year ending December 31,2004.  At December 31, 2004, notes payable to banks totaled $104,618,000 andresulted primarily from advances under bank lines of credit to purchaseadditional properties and to make improvements to office properties.

       *Mortgage Notes Payable WithoutRecourse. * Mortgage notes payable without recourse increased $106,785,000or 43.2% during the year ending December 31, 2004, as a result of the following(in thousands):

|                                                             | **Increase**              |
|-------------------------------------------------------------|---------------------------|
|                                                             | **(Decrease)**            |
| Assumption of first mortgage on  office property purchases  | $  88,677  |
| Placement of mortgage debt                                  | 28,950               |
| Impact of consolidation of  MBALP                           | 13,822               |
| Scheduled principal payments                                | (13,087)                  |
| Principal paid on early  extinguishment of debt             | (11,334)                  |
| Market value adjustment on  reverse swap                    |                           |
|       interest  rate contract | (243)                     |
|                                                             | $106,785             |

       Item 7. "Management's Discussion andAnalysis of Financial Condition and Results of Operation - Financial Condition- Purchases and Improvements" includes a description of mortgages assumed inconnection with 2004 office property purchases.

       On May 26, 2004 the Company closed witha lender two non-recourse first mortgages totaling $28,950,000, which weresecured by two properties. The mortgages are interest only in years one andtwo, have a fixed interest rate of 4.39% with a 7-year term and a 25-yearamortization. Proceeds from the mortgage were used to reduce amountsoutstanding under the Company's lines of credit.

       The Company expects to continueseeking fixed-rate, non-recourse mortgage financing with maturities from fiveto ten years typically amortizing over 25 to 30 years on select office buildinginvestments as additional capital is needed.  The Company targets a debt tototal market capitalization rate at a percentage in the mid-40's.  This ratemay vary at times pending acquisitions, sales and/or equity offerings.  Inaddition, volatility in the price of the Company's common stock may affect thedebt to total market capitalization ratio.  However, over time the Companyplans to maintain a percentage in the mid-40's.  In addition to this debtratio, the Company monitors interest and fixed charge coverage ratios.  Theinterest coverage ratio is computed by comparing the cash interest accrued toearnings before interest, taxes, depreciation and amortization("EBITDA").    The fixed charge coverage ratio is computed by comparingthe cash interest accrued, principal payments made on mortgage loans and preferreddividends paid to EBITDA.

----

The computationof the interest and fixed charge coverage ratios and the reconciliation of netincome to EBITDA are as follows for the year ended December 31, 2004 and 2003 (in thousands):

|                                                                                                                      | **Year Ended**            |
|----------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                      | **December 31**           |
|                                                                                                                      | **2004**                  | ** ** | **2003** |
| **Net  income**                                                                                                      | $  29,515  |  | $  43,181  |
| **Adjustments  to net income:**                                                                                      |                           |  |  |
|         Interest  expense                                                    | 24,309               |  | 18,860  |
|         Amortization  of financing costs                                     | 997                  |  | 858  |
|         Prepayment  expenses - early extinguishment of debt                  | 511                  |  | -  |
|         Depreciation  and amortization                                       | 36,843               |  | 28,030  |
|         Amortization  of deferred compensation                               | 783                  |  | 694  |
|         Gain  on sale of joint venture interests and real estate             | (4,309)                   |  | (10,661) |
|         Tax  expenses                                                        | (49)                      |  | 5  |
|         EBITDA  adjustments - unconsolidated joint ventures                  | 5,929                |  | 5,455  |
|         EBITDA  adjustments - minority interest in real estate partnerships  | (1,772)                   |  | -  |
| ** **                                                                                                           |                           |  |  |
| **EBITDA  (1)**                                                                                                      | $  92,757  |  | $  86,422  |
| ** **                                                                                                           |                           |  |  |
| **Interest  coverage ratio:**                                                                                        |                           |  |  |
| EBITDA                                                                                                               | $  92,757  |  | $  86,422  |
| Interest  expense:                                                                                                   |                           |  |  |
|         Interest  expense                                                    | $  24,309  |  | $  18,860  |
|         Capitalized  interest                                                | 15                   |  | -  |
|         Interest  expense - unconsolidated joint ventures                    | 2,927                |  | 2,796  |
|         Interest  expense - minority interest in real estate partnerships    | (1,093)                   |  | -  |
| Total  interest expense                                                                                              | $26,158              |  | $  21,656  |
| **Interest  coverage ratio**                                                                                         | 3.55                 |  | 3.99  |
| ** **                                                                                                           |                           |  |  |
| **Fixed  charge coverage ratio:**                                                                                    |                           |  |  |
| EBITDA                                                                                                               | $  92,757  |  | $  86,422  |
| Fixed  charges:                                                                                                      |                           |  |  |
|         Interest  expense                                                    | $  26,158  |  | $  21,656  |
|         Preferred  dividends                                                 | 9,986                |  | 11,443  |
|         Preferred  distributions - unconsolidated joint ventures             | 507                  |  | 499  |
|         Principal  payments (excluding early extinguishment of debt)         | 13,087               |  | 11,005  |
|         Principal  payments - unconsolidated joint ventures                  | 633                  |  | 573  |
|         Principal  payments - Monitory interests in real estate partnerships | (399)                     |  | -  |
| Total  fixed charges                                                                                                 | $  49,972  |  | $  45,176  |
| **Fixed  charge coverage ratio**                                                                                     | 1.86                 |  | 1.91  |

       (1)  EBITDA, a non-GAAP financialmeasure, means operating income before mortgage and other interest expense,income taxes, depreciation and amortization.  We believe that EBITDA is usefulto investors and Parkway's management as an indication of the Company's abilityto service debt and pay cash distributions.  EBITDA, as calculated by us, isnot comparable to EBITDA reported by other REITs that do not define EBITDAexactly as we do.  EBITDA does not represent cash generated from operatingactivities in accordance with generally accepted accounting principles, andshould not be considered an alternative to operating income or net income as anindicator of performance or as an alternative to cash flows from operatingactivities as an indicator of liquidity.

       *Accounts Payable and Other Liabilities.* During 2004, accounts payable and other liabilities increased $5,446,000.  Theincrease is primarily attributable to the allocation of office propertypurchase prices to below market in-place leases in accordance with SFAS 141which totaled $3,739,000 at December 31, 2004.

       *Subsidiary Redeemable PreferredMembership Interests. *In connection with the Capital City Plaza purchase, thelimited liability company that owns the building issued $15.5 million inpreferred membership interests to the seller.  The preferred membershipinterests pay the seller a 7% coupon rate and were issued to accommodate theirtax planning needs.  The seller has the right to redeem $5.5 million of themembership interests within six months of closing and $10 million of themembership interests within nine months of closing.  Parkway has the right toretire the preferred interest 40 months after closing.  During the thirdquarter in 2004, the seller redeemed $4,750,000 of the preferred membershipinterests.

----

** **

| **Increase**

**(Decrease)**

Net income

$  29,515 

Change in  market value of interest rate swap

(226)

Comprehensive  income

29,289 

Common stock  dividends declared

(29,951)

Preferred  stock dividends declared

(4,800)

Convertible  preferred stock dividends declared

(5,186)

Exercise of  stock options

5,964 

Shares  issued - stock offerings

(5)

Shares  issued - Directors' fees

138 

Restricted  shares and deferred incentive share units issued

271 

Unearned  compensation

(271)

Amortization  of unearned compensation

783 

Shares  contributed to deferred compensation plan

(79)

Shares issued  through DRIP plan

11,515 

$    7,668 

       During 2004, 1,139,358 shares of8.34% Series B Cumulative Convertible Preferred Stock were converted into1,139,358 shares of common stock.  As of December 31, 2004, there were 803,499 shares of Series B Convertible Preferred Stock outstanding.

       Through the Company's DividendReinvestment and Stock Purchase Plan ("DRIP Plan"), 296,173 common shares weresold during 2004.  Net proceeds received on the issuance of shares were $11,515,000,which equates to an average net price per share of $38.88 at a discount of 2.3%. The proceeds were used to reduce amounts outstanding under the Company'sshort-term lines of credit.

**Results of Operations**

***Comments are for the year ended December 31, 2004 compared to the year endedDecember 31, 2003.***

       Net income available for commonstockholders for the year ended December 31, 2004 was $19,529,000 ($1.73 perbasic common share) as compared to $29,119,000 ($2.85 per basic common share)for the year ended December 31, 2003.  Net income for the year ending December31, 2004 included gains on a note receivable and the sale of a joint ventureinterest of $4,309,000.  Net income for the year ending December 31, 2003included gains from the sale of two joint venture interests, an office propertyand land in the amount of $10,661,000.

       *Operating Properties*.  Theprimary reason for the change in the Company's net income from office andparking properties for 2004 as compared to 2003 is the net effect of the operationsof the following properties purchased, properties sold and joint ventureinterests sold (in thousands):

**Properties Purchased:**

**Office Properties**

** **

**Purchase Date**

** **

**Square Feet**

Citrus Center

02/11/03

258

Peachtree Dunwoody Pavilion

08/28/03

366

Wells Fargo Building

09/12/03

135

Carmel Crossing

11/24/03

324

Maitland 200

01/29/04

203

Capital City Plaza

04/02/04

407

Squaw Peak Corporate Center

08/24/04

287

                                                          

**Property Sold:**

** **

**Office Property**

** **

**Date Sold**

** **

**Square Feet**

BB&T Financial Center

08/01/03

240

**Joint Venture Interests Sold:**

**Office Property/Interest  Sold**

** **

**Date Sold**

** **

**Square Feet**

Viad Corporate Center/70%

03/06/03

481

UBS Building & River Oaks  Place/80%

05/28/03

170

Falls Pointe, Lakewood & Carmel Crossing/80%

12/14/04

550

       Operations of office and parkingproperties are summarized below (in thousands):

**Year Ended**

**December 31**

**2004**

**2003**

Income

$160,506 

$142,196 

Operating expense

(73,487)

(63,362)

87,019 

78,834 

Interest expense

(21,580)

(16,319)

Depreciation and amortization

(36,843)

(28,030)

Income from office and parking properties

$  28,596 

$  34,485 

       *ManagementCompany Income*.  The increase in management company income of$1,696,000 for the year ended December 31, 2004 compared to 2003 is primarilydue to the acquisition fee of approximately $2 million earned on the RubiconJoint Venture transaction on December 14, 2004.  Under Parkway's three-yearstrategic plan, VALUESQUARE,Parkway will continue to pursue joint venture opportunities with best partnerswhile maintaining the management and leasing of the properties on a day-to-daybasis.

        *Interest**on NoteReceivable from Moore Building Associates LP andIncentive Management Fee Income from Moore BuildingAssociates LP*.  In accordance with FIN 46R, Parkway began consolidatingMBALP effective January 1, 2004.  Due to the consolidation, the intercompanyrevenue and expense from MBALP was eliminated from the financial statements. Therefore, interest income and incentive management fee income from MBALP forthe year ending December 31, 2004 has been eliminated in consolidation.

        *Interest Expense.*  The $5,261,000increase in interest expense on office properties in 2004 compared to 2003 isdue to the net effect of the early extinguishment of three mortgages in 2004and two mortgages in 2003, new loans placed or assumed in 2004 and 2003, theissuance of the subsidiary redeemable preferred membership interests inconnection with the Capital City Plaza purchase in 2004 and the impact ofconsolidating MBALP.  The average interest rate on mortgage notes payable as of December 31, 2004 and 2003 was 6.0% and 6.9%, respectively.

       The $838,000 increase in interestexpense on bank notes for the year ending December 31, 2004 compared to theyear ending December 31, 2003 is primarily due to the increase in the averagebalance of bank borrowings from $96 million in 2003 to $140 million in 2004. The increase in bank borrowings is primarily attributable to reinvesting proceedsfrom the 2003 joint ventures previously used to reduce amounts outstandingunder the Company's lines of credit. 

***Comments are for the year ended December 31, 2003 compared to the yearended December 31, 2002.***

       Net income available for commonstockholders for the year ended December 31, 2003 was $29,119,000 ($2.85 perbasic common share) as compared to $17,458,000 ($1.87 per basic common share)for the year ended December 31, 2002.  Net income for the year ending December 31, 2003 included a gain from the sale of two joint venture interests, an officeproperty and land in the amount of $10,661,000.  Net income for the year ending December 31, 2002 included a net loss of $1,298,000, which was attributable tothe sale of a joint venture interest, an office property, an impairment loss onan office property and an impairment loss on land.

       *Operating Properties*.  Theprimary reason for the change in the Company's net income from office andparking properties for 2003 as compared to 2002 is the net effect of the operationsof the following properties purchased, properties sold and joint ventureinterests sold (in thousands):

**Properties Purchased:**

**Office Properties**

** **

**Purchase Date**

** **

**Square Feet**

The Park on Camelback

05/22/02

103

Viad Corporate Center

05/31/02

481

5300 Memorial

06/05/02

154

Town & Country Central One

06/05/02

148

1717 St. James Place

06/05/02

110

Citrus Center

02/11/03

258

Peachtree Dunwoody Pavilion

08/28/03

366

Wells Fargo Building

09/12/03

135

Carmel Crossing

11/24/03

324

**Properties Sold: **

**Office Property**

** **

**Date Sold**

** **

**Square Feet**

Corporate Square West

05/31/02

96

BB&T Financial Center

08/01/03

240

**Joint Venture Interests Sold: **

**Office Property/Interest  Sold**

** **

**Date Sold**

** **

**Square Feet**

233 North Michigan/70%

05/30/02

1,070

Viad Corporate Center/70%

03/06/03

481

UBS Building & River

     Oaks Place/80%

05/28/03

170

       Operations of office and parkingproperties are summarized below (in thousands):

**Year Ended**

**December 31**

**2003**

**2002**

Income

$142,196 

$152,442 

Operating expense

(63,362)

(65,942)

78,834 

86,500 

Interest expense

(16,319)

(19,839)

Depreciation and amortization

(28,030)

(27,412)

Income from office and parking properties

$  34,485 

$  39,249 

       *Equity in Earnings ofUnconsolidated Joint Ventures and Management Company Income*.  Equity inearnings of unconsolidated joint ventures increased $1,388,000 for the yearending December 31, 2003 compared to the year ending December 31, 2002.  Thisincrease is attributable to the formation of the Viad Joint Venture and theJackson Joint Venture in 2003 and the 233 North Michigan Avenue joint venture in2002.  Under the terms of the joint venture agreements, Parkway continuesto provide management and leasing services for the buildings on a day-to-daybasis.  The increase in management company income of $939,000 for the yearended December 31, 2003 compared to 2002 is primarily due to the fees earnedfrom providing management and leasing services to the joint ventures. Under Parkway's three-year strategic plan, VALUESQUARE, Parkway will continueto pursue joint venture opportunities with best partners while maintaining themanagement and leasing of the properties on a day-to-day basis.

       *Interest Expense*.  The$3,520,000 decrease in interest expense on office properties in 2003 comparedto 2002 is primarily due to the net effect of the early extinguishment of twomortgages in 2003 and three mortgages in 2002, the transfer of a mortgage notepayable to the 233 North Michigan Avenue joint venture in 2002 and new loansplaced or assumed in 2003 and 2002.  The average interest rate on mortgagenotes payable as of December 31, 2003 and 2002 was 6.9% and 7.4%, respectively.

       The $3,248,000 decrease in interestexpense on bank notes for the year ending December 31, 2003 compared to the year ending December 31, 2002 is primarily due to the decrease in theweighted average interest rate on bank lines of credit from 4.7% during 2002 to2.8% during 2003.  Additionally, the average balance of bank borrowingsdecreased from $127 million in 2002 to $96 million in 2003.  The decrease inbank borrowings is primarily attributable to proceeds from the 2003 jointventures used to reduce amounts outstanding under the Company's lines ofcredit.  We anticipate that the outstanding balance under the Company's linesof credit will increase as the funds from the joint ventures are invested innew operating properties. 

       *General and AdministrativeExpense.*  General and administrative expense decreased $828,000 for theyear ending December 31, 2003 compared to the same period in 2002.  The netdecrease is primarily due to the decrease in amortization of unearnedcompensation expense pertaining to the Company's restricted stock shares. Due to Parkway's achievement of the 5 in 50 Plan in 2002, the restricted sharesgranted were fully amortized in 2002.  In 2003, the stockholders approvedthe issuance of 142,000 shares of restricted stock to certain officers of theCompany in connection with the VALUESQUARE****plan. The restricted shares issued in 2003 are valued at $5,092,000, and the vestingperiod for the stock is 7 years or 36 months if the goals of the VALUESQUARE****planare achieved.

**Liquidity and Capital Resources**

       *Statement of Cash Flows*.  Cashand cash equivalents were $1,077,000 and $468,000 at December 31, 2004 and  December 31, 2003, respectively.  Cash flows provided by operating activitiesfor the year ending December 31, 2004 were $58,569,000 compared to $51,170,000for the same period of 2003.  The change in cash flows from operatingactivities is primarily attributable to the timing of receipt of revenues andpayment of expenses and the increase in number of properties owned.

       Cash used in investing activities was$30,370,000 for the year ended December 31, 2004 compared to cash used byinvesting activities of $28,417,000 for the same period of 2003.  The decreasein cash provided by investing activities of $1,953,000 is primarily due to increasedoffice property improvements and parking development costs in 2004.

       Cash used in financing activities was$28,353,000 for the year ended December 31, 2004 compared to cash used infinancing activities of $23,879,000 for the same period of 2003.  The decreasein cash provided by financing activities of $4,474,000 is primarily due to the decreasein net proceeds from stock offerings. 

       *Liquidity*.  The Company plansto continue pursuing the acquisition of additional investments that meet theCompany's investment criteria in accordance with the strategies outlined under"Item 1. Business" and intends to use bank lines of credit, proceedsfrom the sale of non-core assets and office properties, proceeds from the saleof portions of owned assets through joint ventures, possible sales ofsecurities and cash balances to fund those acquisitions.  At December 31, 2004, the Company had $104,618,000 outstanding under three unsecured banklines of credit.

       The Company's cash flows are exposedto interest rate changes primarily as a result of its lines of credit used tomaintain liquidity and fund capital expenditures and expansion of the Company'sreal estate investment portfolio and operations.  The Company's interest raterisk management objective is to limit the impact of interest rate changes on earningsand cash flows and to lower its overall borrowing costs.  To achieve itsobjectives, the Company borrows at fixed rates, but also utilizes a three-yearunsecured revolving credit facility and two one-year unsecured lines of credit.

       On February6, 2004, Parkway entered into a Credit Agreement with a consortium of 11 bankswith Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Runner,Wachovia Bank, National Association as Administrative Agent, PNC Bank, NationalAssociation as Syndication Agent, and other banks as participants.  TheCredit Agreement provides for a three-year $170 million unsecured revolvingcredit facility (the "$170 million line").  The $170 million line replacesthe previous $135 million unsecured revolving credit facility and the $20million term loan with JP Morgan Chase Bank.  The increased size of theline of credit allows greater financial flexibility and capacity whileaccommodating the Company's growth.  Additionally, previous covenants suchas market concentration of assets were removed while per building occupancylimits were replaced with asset pool occupancy requirements.  The changesresult in greater strategic flexibility in terms of where the Company investsand mutes the impact of customer move-outs, particularly within smallerbuildings.  The interest rate on the $170 million line is equal to the30-day LIBOR rate plus 100 to 150 basis points, depending upon overall Companyleverage (with the current 

rate set at 132.5basis points).  The interest rate on the $170 million line was 3% atDecember 31, 2004. The $170 million line matures February 6, 2007 and contains aone-year extension option available at maturity.  The line is expected tofund acquisitions of additional investments.  The Company paid a facilityfee of $170,000 (10 basis points) and origination fees of $556,000 (32.71 basispoints) upon closing of the loan agreement and pays an annual administration feeof $35,000.  The Company also pays fees on the unused portion of the linebased upon overall Company leverage, with the current rate set at 12.5 basispoints.

        On February 4, 2005, Parkwayamended and renewed the one-year $15 million unsecured line of credit with PNCBank (the "$15 million line").  This line of credit matures February 2, 2006,is unsecured and is expected to fund the daily cash requirements of theCompany's treasury management system.  The interest rate on the $15 millionline is equal to the 30-day LIBOR rate plus 100 to 150 basis points, dependingupon overall Company leverage (with the current rate set at 132.5 basispoints).  The interest rate on the $15 million line was 3.6% at December 31, 2004.  The Company paid a facility fee of $15,000 (10 basis points) uponclosing of the loan agreement.  Under the $15 million line, the Company doesnot pay annual administration fees or fees on the unused portion of the line.

       On December 7, 2004, the Companyclosed a $9 million unsecured line of credit with Trustmark National Bank (the"$9 million line").  The interest rate on the $9 million line is equal to the30-day LIBOR rate plus 132.5 basis points and was 3.7% at December 31, 2004.  This line of credit matures December 7, 2005 and the proceeds are being used tofund the construction of the City Centre Garage currently under development. 

       The Company's interest rate hedgecontracts as of December 31, 2004 are summarized as follows (in thousands):

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**Fair**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**Market Value**

Swap

$20,000

12/31/05

1-Month LIBOR

3.183%

$  (33)

Swap

$40,000

06/30/06

1-Month LIBOR

3.530%

(193)

$(226)

       To protect against the potential forrapidly rising interest rates, the Company entered into two interest rate swapagreements in May 2004. The first interest rate swap agreement is for a $40million notional amount and fixed the 30-day LIBOR interest rate at 3.53% forthe period January 1, 2005 through June 30, 2006. The second interest rate swapagreement is for a $20 million notional amount and fixed the 30-day LIBORinterest rate at 3.18% for the period January 1, 2005 through December 31, 2005.  The Company designated the swaps as hedges of the variable interestrates on the Company's borrowings under the $170 million line.  Accordingly,changes in the fair value of the swap are recognized in accumulated othercomprehensive income until the hedged item is recognized in earnings.

       At December 31, 2004, the Company had$353,975,000 of non-recourse fixed rate mortgage notes payable with an averageinterest rate of 6% secured by office properties and $104,618,000 drawn underbank lines of credit.  Parkway's pro rata share of unconsolidated joint venturedebt was $52,469,000 with an average interest rate of 7% at December 31, 2004. Based on the Company's total market capitalization of approximately $1.2billion at December 31, 2004 (using the December 31, 2004 closing price of $50.75per common share), the Company's debt represented approximately 41.4% of itstotal market capitalization.  The Company targets a debt to total marketcapitalization rate at a percentage in the mid-40's.  This rate may vary attimes pending acquisitions, sales and/or equity offerings.  In addition,volatility in the price of the Company's common stock may affect the debt tototal market capitalization ratio.  However, over time the Company plans tomaintain a percentage in the mid-40's.  In addition to this debt ratio, theCompany also monitors interest and fixed charge coverage ratios.  The interestcoverage ratio is computed by comparing the cash interest accrued to earningsbefore interest, taxes, depreciation and amortization.  This ratio for the yearending December 31, 2004 and 2003 was 3.55 and 3.99 times, respectively.  Thefixed charge coverage ratio is computed by comparing the cash interest accrued,principal payments made on mortgage loans and preferred dividends paid toearnings before interest, taxes, depreciation and amortization.  This ratio forthe year ending December 31, 2004 and 2003 was 1.86 and 1.91 times,respectively.  Interest and fixed charge coverage ratios were lower in 2004compared to 2003 primarily due to lower revenues as a result of loweroccupancy.

       The table below presents theprincipal payments due and weighted average interest rates for the fixed ratedebt.

**Average**

**Fixed Rate Debt**

**Interest Rate**

**(In thousands)**

2005

5.98%

$  14,609

2006

5.95%

16,272

2007

5.92%

35,107

2008

6.13%

98,475

2009

6.28%

30,517

Thereafter

7.42%

158,995

Total

$353,975

Fair value at 12/31/04

$366,252

       The Company presently has plans tomake additional capital improvements at its office properties in 2005 ofapproximately $30 million.  These expenses include tenant improvements,capitalized acquisition costs and capitalized building improvements. Approximately $6 million of these improvements relate to upgrades on propertiesacquired in recent years that were anticipated at the time of purchase.  Allsuch improvements are expected to be financed by cash flow from the propertiesand advances on the bank lines of credit.

       The Company anticipates that itscurrent cash balance, operating cash flows, proceeds from the sale of officeproperties, proceeds from the sale of portions of owned assets through jointventures, possible sales of securities and borrowings (including borrowingsunder the working capital line of credit) will be adequate to pay the Company's(i) operating and administrative expenses, (ii) debt service obligations, (iii)distributions to shareholders, (iv) capital improvements, and (v) normal repairand maintenance expenses at its properties both in the short and long term.

**Off-Balance Sheet Arrangements**

       At December 31, 2004, Parkway had thefollowing off-balance sheet arrangements:  (1) a non-controlling 30% interestin Parkway 233 North Michigan, LLC, a real estate joint venture; (2) anon-controlling 30% interest in Phoenix OfficeInvest, LLC, a real estate jointventure; (3) a non-controlling 20% interest in Parkway Joint Venture, LLC, areal estate joint venture; (4) a non-controlling 50% interest in Wink/ParkwayPartnership, a real estate joint venture; and (5) a non-controlling 20%interest in RubiconPark I, LLC, a real estate joint venture.

       The above real estate joint venturesown and operate office properties in Chicago, Illinois; Phoenix, Arizona;Jackson, Mississippi; New Orleans, Louisiana; Atlanta, Georgia; and Charlotte,North Carolina, respectively.  Parkway manages all ventures on a day-to-daybasis with the exception of the Wink/Parkway Partnership.  The Company accountsfor its interest in these joint ventures using the equity method ofaccounting.  

       Thefollowing information summarizes the financial position at December 31, 2004for the investments in which we held an interest at December 31, 2004 (inthousands):

** **

** **

**Mortgage**

** **

**Parkway's**

**Summary of  Financial Position**

**Total Assets**

**Debt (1)**

**Total Equity**

**Investment**

Parkway 233 North Michigan, LLC

$182,380

$100,133

$71,450

$14,539

Phoenix OfficeInvest, LLC

62,425

42,500

17,346

4,388

Parkway Joint Venture, LLC

17,184

11,269

5,383

19

Wink/Parkway Partnership

1,413

450

960

480

RubiconPark I, LLC

76,011

52,000

23,716

5,868

$339,413

$206,352

$118,855

$25,294

       (1)  The mortgage debt, all of whichis non-recourse, is collateralized by the individual real estate property orproperties within each venture, the net book value of which totaled $314million at December 31, 2004.  Parkway's proportionate share of thenon-recourse mortgage debt totaled $52.5 million at December 31, 2004.

       The following information summarizesthe results of operations for the year ended December 31, 2004 for investmentswhich impacted our 2004 results of operations (in thousands):

** **

**Total**

**Net**

**Parkway's Share**

**Summary of  Operations**

**Revenue**

**Income**

**of Net Income**

Parkway 233 North Michigan, LLC

$33,586

$2,663

$   799

Phoenix OfficeInvest, LLC

11,474

2,390

717

Parkway Joint Venture, LLC

2,827

499

100

Wink/Parkway Partnership

305

143

72

RubiconPark I, LLC

418

7

9

$48,610

$5,702

$1,697

**Contractual Obligations**

       We have contractual obligationsincluding mortgage notes payable and lease obligations.  The table below presentstotal payments due under specified contractual obligations by year throughmaturity as of December 31, 2004 (in thousands):

**Payments Due By Period**

**Contractual  Obligations**

**Total**

**2005**

**2006**

**2007**

**2008**

**2009**

**Thereafter**

Long-Term Debt (Mortgage  Notes Payable 

       Without  Recourse)

$445,544

$36,700

$37,686

$54,964

$115,379

$41,479

$159,336

Capital  Lease Obligations

-

-

-

-

-

-

-

Operating  Leases

1,763

925

529

222

87

-

-

Purchase  Obligations

12,040

11,394

580

36

14

2

14

Subsidiary  Redeemable Preferred

    Membership  Interests

10,741

10,741

-

-

-

-

-

Other  Long-Term Liabilities

-

-

-

-

-

-

-

Total

$470,088

$59,760

$38,795

$55,222

$115,480

$41,481

$159,350

       The amounts presented above formortgage notes payable without recourse include principal and interestpayments.  The amounts presented for purchase obligations represent theremaining tenant improvement and building improvement allowance obligation forleases in place as of December 31, 2004 plus commitments for the City Centreparking garage development.

       In connection with the Capital CityPlaza purchase, the limited liability company that owns the building issued$15.5 million in preferred membership interests to the seller.  The preferredmembership interests pay the seller a 7% coupon rate and were issued toaccommodate their tax planning needs.  The seller has the right to redeem $5.5million of the membership interests within six months of closing and$10 million of the membership interests within nine months of closing. Parkway has the right to retire the preferred interest 40 months after closing. During the third quarter in 2004, the seller redeemed $4,750,000 of thepreferred membership interests.

       Parkway has a less than .1% ownershipinterest in MBALP and acts as the managing general partner.  MBALP is primarilyfunded with financing from a third party lender, which is secured by a firstlien on the rental property of the partnership.  The creditors of MBALP do nothave recourse to Parkway.  In acting as the general partner, Parkway iscommitted to providing additional funding to partnership deficits up to anaggregate amount of $1 million.  To date Parkway has not been required toprovide any additional funding to MBALP.

**Critical Accounting Policies and Estimates**

       *General. *Parkway'sinvestments are generally made in office properties.  Therefore, the Company isgenerally subject to risks incidental to the ownership of real estate.  Some ofthese risks include changes in supply or demand for office properties ortenants for such properties in an area in which we have buildings; changes inreal estate tax rates; and changes in federal income tax, real estate andzoning laws.  The Company's discussion and analysis of financial condition andresults of operations is based upon its Consolidated Financial Statements.  TheCompany's Consolidated Financial Statements include the accounts of ParkwayProperties, Inc. and its majority owned subsidiaries. Parkway also consolidatessubsidiaries where the entity is a variable interest entity and Parkway is theprimary beneficiary, as defined in FASB Interpretation 46R "Consolidation ofVariable Interest Entities" ("FIN 46R").  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make estimates and assumptions thataffect the reported 

amounts of assetsand liabilities at the date of the financial statements and the reported amountsof revenues and expenses for the reporting period.  Actual results coulddiffer from our estimates.

       The accounting policies and estimatesused in the preparation of our Consolidated Financial Statements are more fullydescribed in the notes to our Consolidated Financial Statements.  However,certain of the Company's significant accounting policies are consideredcritical accounting policies due to the increased level of assumptions used orestimates made in determining their impact on our Consolidated FinancialStatements.

       Parkway considers critical accountingpolicies and estimates to be those used in the determination of the reportedamounts and disclosure related to the following:

       (1)  Impairment or disposal oflong-lived assets;

       (2)  Depreciable lives applied to real estateand improvements to real estate;

       (3) Initial recognition, measurement and allocation of the cost of real estateacquired; and

       (4) Allowance for doubtful accounts

       *Impairment or Disposal ofLong-Lived Assets.*  Changes in the supply or demand of tenants for ourproperties could impact our ability to fill available space.  Should asignificant amount of available space exist for an extended period, ourinvestment in a particular office building may be impaired.  We evaluate ourreal estate assets upon the occurrence of significant adverse changes to assesswhether any impairment indicators are present that affect the recovery of thecarrying amount. 

       Real estate assets are classified asheld for sale or held and used in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets".  In accordance with SFAS No. 144, the Companyrecords assets held for sale at the lower of carrying amount or fair value lesscost to sell.  With respect to assets classified as held and used, weperiodically review these assets to determine whether our carrying amount willbe recovered.  A long-lived asset is considered impaired if its carrying valueexceeds the estimated fair value.  Fair value is based on the estimated andrealizable contract sales price (if available) for the asset less estimatedcosts to sell.  If a sales price is not available, the estimated undiscountedcash flows of the asset for the remaining useful life are used to determine ifthe carrying value is recoverable.  The cash flow estimates are based on assumptionsabout employing the asset for its remaining useful life.  Factors considered inprojecting future cash flows include but are not limited to:  Existing leases,future leasing and terminations, market rental rates, capital improvements,tenant improvements, leasing commissions, inflation and other known variables. Upon impairment, the Company would recognize an impairment loss to reduce thecarrying value of the long-lived asset to our estimate of its fair value.  Theestimate of fair value and cash flows to be generated from properties requiresus to make assumptions.  If one or more assumptions prove incorrect or if theassumptions change, the recognition of an impairment loss on one or moreproperties may be necessary in the future, which would result in a decrease innet income.

*       *No impairment losses wererecognized for the year ending December 31, 2004 or 2003.

*       Depreciable Lives Applied to RealEstate and Improvements to Real Estate.*  Depreciation of buildings andparking garages is computed using the straight-line method over an estimateduseful life of 40 years.  Depreciation of building improvements is computedusing the straight-line method over the estimated useful life of theimprovement.  If our estimate of useful lives proves to be incorrect, thedepreciation expense recognized would also be incorrect.  Therefore, a changein the estimated useful lives assigned to buildings and improvements wouldresult in either an increase or decrease in depreciation expense, which wouldresult in an increase or decrease in earnings.

*       Initial Recognition, Measurementand Allocation of the Cost of Real Estate Acquired.*  Parkway accounts forits acquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, "Business Combinations," which requires the fairvalue of the real estate acquired to be allocated to the acquired tangibleassets, consisting of land, building, garage, building improvements and tenantimprovements, and identified intangible assets and liabilities, consisting ofthe value of above and below market leases, customer relationships, lease costsand the value of  in-place leases.

*       *Parkway allocates the purchaseprice to the fair value of the tangible assets of an acquired property byvaluing the property as if it were vacant.  The as-if-vacant value is allocatedto tangible assets based on the relative fair value of those assets.  Value isallocated to tenant improvements based on the estimated costs of similar customerswith similar terms.  The difference between the purchase price and theas-if-vacant value represents the fair value of the intangible assets or theintangible gap.  The intangible gap is then allocated among the identifiableintangible assets.

*       *The Company determines thefair value of the tangible and intangible components using a variety of methodsand assumptions all of which result in an approximation of fair value. Differing assumptions and methods could result in different estimates of fairvalue and thus, a different purchase price allocation and corresponding increaseor decrease in depreciation and amortization expense.

*       Allowance for Doubtful Accounts. *Accountsreceivable are reduced by an allowance for amounts that may becomeuncollectible in the future.  Our receivable balance is comprised primarily ofrents and operating expense recoveries due from customers.  Change in thesupply of or demand for office properties could impact our customers' abilityto honor their lease obligations, which could in turn affect our recordedrevenues and estimates of the collectibility of our receivables.  Revenue fromreal estate rentals is recognized and accrued as earned on a pro rata basisover the term of the lease.  We regularly evaluate the adequacy of our allowancefor doubtful accounts considering such factors as credit quality of our customers,delinquency of payment, historical trends and current economic conditions.  Weprovide an allowance for doubtful accounts for customer balances that are over90 days past due and for specific customer receivables for which collection isconsidered doubtful.  Actual results may differ from these estimates underdifferent assumptions or conditions, which could result in an increase ordecrease in bad debt expense.

**Funds FromOperations**

       Managementbelieves that funds from operations ("FFO") is an appropriate measure ofperformance for equity REITs and computes this measure in accordance with theNational Association of Real Estate Investment Trusts' ("NAREIT") definitionof FFO.  FFO as reported by Parkway may not be comparable to FFO reported byother REITs that do not define the term in accordance with the current NAREITdefinition.  We believe FFO is helpful to investors as a supplemental measurethat enhances the comparability of our operations by adjusting net income foritems not reflective of our principal and recurring operations.  This measure,along with cash flows from operating, financing and investing activities,provides investors with an indication of our ability to incur and service debt,to make capital expenditures and to fund other cash needs.  In addition, FFOhas widespread acceptance and use within the REIT and analyst communities. Funds from operations is defined by NAREIT as net income (computed inaccordance with generally accepted accounting principles "GAAP"),excluding gains or losses from sales of property and extraordinary items underGAAP, plus depreciation and amortization, and after adjustments forunconsolidated partnerships and joint ventures.  Adjustments for unconsolidatedpartnerships and joint ventures will be calculated to reflect funds fromoperations on the same basis.  We believe that in order to facilitate a clearunderstanding of our operating results, FFO should be examined in conjunctionwith the net income as presented in our consolidated financial statements andnotes thereto included elsewhere in this Form 10‐K.  Funds fromoperations do not represent cash generated from operating activities inaccordance with accounting principles generally accepted in the United States and is not anindication of cash available to fund cash needs.  Funds from operations shouldnot be considered an alternative to net income as an indicator of the Company'soperating performance or as an alternative to cash flow as a measure ofliquidity.

       Thefollowing table presents a reconciliation of the Company's net income to FFOfor the years ended December 31, 2004and 2003 (in thousands, except per share data):
 **Total  Dollar Amount****Diluted  Per Share** **Year  Ended****Year  Ended** **December  31****December  31** **2004****2003****2004****2003**Net income$29,515 $43,181 $2.57 $4.13 Adjustments to derive funds from operations:    
     Depreciation  and amortization

36,843 

28,030 

2.78 

2.23 

     Minority  interest depreciation and amortization

(654)

- 

(.05)

- 

     Adjustments  for unconsolidated joint ventures

2,345 

2,030 

.18 

.16 
     Preferred  dividends(4,800)(5,352)(.42)(.51)
     Convertible  preferred dividends

(5,186)

(6,091)

(.45)

(.58)

     Original  issue costs-redemption of preferred stock

- 

(2,619)

- 

(.25)

     Gain  on real estate and joint venture interests

(3,535)

(10,299)

(.27)

(.82)
     Amortization  of deferred gains and other
2 

(23)

- 

- 
     Diluted  share adjustment for convertible preferred stock- -.17 .02 Funds from operations applicable to  common shareholders$54,530 $48,857 $4.51 $4.38 
**Inflation**

       In the last five years, inflation hasnot had a significant impact on the Company because of the relatively lowinflation rate in the Company's geographic areas of operation.  Most of theleases require the tenants to pay their pro rata share of operating expenses,including common area maintenance, real estate taxes and insurance, therebyreducing the Company's exposure to increases in operating expenses resultingfrom inflation.  In addition, the Company's leases typically have three toseven year terms, which may enable the Company to replace existing leases withnew leases at market base rent, which may be higher or lower than the existinglease rate.

**Forward-Looking Statements**

       In addition to historicalinformation, certain sections of this Form 10-K may contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, such as those that are notin the present or past tense, that discuss the Company's beliefs, expectationsor intentions or those pertaining to the Company's capital resources,profitability and portfolio performance and estimates of market rental rates. Forward-looking statements involve numerous risks and uncertainties.  Thefollowing factors, among others discussed herein and in the Company's filingsunder the Securities Exchange Act of 1934, could cause actual results andfuture events to differ materially from those set forth or contemplated in theforward-looking statements:  defaults or non-renewal of leases, increasedinterest rates and operating costs, failure to obtain necessary outside financing,difficulties in identifying properties to acquire and in effectingacquisitions, failure to qualify as a real estate investment trust under theInternal Revenue Code of 1986, as amended, environmental uncertainties, risksrelated to natural disasters, financial market fluctuations, changes in realestate and zoning laws and increases in real property tax rates.  The successof the Company also depends upon the trends of the economy, including interestrates, income tax laws, governmental regulation, legislation, populationchanges and those risk factors discussed elsewhere in this Form 10-K and in theCompany's filings under the Securities Exchange Act of 1934.  Readers arecautioned not to place undue reliance on forward-looking statements, whichreflect management's analysis only as the date hereof.  The Company assumes noobligation to update forward-looking statements.

**ITEM 7A.  *Quantitative and Qualitative Disclosures About MarketRisk.***

       See information appearing underthe caption "Liquidity" appearing in Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operations".

       As of December 31, 2004, total outstanding debt was approximately $458,593,000 of which $104,618,000 or 22.8%,is variable rate debt.  If market rates of interest on the variable rate debtfluctuate by 10% (or approximately 31 basis points), the change in interestexpense on the variable rate debt would increase or decrease future earningsand cash flows by approximately $323,000 annually.
****
**ITEM 8.  *FinancialStatements and Supplementary Data.***

**Index to Consolidated  Financial Statements**

**Page**

Report  of Independent Registered Public Accounting Firm

32

Consolidated Balance Sheets -  as of December 31, 2004 and 2003

33

Consolidated Statements of  Income - for the years ended December 31, 2004, 2003 and 2002

34

Consolidated Statements of  Stockholders' Equity - for the years ended December 31, 2004, 2003 and 2002

35

Consolidated Statements of Cash  Flows - for the years ended December 31, 2004, 2003 and 2002

36

Notes to Consolidated Financial  Statements

37

Schedule  II - Valuations and Qualifying Accounts

62

Schedule  III - Real Estate and Accumulated Depreciation

63

Note  to Schedule III - Real Estate and Accumulated Depreciation

65
****
**REPORT OF INDEPENDENT AUDITORS**

Shareholders and Board of Directors 

Parkway Properties, Inc.

We have audited the accompanying consolidated balance sheets of ParkwayProperties, Inc. and subsidiaries as of December 31, 2004 and 2003, and therelated consolidated statements of income, stockholders' equity, and cash flowsfor each of the three years in the period ended December 31, 2004.  Our auditsalso included the financial statement schedules listed in the index at Item 15(a)2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of ParkwayProperties, Inc. and subsidiaries at December 31, 2004 and 2003, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with U.S. generallyaccepted accounting principles.  Also, in our opinion, the related financialstatement schedules, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth herein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Parkway Properties, Inc. andsubsidiaries' internal control over financial reporting as of December 31,2004, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission andour report dated February 28, 2005 expressed an unqualified opinion thereon.

                                                                                                                                                       Ernst&Young LLP

New Orleans, LouisianaFebruary 28, 2005

** **
**PARKWAYPROPERTIES, INC.CONSOLIDATED BALANCE SHEETS(In thousands)

**December 31**

**December 31**

**2004**

**2003**

**Assets**

Real estate related investments:

     Office and parking  properties

$  959,279 

$  844,168 

     Parking development

4,434 

- 

     Accumulated depreciation

(142,906)

(115,473)

820,807 

728,695 

     Land available for sale

3,528 

3,528 

     Note receivable from Moore  Building Associates LP

- 

5,926 

     Mortgage loans

- 

861 

     Investment in unconsolidated  joint ventures

25,294 

20,026 

849,629 

759,036 

Rents receivable and other assets

42,448 

35,072 

Intangible assets, net

38,034 

7,732 

Cash and cash equivalents

1,077 

468 

$  931,188 

$  802,308 

**Liabilities**

** **

** **

Notes payable to banks

$  104,618 

$  110,075 

Mortgage notes payable without recourse

353,975 

247,190 

Accounts payable and other liabilities

42,468 

37,022 

Subsidiary redeemable preferred membership interests

10,741 

- 

511,802 

394,287 

**Minority Interest**

** **

** **

Minority Interest - unit holders

39 

41 

Minority Interest - real estate partnerships

3,699 

- 

** **

3,738 

41 

**Stockholders' Equity**

** **

** **

8.34% Series B Cumulative Convertible Preferred stock,  $.001 par value,

     2,142,857 shares authorized,  803,499 and 1,942,857 shares issued and 

     outstanding in 2004 and  2003, respectively

28,122 

68,000 

Series C Preferred stock, $.001 par value, 400,000 shares  authorized,

     no shares issued

- 

- 

8.00% Series D Preferred stock, $.001 par value, 2,400,000  shares authorized, 

     issued and outstanding

57,976 

57,976 

Common stock, $.001 par value, 65,057,143 shares  authorized, 12,464,817 and

     10,808,131 shares issued and  outstanding in 2004 and 2003, respectively

12 

11 

Excess stock, $.001 par value, 30,000,000 shares  authorized, no shares issued

- 

- 

Common stock held in trust, at cost, 130,000 and 128,000  shares in 2004

     and 2003, respectively  

(4,400)

(4,321)

Additional paid-in capital

310,455 

252,695 

Unearned compensation

(4,122)

(4,634)

Accumulated other comprehensive loss

(226)

 - 

Retained earnings

27,831 

38,253 

415,648 

407,980 

$  931,188 

$  802,308 

See notes to consolidated financial statements.
 
**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF INCOME**(In thousands, except per share data)

**Year Ended December 31**

**2004**

**2003**

**2002**

**Revenues**

Income  from office and parking properties

$160,506 

$142,196 

$152,442 

Management company income

3,832 

2,136 

1,197 

Interest  on note receivable from Moore Building Associates LP

- 

819 

895 

Incentive  management fee from Moore Building Associates LP

- 

300 

325 

Other  income and deferred gains

37 

599 

401 

Total  revenues

164,375 

146,050 

155,260 

** **

**Expenses**

Office  and parking properties:

     Operating  expense

73,487 

63,362 

65,942 

     Interest  expense:

          Contractual

19,788 

16,026 

18,766 

          Subsidiary  redeemable preferred membership interests

725 

- 

- 

          Prepayment  expenses

511 

- 

833 

          Amortization  of loan costs

556 

293 

240 

     Depreciation  and amortization

36,843 

28,030 

27,412 

Operating  expense for other real estate properties

22 

37 

34 

Interest  expense on bank notes:

          Contractual

3,796 

2,834 

6,055 

          Amortization  of loan costs

441 

565 

592 

Management  company expenses

358 

391 

416 

General  and administrative

4,464 

4,201 

5,029 

Total  expenses

140,991 

115,739 

125,319 

** **

**Income  before equity in earnings, gain (loss), minority interest and**

     **discontinued  operations**

23,384 

30,311 

29,941 

Equity  in earnings of unconsolidated joint ventures

1,697 

2,212 

824 

Gain  (loss) on note receivable, sale of joint venture interests and real estate

4,309 

10,661 

(474)

Impairment  loss on office property

- 

- 

(1,594)

Minority  interest - unit holders

(2)

(3)

(2)

Minority  interest - real estate partnerships

127 

-

-

** **

**Income  from continuing operations**

29,515 

43,181 

28,695 

Discontinued  operations:

     Income  from discontinued operations

- 

-  

47 

     Gain  on sale of real estate from discontinued operations

- 

-  

770 

**Net  income**

29,515 

43,181 

29,512 

Change  in market value of interest rate swap

(226)

170 

1,524 

**Comprehensive  income**

$  29,289 

$  43,351 

$  31,036 

** **

**Net  income available to common stockholders:**

Net  income

$  29,515 

$  43,181 

$  29,512 

Original  issue costs associated with redemption or preferred stock

- 

(2,619)

- 

Dividends  on preferred stock

(4,800)

(5,352)

(5,797)

Dividends  on convertible preferred stock

(5,186)

(6,091)

(6,257)

**Net  income available to common stockholders**

$  19,529 

$  29,119 

$  17,458 

** **

**Net  income per common share:**

Basic:

Income  before discontinued operations

$     1.73 

$     2.85 

$     1.78 

Discontinued  operations

- 

-  

.09 

Net  income

$     1.73 

$     2.85 

$     1.87 

Diluted:

Income  before discontinued operations

$     1.70 

$     2.79 

$     1.75 

Discontinued  operations

- 

- 

.09 

Net  income

$     1.70 

$     2.79 

$     1.84 

** **

**Dividends per common share**

$     2.60 

$     2.60 

$     2.56 

** **

**Weighted  average shares outstanding:**

Basic

11,270 

10,224 

9,312 

Diluted

11,478 

10,453 

9,480 

Seenotes to consolidated financial statements

**PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**(In thousands)

**Year  Ended December 31**

**2004**

**2003**

**2002**

**8.75% Series A Preferred  stock, $.001 par value**

     Balance  at beginning of year

$            - 

$  66,250 

$  66,250 

          Redemption  of preferred stock

- 

(66,250)

- 

     Balance  at end of year

- 

- 

66,250 

** **

**8.34% Series B Cumulative  Convertible Preferred stock, $.001 par value**

     Balance  at beginning of year

68,000 

75,000 

75,000 

          Conversion  of preferred stock to common stock

(39,878)

(7,000)

- 

     Balance  at end of year

28,122 

68,000 

75,000 

** **

**8.00% Series D Preferred  stock, $.001 par value**

     Balance  at beginning of year

57,976 

- 

- 

          Shares  issued

- 

57,976 

- 

     Balance  at end of year

57,976 

57,976 

- 

** **

**Common stock, $.001 par  value**

     Balance  at beginning of year

11 

9 

9 

          Shares  issued - stock offering

- 

1 

- 

          Shares  issued - other

1 

1 

- 

     Balance  at end of year

12 

11 

9 

**Common stock held in trust**

     Balance  at beginning of year

(4,321)

- 

- 

          Shares  contributed to deferred compensation plan

(79)

(4,321)

- 

     Balance  at end of year

(4,400)

(4,321)

- 

** **

** **

** **

** **

**Additional paid-in capital**

** **

** **

** **

     Balance  at beginning of year

252,695 

199,979 

196,032 

          Stock  options exercised

5,964 

6,079 

2,996 

          Shares  issued in lieu of Directors' fees

138 

76 

62 

          Restricted  shares issued

70 

5,092 

- 

          Deferred  incentive share units issued

201 

236 

- 

          Shares  issued - employee excellence recognition program

- 

3 

3 

          Shares  issued - DRIP Plan

11,515 

7,799 

1,310 

          Shares  issued - stock offerings

(5)

24,178 

- 

          Conversion  of preferred stock to common stock

39,877 

7,000 

- 

          Original  issue costs associated with redemption of preferred stock

- 

2,619 

- 

          Purchase  of Company stock

- 

(366)

(424)

     Balance  at end of year

310,455 

252,695 

199,979 

** **

**Unearned compensation**

     Balance  at beginning of year

(4,634)

- 

(2,190)

          Restricted  shares issued

(70)

(5,092)

- 

          Deferred  incentive share units issued

(201)

(236)

- 

          Amortization  of unearned compensation

783 

694 

2,190 

**     **Balance  at end of year

(4,122)

(4,634)

- 

** **

** **

** **

** **

**Accumulated other  comprehensive income (loss)**

** **

** **

** **

     Balance  at beginning of year

- 

(170)

(1,694)

          Change  in market value of interest rate swaps

(226)

170 

1,524 

     Balance  at end of year

(226)

- 

(170)

** **

** **

** **

** **

**Retained earnings**

** **

** **

** **

     Balance  at beginning of year

38,253 

35,753 

42,174 

          Net  income

29,515 

43,181 

29,512 

          Original  issue costs associated with redemption of preferred stock

- 

(2,619)

- 

          Preferred  stock dividends declared

(4,800)

(5,352)

(5,797)

          Convertible  preferred stock dividends declared

(5,186)

(6,091)

(6,257)

          Common  stock dividends declared

(29,951)

(26,619)

(23,879)

     Balance  at end of year

27,831 

38,253 

35,753 

**Total stockholders' equity**

$415,648 

$407,980 

$376,821 

See notes toconsolidated financial statements.
**PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

**Year  Ended December 31**

**2004**

**2003**

**2002**

**Operating activities**

     Net income

$    29,515 

$    43,181 

$    29,512 

     Adjustments  to reconcile net income to cash

          provided  by operating activities:

          Depreciation  and amortization

36,843 

28,030 

27,412 

          Depreciation  and amortization - discontinued operations

- 

- 

22 

          Amortization  of above (below) market leases

139 

(29)

- 

          Amortization  of loan costs

997 

858 

832 

          Amortization  of unearned compensation

783 

694 

2,190 

          Income  (loss) allocated to minority interests

(125)

3 

2 

          (Gain)  loss on note receivable, sale of joint venture 

               interests  and real estate

(4,309)

(10,661)

1,298 

          Equity  in earnings of consolidated joint ventures

(1,697)

(2,212)

(824)

          Other

-

(8)

(11)

          Changes  in operating assets and liabilities:

               Increase  in receivables and other assets

(4,613)

(5,501)

(5,030)

               Increase  (decrease) in accounts payable and 

                    accrued  expenses

1,036 

(3,185)

7,413 

     **Cash  provided by operating activities**

58,569 

51,170 

62,816 

** **

**Investing activities**

     Payments  received on mortgage loans

775 

8 

8 

     Net  decrease in note receivable from 

          Moore  Building Associates LP

- 

- 

946 

     Distributions  from unconsolidated joint ventures

2,573 

3,148 

1,641 

     Investments  in unconsolidated joint ventures

(286)

(549)

(1,663)

     Purchases  of real estate related investments

(56,625)

(106,258)

(97,823)

     Proceeds  from sales of joint venture interests and real estate

58,223 

97,433 

58,602 

     Real  estate development

(4,434)

- 

(230)

     Improvements  to real estate related investments

(30,596)

(22,199)

(20,063)

**     Cash  used in investing activities**

(30,370)

(28,417)

(58,582)

** **

**Financing activities**

     Principal  payments on mortgage notes payable

(24,421)

(26,427)

(20,840)

     Net  proceeds from (payments on) bank borrowings

(5,683)

(31,724)

17,450 

     Proceeds  from long-term financing

28,950 

42,800 

29,975 

     Stock  options exercised

5,964 

6,080 

2,996 

**     **Dividends  paid on common stock

(29,582)

(26,349)

(23,445)

     Dividends  paid on preferred stock

(10,341)

(11,597)

(12,054)

     Purchase  of Company stock

- 

(366)

(424)

     Proceeds  from DRIP Plan

11,515 

7,799 

1,310 

     Redemption  of subsidiary preferred membership

          interests  and preferred stock

(4,750)

(66,250)

- 

     Proceeds  from stock offerings

(5)

82,155 

- 

     **Cash  used in financing activities**

(28,353)

(23,879)

(5,032)

**     Impact  on cash of consolidation of MBALP**

763 

-

-

     **Increase  (decrease) in cash and cash equivalents**

609 

(1,126)

(798)

**     Cash  and cash equivalents at beginning of year**

468 

1,594 

2,392 

     **Cash  and cash equivalents at end of year**

$       1,077 

$       468 

$     1,594 

 

See notes to consolidated financial statements.

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2004**

**NOTE A - Summary ofSignificant Accounting Policies**

**Principles of consolidation**

       The consolidated financial statementsinclude the accounts of Parkway Properties, Inc. ("Parkway" or"the Company") and its majority owned subsidiaries.  Parkway alsoconsolidates subsidiaries where the entity is a variable interest entity andParkway is the primary beneficiary, as defined in FASB Interpretation 46R"Consolidation of Variable Interest Entities" ("FIN 46R").  All significantintercompany transactions and accounts have been eliminated.

       In December 2003, the FinancialAccounting Standards Board issued FIN 46R, which requires the consolidation ofentities in which a company absorbs a majority of the entity's expected losses,receives a majority of the entity's expected residual returns, or both, as aresult of ownership, contractual or other financial interests in the entity. 

       Effective January 1, 2004, Parkway began consolidating its ownership interest in MBALP.  Parkway has less than .1%ownership interest in MBALP and acts as the managing general partner of thispartnership.  MBALP was established for the purpose of owning a commercialoffice building (the Toyota Center in Memphis, Tennessee) and is primarilyfunded with financing from a third party lender, which is secured by a firstlien on the rental property of the partnership.  The creditors of MBALP do nothave recourse to Parkway.  In acting as the general partner, Parkway is committedto providing additional funding to meet partnership operating deficits up to anaggregate amount of $1 million.  MBALP has a fixed rate non-recourse firstmortgage in the amount of $13,423,000 that is secured by the Toyota Center,which has a carrying amount of $23,529,000.

       Parkway receives income from MBALP inthe form of interest from a construction note receivable, incentive managementfees and property management fees.  As a result of the consolidation of MBALP,Parkway has eliminated any intercompany asset, liability, revenue and expenseaccounts between Parkway and MBALP.

**Basis of presentation**

       The accompanying financial statementsreflect all adjustments which are, in the opinion of management, necessary fora fair statement of the results for the periods presented.  All suchadjustments are of a normal recurring nature.  The financial statements shouldbe read in conjunction with the annual report and the notes thereto.

       Effective January 1, 1997, theCompany elected to be taxed as a real estate investment trust (REIT) under theInternal Revenue Code of 1986, as amended.

       The Company completed itsreorganization into the UPREIT (Umbrella Partnership REIT) structure effectiveJanuary 1, 1998. The Company anticipates that the UPREIT structure will enableit to pursue additional investment opportunities by having the ability to offertax-advantaged operating partnership units to property owners in exchange forproperties.

**Business**

       The Company's operations are exclusivelyin the real estate industry, principally the operation, management, andownership of office buildings. 

**Use of estimates**

       The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States ("GAAP") requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
****
**Cash equivalents**

       The Company considers all highlyliquid investments with a maturity of three months or less when purchasedto be cash equivalents.

**Allowance for doubtful accounts**

**       **Accounts receivable are reducedby an allowance for amounts that the Company estimates to be uncollectible. The receivable balance is comprised primarily of rent and expense reimbursementincome due from the customers.  Management evaluates the adequacy of theallowance for doubtful accounts considering such factors as the credit qualityof our customers, delinquency of payment, historical trends and currenteconomic conditions.  The Company provides an allowance for doubtful accountsfor customer balances that are over 90 days past due and for specific customerreceivables for which collection is considered doubtful.

**Investment in unconsolidated joint ventures**

       As of December 31, 2004, Parkway hasfive investments in unconsolidated joint ventures, which are accounted forusing the equity method of accounting.  Parkway's investments in unconsolidatedjoint ventures consist of a 50% interest in Wink-Parkway Partnership, a 30%interest in Parkway 233 North Michigan, LLC, a 30% interest in PhoenixOfficeInvest, LLC , a 20% interest in Parkway Joint Venture LLC and a 20%interest in RubiconPark I, LLC.  The Company has a non-controlling interest inthese investments and accounts for the interest using the equity method ofaccounting.  Therefore, Parkway reports its share of income and losses based onits ownership interest in these entities.  Parkway classifies its interests asnon-controlling when it holds less than a majority voting interest in theentity and does not have the sole ability, based on the terms of the jointventure agreements, to make decisions about the entities' activities regardingitems such as major leases, encumbering the entities with debt, major capitalexpenditures and whether to dispose of the entities.

**Minority Interest**

*Minority Interest - Unit Holders*

       Minority interest in ParkwayProperties LP (the "Operating Partnership") represents the limited partner'sproportionate share of the equity in our operating partnership.  The operating partnershippays a regular quarterly distribution to the holders of operating units. Income is allocated to minority interest based on the weighted averagepercentage ownership during the year.  As of December 31, 2004, the minority interest in our operating partnership consisted of 1,318 operating units heldby a party other than the Company.

*Minority Interest - Real Estate Partnerships*

       In compliance with FIN 46R (see"Principles of Consolidation"), Parkway began consolidating its ownership interestin MBALP effective January 1, 2004.  Parkway has less than .1% ownershipinterest in MBALP and acts as the managing general partner of this partnership. Minority interest in real estate partnerships represents the other partners'proportionate share of the equity in the partnership.  Income is allocated tominority interest based on the weighted average percentage ownership during theyear.

**Real estate properties**

       Real estate properties are stated atthe lower of cost less accumulated depreciation, or fair value.  Cost includesthe carrying amount of the Company's investment plus any additionalconsideration paid, liabilities assumed, costs of securing title andimprovements made subsequent to acquisition.  Depreciation of buildings andbuilding improvements is computed using the straight-line method over theestimated useful lives of the assets.  Depreciation of tenant improvements,including personal property, is computed using the straight-line method overthe term of the lease involved.  Maintenance and repair expenses are charged toexpense as incurred.  Geographically, the Company's properties are concentratedin the Southeastern and Southwestern United States and Chicago.  

       Balancesof major classes of depreciable assets (in thousands) and their respectiveestimated useful lives are:

 

 
 
**December 31**
**December 31**
**Asset Category**

**Estimated Useful  Life**

**2004**

**2003**

Building

40 years
$771,721
$ 682,672
Building improvements

7 to 40 years
52,881
42,233
  Tenant improvements
Term of lease
63,503
49,664
 
 
 
 
$887,995
$ 774,569  
       Depreciation expense related to theseassets of $31,251,000, $25,037,000 and $25,344,000 was recognized in 2004, 2003and 2002, respectively.

       The Company evaluates its real estateassets upon occurrence of significant adverse changes in their operations toassess whether any impairment indicators are present that affect the recoveryof the carrying amount.  Real estate assets are classified as held for sale orheld and used in accordance with Statement of Financial Accounting Standards("SFAS") No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets".  In accordance with SFAS No. 144, Parkway recordsassets held for sale at the lower of carrying amount or fair value less cost tosell.  With respect to assets classified as held and used, Parkway recognizesan impairment loss to the extent the carrying amount is not recoverable andexceeds its fair value.  Fair value is based on the estimated and realizablecontract sales price (if available) for the asset less estimated costs tosell.  If a sales price is not available, the estimated undiscounted cash flowsof the asset for the remaining useful life are used to determine if thecarrying value is recoverable.  The cash flow estimates are based onassumptions about employing the asset for its remaining useful life.  Factorsconsidered in projecting future cash flows include but are not limited to: Existing leases, future leasing and terminations, market rental rates, capitalimprovements, tenant improvements, leasing commissions, inflation and otherknown variables.  Upon impairment, Parkway recognizes an impairment loss toreduce the carrying value of the real estate asset to the estimate of its fairvalue.  In 2002, the Company recorded an impairment loss on its office propertyin Greenville, South Carolina in the amount of $1.6 million.  The loss on theGreenville property was created largely by rental rate decreases and currentconditions within the market.  The estimated fair value of the Greenvilleproperty was determined based upon current prices of similar properties in themarket area.

       Management continually evaluates theCompany's office buildings and the markets where the properties are located toensure that these buildings continue to meet their investment criteria.  During1998, management implemented a self management strategy for the Company'soffice buildings which requires the Company to have minimum square footage inan area in order for the strategy to be cost effective.  If the officeproperties no longer meet management's investment criteria or the management ofthe building is not cost effective, management may consider a sale of theoffice property.  If such a sale becomes probable, the office property isclassified as held for sale.

       Gains from sales of real estate arerecognized based on the provisions of Statement of Financial AccountingStandards ("SFAS") No. 66 which require upon closing, the transfer ofrights of ownership to the purchaser, receipt from the purchaser of an adequatecash down payment and adequate continuing investment by the purchaser.  If therequirements for recognizing gains have not been met, the sale and relatedcosts are recorded, but the gain is deferred and recognized generally on the installmentmethod of accounting as collections are received.

       Non-core assets (see Note D) arecarried at the lower of cost or fair value minus estimated costs to sell. Operating real estate held for investment is stated at the lower of cost or netrealizable value.  In 2002, an impairment loss of $205,000 was recorded on 12acres of land in New Orleans, Louisiana.  The loss on the land was computedbased on market research and comparable sales in the area.

**Revenue Recognition**

       Revenue from real estate rentals isrecognized on a straight-line basis over the terms of the respective leases.   

       Property operating cost recoveriesfrom customers ("expense reimbursements") are recognized as revenue in theperiod in which the expenses are incurred.  The most common types of expensereimbursements in the Company's leases are common area maintenance expenses ("CAM")and real estate taxes, where the customer pays its pro-rata share of operatingand administrative expenses and real estate taxes.  
       The computation of expensereimbursements is dependent on the provisions of individual customer leases. Most customers make monthly fixed payments of estimated expense reimbursements. The Company makes adjustments, positive or negative, to expense reimbursementincome quarterly to adjust the recorded amounts to the Company's best estimateof the final property operating costs per the most recent quarterly revisedbudget.  After the end of the calendar year, the Company computes each customer'sfinal expense reimbursements and issues a bill or credit for the differencebetween the actual amount and the amounts billed monthly during the year. These differences are recorded to expense reimbursement income in the periodthe final bills are prepared, usually beginning in February and completed byMay.  The net amounts of any such adjustments were not material for the yearsended December 31, 2004, 2003 and 2002.  
       Management fee income is computed andrecorded monthly in accordance with the terms set forth in the stand alonemanagement service agreements.  Leasing and brokerage commissions arerecognized pursuant to the terms of the stand alone agreements at the time thelease is signed.  Such fees on Company-owned properties are eliminated inconsolidation.

**Acquired Real Estate Assets**

       Parkway accounts for its acquisitionsof real estate in accordance with Statement of Financial Accounting StandardsNo. 141, "Business Combinations" ("SFAS 141"), which requires the fair value ofthe real estate acquired to be allocated to the acquired tangible assets,consisting of land, building, garage, building improvements and tenantimprovements, and identified intangible assets and liabilities, consisting ofthe value of above and below market leases, customer relationships, lease costsand the value of  in-place leases.

       Parkway allocates the purchase priceto the fair value of the tangible assets of an acquired property by valuing theproperty as if it were vacant.  The as-if-vacant value is allocated to tangibleassets based on the relative fair value of those assets.  Value is allocated totenant improvements based on the estimated costs of similar customers withsimilar terms.  The difference between the purchase price and the as-if-vacantvalue represents the fair value of the intangible assets or the intangiblegap.  The intangible gap is then allocated among the identifiable intangibleassets including the above or below market value of in-place leases, customerrelationships, lease costs and value of at market in-place leases.

       The Company may engage independentthird-party appraisers to perform the valuations used to determine the fairvalue of these identifiable intangible assets.  These valuations and appraisalsuse commonly employed valuation techniques, such as discounted cash flowanalyses. Factors considered in these analyses include an estimate of carryingcosts during hypothetical expected lease-up periods considering current marketconditions, and costs to execute similar leases. Parkway also considersinformation obtained about each property as a result of its pre-acquisition duediligence, marketing and leasing activities in estimating the fair value of thetangible and intangible assets acquired. In estimating carrying costs, theCompany includes real estate taxes, insurance and other operating expenses andestimates of lost rentals at market rates during the expected lease-up periodsdepending on specific local market conditions and depending on the type ofproperty acquired. Additionally, Parkway estimates costs to execute similarleases including leasing commissions, legal and other related expenses to theextent that such costs are not already incurred in connection with a new leaseorigination as part of the transaction.

       The fair value of above or belowmarket in-place lease values is the present value of the difference between thecontractual amount to be paid pursuant to the in-place lease and the estimatedcurrent market lease rate expected over the remaining life of the lease.  Thecapitalized above market lease values are amortized as a reduction of rentalincome over the remaining terms of the respective leases. The capitalized belowmarket lease values are amortized as an increase to rental income over theremaining terms of the respective leases. 

       The fair value of customerrelationships represents the quantifiable benefits related to developing arelationship with the current customer.  Examples of these benefits would begrowth prospects for developing new business with the existing customer, theability to attract similar customers to the building, the tenant's creditquality and expectations of lease renewals (including those existing under theterms of the lease agreement or management's expectation for renewal), amongother factors.  We believe that there would typically be little valueassociated with customer relationships that is in excess of the value of thein-place lease and their typical renewal rates.  Any value assigned to customerrelationships is amortized over the remaining terms of the respective leasesplus any expected renewal periods as a lease cost amortization expense.

       The fair value of at market in-placeleases is the present value associated with re-leasing the in-place lease as ifthe property was vacant.  Factors to be considered include estimates ofcarrying costs during hypothetical expected lease-up periods consideringcurrent market conditions and costs to execute similar leases.  In estimatingcarrying costs, the Company includes real estate taxes, insurance and otheroperating expenses and estimates of lost rentals at market rates during theexpected lease-up periods.  The value of at market in-place leases is amortizedas a lease cost amortization expense over the expected life of the lease,including expected renewals.  The current estimated lives assigned to in-placeleases range from 9 to 11 years.

       A separate component of the fairvalue of in-place leases is identified for the lease costs.  The fair value oflease costs represents the estimated commissions or legal fees paid inconnection with the current leases in place.  Lease costs are amortized overthe remaining terms of the respective leases as lease cost amortizationexpense.

       In no event does the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding. Should a customer terminate its lease, the unamortized portion of thein-place lease value, lease cost and customer relationship intangibles would becharged to expense.  Additionally, the unamortized portion of above marketin-place leases would be recorded as a reduction to rental income and the belowmarket in-place lease value would be recorded as an increase to rental income.

**Interest income recognition**

       Interest is generally accrued monthlybased on the outstanding loan balances.  Recognition of interest income isdiscontinued whenever, in the opinion of management, the collectibility ofsuch income becomes doubtful.  After a loan is classified as non-earning,interest is recognized as income when received in cash.

**Amortization**

       Debt origination costs are deferredand amortized using a method that approximates the interest method over theterm of the loan.  Leasing costs are deferred and amortized using thestraight-line method over the term of the respective lease.

**Early Extinguishment of Debt**

       When outstanding debt isextinguished, the Company records any prepayment premium and unamortized loancosts to expense.

**Derivative Financial Instruments**

       The Company follows SFAS No. 133"Accounting for Derivative Instruments and Hedging Activities" andrecognizes all derivative instruments on the balance sheet at their fairvalue.  Changes in the fair value of derivatives are recorded each period incurrent earnings or other comprehensive income, depending on whether aderivative is designated as part of a hedge transaction and, if it is, the typeof hedge transaction.  The ineffective portion of the hedge, if any, is immediatelyrecognized in earnings.

**Stock based compensation**

       The Company has granted stock optionsfor a fixed number of shares to employees and directors with an exerciseprice equal to or above the fair value of the shares at the date ofgrant.  The Company accounts for stock option grants in accordance withAPB Opinion No. 25, "Accounting for Stock Issued to Employees"(the intrinsic value method), and accordingly, recognizes no compensationexpense for the stock option grants.

       Thefollowing table illustrates the effect on net income and earnings per share ifthe company had applied the fair value recognition provisions of FASB StatementNo. 123, *Accounting for Stock-Based Compensation,*to stock-basedemployee compensation.

**Year Ended December  31**

**2004**

**2003**

**2002**

Net income available to common stockholders

$19,529 

$29,119 

$17,458 

Stock based employee compensation costs assuming fair  value method

(249)

(425)

(763)

Pro forma net income available to common stockholders

$19,280 

$28,694 

$16,695 

Pro forma net income per common share:

Basic:

      Net income available  to common stockholders

$    1.73 

$    2.85 

$    1.87 

      Stock based employee  compensation costs assuming fair value method

(.02)

(.04)

(.08)

      Pro forma net income  per common share

$    1.71 

2.81 

$    1.79 

Diluted:

      Net income available  to common stockholders

$    1.70 

$    2.79 

$    1.84 

      Stock based employee  compensation costs assuming fair value method

(.02)

(.04)

(.08)

      Pro forma net income  per common share

$    1.68 

$    2.75 

$    1.76 

       Effective January 1, 2003, thestockholders of the Company approved Parkway's 2003 Equity Incentive Plan (the"2003 Plan") that authorized the grant of up to 200,000 equity based awards toemployees of the Company.  At present, it is Parkway's intention to grantrestricted stock and/or deferred incentive share units instead of stockoptions.  Restricted stock and deferred incentive share units are valued basedon the New York Stock Exchange closing market price of Parkway common shares(NYSE ticker symbol PKY) as of the date of grant.  The Company accounts forrestricted stock and deferred incentive share units in accordance with APB No.25 and accordingly, compensation expense is recognized over the expectedvesting period.  Compensation expense related to restricted stock and deferredincentive share units of $783,000, $694,000 and $2,190,000 was recognized in2004, 2003 and 2002, respectively.

       Therestricted stock granted under the 2003 Plan vests the earlier of seven yearsfrom grant date or effective December 31, 2005 if certain goals of the VALUESQUARE Plan are met.  The VALUESQUAREPlan has as its goal to achieve funds from operations available to commonstockholders ("FFO") growth that is 10% higher than that of the NationalAssociation of Real Estate Investment Trusts ("NAREIT") Office Index peergroup.  Achievement of the goals of the plan will be determined during thefirst quarter of 2006 upon completion of the audited financial statements for2005 for the Company and each company comprising the peer group.  The value ofthe restricted shares is being amortized ratably over the seven-year perioduntil such time as it becomes probable that the conditions of early vestingwill be met.  The deferred incentive share units granted under the 2003 Planvest four years from grant date and are being amortized ratably over thefour-year period.

       Restricted stock and deferredincentive share units are forfeited if an employee leaves the Company beforethe vesting date.  Shares and/or units that are forfeited become available forfuture grant under the 2003 Plan.  In connection with the forfeitedshares/units, the value of the forfeited shares/units, unearned compensation,accumulated amortization of unearned compensation and accumulated dividends, ifany, are reversed.  

**Income taxes**

       The Company is a REIT for federalincome tax purposes.  A corporate REIT is a legal entity that holds real estateassets, and through distributions to stockholders, is exempt from the paymentof Federal income taxes at the corporate level.  To maintain qualification as aREIT, the Company is subject to a number of organizational and operationalrequirements, including a requirement that it currently distribute tostockholders at least 90% of its annual REIT taxable income.

**Net Income Per Common Share**

       Basic earnings per share (EPS) arecomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the year.  In arrivingat income available to common stockholders, preferred stock dividends arededucted.  Diluted EPS reflects the potential dilution that could occur ifdilutive operating partnership 

units, dilutive employee stock options, deferredincentive share units and warrants and dilutive 8.34% Series B cumulativeconvertible preferred stock were exercised or converted into common stock thatthen shared in the earnings of Parkway.

     The computation of diluted EPS is as follows:

**Year Ended December 31**

**2004**

**2003**

**2002**

(in thousands, except  per share data)

Numerator:

    Basic  and diluted net income

        available  to common stockholders

$19,529

$29,119

$17,458

Denominator:

    Basic  weighted average shares

11,270

10,224

9,312

    Effect  of employee stock options, deferred

        incentive  share units and warrants

208

229

168

    Diluted  weighted average shares

11,478

10,453

9,480

Diluted  earnings per share

$    1.70

$    2.79

$    1.84

       The computation of diluted EPS didnot assume the conversion of the 8.34% Series B cumulative convertiblepreferred stock because their inclusion would have been anti-dilutive.

Reclassifications

       Certain reclassifications have beenmade in the 2003 and 2002 consolidated financial statements to conform to the2004 classifications with no impact on previously reported net income orstockholders' equity.

**New Accounting Pronouncements**

       In December 2004, the FinancialAccounting Standards Board issued SFAS No. 123R, "Share-Based Payment".  SFASNo. 123R requires public companies to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award.

       Effective July 1, 2005, Parkway willadopt SFAS No. 123R and begin recording compensation expense based on thegrant-date fair value of employee stock options.  Parkway does not anticipatethat the adoption of SFAS No. 123R will have a significant impact on theCompany's consolidated financial statements since Parkway has begun grantingrestricted stock and/or deferred incentive share units instead of stock optionsto employees of the Company.  The compensation expense associated with stockoptions to be recognized in 2005 is currently estimated at $50,000.

**Note B - Investment in Office and Parking Properties**

       At December 31, 2004, Parkwayowned 55 office and parking properties located in nine states with an aggregateof 9,259,000 square feet of leasablespace.  The purchase price of office properties acquired during the year endedDecember 31, 2004 is as follows:

** **

**Cost**

**Market Location**

**(in thousands)**

Orlando, FL

$  26,295

Atlanta, GA

76,330

Phoenix, AZ

46,906

$149,531

       Theunaudited pro forma effect on the Company's results of operations of the 2004purchases as if the purchases had occurred on January 1, 2003 is as follows (inthousands, except per share data):

 

**Year Ended**

**December 31**

**2004**

**2003**

Revenues

$  6,075 

$18,009 

Net income available to

   common  stockholders

$(1,516)

$(3,512)

Basic earnings per share

$(    .13)

$(    .34)

Diluted earnings per share

$(    .13)

$(    .34)

       Pro forma results do not purport tobe indicative of actual results had the purchase been made at January 1, 2003,or the results that may occur in the future.

       The following is a schedule by yearof future approximate minimum rental receipts under noncancelable leasesfor office buildings owned as of December 31, 2004 (in thousands):

2005

$138,227

2006

121,711

2007

105,438

2008

81,708

2009

60,376

Subsequently

157,749

$665,209

       On January 29, 2004, the Company purchased Maitland 200, a 206,000 square-foot, four-story office building locatedin the Maitland Center submarket of Orlando, Florida.  Maitland 200 is currently96% leased and was purchased for $26.3 million plus $1.4 million in closingcosts and anticipated capital expenditures and leasing costs during the firsttwo years of ownership.  The purchase was funded with the Company's existinglines of credit and represents the reinvestment of proceeds from the sale ofproperties through joint ventures in 2003.  Maitland 200 was constructed in1984 and includes 885 surface parking spaces on 10.27 acres.

       On April 2, 2004, the Company purchased Capital City Plaza, a 410,000 square-foot, 17-story Class A officebuilding in the Buckhead submarket of Atlanta, Georgia.  The acquisition alsoincludes an adjoining five-story parking garage containing 726 spaces, asurface parking lot containing 81 parking spaces and rights to an adjacent lotcontaining 349 parking spaces.  Capital City Plaza is currently 98% leased andwas acquired for $76.3 million plus $2.3 million in closing costs andanticipated capital expenditures and leasing costs during the first two yearsof ownership.  The purchase was funded with the Company's existing lines ofcredit, assumption of an existing non-recourse first mortgage of approximately$44 million and the issuance of $15.5 million in subsidiary redeemable preferredmembership interests to the seller.  The mortgage matures in August 2008 andbears interest at 6.75%.  In accordance with generally accepted accountingprinciples, the mortgage was recorded at $49.1 million to reflect the fairvalue of the financial instrument based on the rate of 3.67%.

       On August 24, 2004, the Company purchased Squaw Peak Corporate Center, a 287,000 square foot, two-building officecampus in the Camelback/Squaw Peak submarket of Phoenix, Arizona.  Theacquisition also includes two adjoining two-story parking decks containing 518spaces, 122 covered spaces and a surface parking lot containing 792 parkingspaces.  The property is currently 95% leased and was acquired for $46.9million plus $2.7 million in closing costs and anticipated capital expendituresand leasing costs during the first two years of ownership.  The purchase wasfunded with the company's existing lines of credit, proceeds from equity issuedunder the Company's DRIP plan in the second quarter of 2004, and the assumptionof an existing first mortgage of approximately $34 million.  The mortgagematures in December 2010 and bears interest at 8.16%.  In accordance withgenerally accepted accounting principles, the mortgage was recorded at $39.6million to reflect the fair value of the financial instrument based on the rateof 4.92% on the date of purchase.

       On December14, 2004, the Company sold an 80% interest in three assets to Rubicon AmericaTrust, an Australian listed trust, which is advised by the Greenwich GroupInternational (the "Rubicon Joint Venture").  The sale values theproperties at $66.7 million.  The net book value of the properties on thedate of the sale was $59 million.  The properties included in the 

550,000 square footventure are Lakewood and Falls Pointe in Atlanta and Carmel Crossing inCharlotte.  The Company recognized a net acquisition fee of approximately$2 million in addition to the sales price and recorded again on the sale of the$3.5 million.  Parkway Realty Services continues to provide management andleasing services for the buildings.

       Simultaneous with closing the RubiconJoint Venture, the entity that owns the properties closed a $52 millionmortgage secured by the properties.  The non-recourse first mortgage has afixed interest rate of 4.86%, is interest only for the first four years,amortizes over 30 years thereafter and matures in seven years.  The Companyreceived net cash proceeds from this joint venture sale and financing ofapproximately $58 million, which was used to reduce short-term borrowings underthe Company's lines of credit.  Parkway's share of the venture's debt is 13.85%,which is included in the calculation of the ratio of debt to total marketcapitalization.  Also, simultaneous with closing, the Company repaid theoutstanding $4.5 million first mortgage on its Lakewood asset at a prepaymentpremium of approximately $381,000.

       On January 5,2005, the Company entered into an agreement to purchase the 70% interest heldby Investcorp International, Inc., its joint venture partner, in the propertyknown as 233 North Michigan Avenue in Chicago, Illinois. The terms of theagreement place total building value at $194.3 million or $182 per square foot.The Company will close the investment in two stages. The Company closed 90% ofthe purchase on January 14, 2005. The second closing for the remainder ofInvestcorp's interest will occur followinglender and rating agency approval, which is expected within ninety days. Atclosing, the Company earned a $400,000 incentive fee from Investcorp based uponthe economic returns generated over the life of the partnership. The purchasewas funded with proceeds from the sale of 1.6 million shares of common stock toCitigroup Global Markets, Inc. on January 10, 2005 and the assumption of anexisting first mortgage on the property.

       The 70% interest in 233 NorthMichigan Avenue was acquired subject to an existing non-recourse first mortgagewith an outstanding balance of approximately $100 million, which matures July2011 and carries a fixed interest rate of 7.21%. In accordance with generallyaccepted accounting principles, the mortgage will be recorded at approximately$112 million to reflect the fair value of the financial instrument based on themarket rate of 4.94% on the date of purchase. 

*       *In early March 2005, theCompany expects, subject to the completion of due diligence, to purchase for approximately$29.3 million two adjacent buildings in downtown Jacksonville, Florida. Inaddition to the purchase price the Company expects to invest an additional $4.3million in improvements.  The buildings, which total 305,000 square feet, areapproximately 93% leased. The purchase will be funded via the remainingproceeds from the Company's January 2005 equity offering as well as itsexisting line of credit. 

       Purchase obligations for tenantimprovement and building improvement allowances for leases in place as ofDecember 31, 2004 plus commitments for the City Centre garage development areas follows (in thousands):

2005

$11,394

2006

580

2007

36

2008

14

2009

2

Thereafter

14

Total

$12,040

       Minimum future operating leasepayments for various equipment leased at the office properties is as followsfor operating leases in place as of December 31, 2004 (in thousands):

2005

$925

2006

529

2007

222

2008

87

Total

$1,763

**Note C - Investment in Unconsolidated Joint Ventures**

       In additionto the 55 office and parking properties owned directly, the Company is alsoinvested in five joint ventures with unrelated investors.  Parkway retaineda minority interest of 30% in two joint ventures, 20% in two joint ventures and50% in 

the other. These investments are accounted for using the equity method of accounting, asParkway does not control any of these joint ventures.  Accordingly, theassets and liabilities of the joint ventures are not included on Parkway'sconsolidated balance sheets as of December 31, 2004 and 2003.  Informationrelating to these unconsolidated joint ventures is detailed below (inthousands).

** **

** **

** **

**Parkway's**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership %**

**Feet**

**Leased**

Parkway  233 North Michigan, LLC

233  N. Michigan

Chicago, IL

30.0%

1,070

93.5%

Phoenix OfficeInvest, LLC

Viad Corp Center

Phoenix, AZ

30.0%

481

95.7%

Wink/Parkway  Partnership

Wink Building

New    Orleans, LA

50.0%

32

100.0%

Parkway  Joint Venture, LLC ("Jackson JV")

UBS/River  Oaks

Jackson, MS

20.0%

170

93.0%

RubiconPark  I, LLC ("Rubicon JV")

Lakewood/Falls  Pointe

Atlanta, GA

20.0%

550

92.1%

Carmel Crossing

Charlotte,  NC

2,303

93.6%

       Balance sheet information for theunconsolidated joint ventures is summarized below as of December 31, 2004 andDecember 31, 2003 (in thousands):

**Balance Sheet Information**

**December 31, 2004**

**233 North**

**Viad Corp**

**Wink**

**Jackson**

**Rubicon**

**Combined**

**Michigan**

**Center**

**Building**

**JV**

**JV**

**Total**

**Unconsolidated Joint  Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Real Estate, Net

$168,135

$  58,688

$1,259

$16,654

$69,336

$314,072

Other Assets

14,245

3,737

154

530

6,675

25,341

Total Assets

$182,380

$62,425

$1,413

$17,184

$76,011

$339,413

Mortgage Debt

$100,133

$42,500

$450

$11,269

$52,000

$206,352

Other Liabilities

10,797

2,579

3

532

295

14,206

Partners'/Shareholders'  Equity

71,450

17,346

960

5,383

23,716

118,855

Total Liabilities and 

    Partners'/Shareholders'  Equity

$182,380

$62,425

$1,413

$17,184

$76,011

$339,413

**Parkway's Share of  Unconsolidated JVs:**

** **

** **

** **

** **

** **

** **

Real Estate, Net

$  50,440

$17,606

$   630

$  3,331

$13,867

$  85,874

Mortgage Debt

$  30,040

$12,750

$   225

$  2,254

$  7,200

$  52,469

Net Investment in Joint  Ventures

$  14,539

$  4,388

$   480

$       19

$  5,868

$  25,294
   
**Balance Sheet Information**

**December 31, 2003**

**233 North**

**Viad Corp**

**Wink**

**Jackson**

**Rubicon**

**Combined**

**Michigan**

**Center**

**Building**

**JV**

**JV**

**Total**

**Unconsolidated Joint  Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Real Estate, Net

$171,396

$59,587

$1,282

$16,595

$        -

$248,860

Other Assets

13,417

2,939

158

723

-

17,237

Total Assets

$184,813

$62,526

$1,440

$17,318

$        -

$266,097

Mortgage Debt

$102,002

$42,500

$   526

$11,442

$        -

$156,470

Other Liabilities

9,054

2,048

4

434

-

11,540

Partners'/Shareholders'  Equity

73,757

17,978

910

5,442

-

98,087

Total Liabilities and 

    Partners'/Shareholders'  Equity

$184,813

$62,526

$1,440

$17,318

$        -

$266,097

**Parkway's Share of  Unconsolidated JVs:**

** **

** **

** **

** **

** **

** **

Real Estate, Net

$  51,419

$17,876

$   641

$  3,319

$        -

$  73,255

Mortgage Debt

$  30,601

$12,750

$   263

$  2,288

-

$  45,902

Net Investment in Joint Ventures

$  14,963

$  4,577

$   455

$       31

$        -

$  20,026

       Incomestatement information for the unconsolidated joint ventures is summarized belowfor the years ending December 31, 2004 and 2003 (in thousands):

**Results of Operations**

**Year Ended December 31, 2004**

**233 North**

**Viad Corp**

**Wink**

**Jackson**

**Rubicon**

**Combined**

**Michigan**

**Center**

**Building**

**JV**

**JV**

**Total**

**Unconsolidated Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Revenues

$  33,586 

$  11,474 

$  305 

$  2,827 

$  418 

$  48,610 

Operating Expenses

(15,997)

(5,231)

(94)

(1,234)

(159)

(22,715)

Net Operating Income

17,589 

6,243 

211 

1,593 

259 

25,895 

Interest Expense

(7,288)

(1,862)

(42)

(718)

(126)

(10,036)

Loan Cost Amortization

(118)

(371)

(3)

(5)

(5)

(502)

Depreciation and Amortization

(5,831)

(1,620)

(23)

(371)

(121)

(7,966)

Preferred Distributions

(1,689)

- 

- 

- 

- 

(1,689)

Net Income

$    2,663 

$    2,390 

$  143 

$    499 

$      7 

$    5,702 

**Parkway's Share of Unconsolidated JVs:**

** **

** **

** **

** **

** **

** **

Net Income

$       799 

$      717 

$    72 

$    100 

$      9 

$    1,697 

Depreciation and Amortization

1,749 

486 

12 

74 

24 

2,345 

Funds from Operations

$    2,548 

$   1,203 

$    84 

$    174 

$    33 

$    4,042 

Interest Expense

$    2,186 

$      559 

$    21 

$    144 

$    17 

$    2,927 

Loan  Cost Amortization

$         36 

$      111 

$      1 

$        1 

$      1 

$       150 

Preferred Distributions

$       507 

$            - 

$       - 

$         - 

$       - 

$       507 

**Other Supplemental Information:**

Distributions from Unconsolidated JVs

$    1,509 

$      907 

$    46 

$    111 

$       - 

$    2,573 
      
**Year Ended December 31, 2003**

**233 North**

**Viad Corp**

**Wink**

**Jackson**

**Rubicon**

**Combined**

**Michigan**

**Center**

**Building**

**JV**

**JV**

**Total**

**Unconsolidated  Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Revenues

$  34,082 

$    9,697 

$  305 

$  1,644 

$       - 

$  45,728 

Operating  Expenses

(14,830)

(4,387)

(85)

(698)

- 

(20,000)

Net  Operating Income

19,252 

5,310 

220 

946 

- 

25,728 

Interest  Expense

(7,522)

(1,494)

(49)

(335)

- 

(9,400)

Loan  Cost Amortization

(119)

(308)

(2)

(1)

- 

(430)

Depreciation  and Amortization

(5,362)

(1,239)

(23)

(192)

- 

(6,816)

Preferred  Distributions

(1,664)

- 

- 

- 

- 

(1,664)

Net  Income

$    4,585 

$    2,269 

$  146 

$    418 

$       - 

$    7,418 

**Parkway's  Share of Unconsolidated JVs:**

** **

** **

** **

** **

** **

** **

Net  Income

$    1,375 

$      681 

$    73 

$      83 

$       - 

$    2,212 

Depreciation  and Amortization

1,609 

372 

11 

38 

- 

2,030 

Funds  from Operations

$    2,984 

$   1,053 

$  84 

$    121 

$       - 

$    4,242 

Interest  Expense

$    2,256 

$      449 

$    24 

$      67 

$       - 

$    2,796 

Loan Cost Amortization

$         36 

$        93 

$      1 

$         - 

$       - 

$       130 

Preferred  Distributions

$       499 

$            - 

$       - 

$         - 

$       - 

$       499 

**Other  Supplemental Information:**

Distributions  from Unconsolidated JVs

$    2,020 

$   1,048 

$    50 

$      30 

$       - 

$    3,148 
 
       Parkway'sshare of the unconsolidated joint ventures' debt is as follows for December 31,2004 and 2003 (in thousands):

     

**Parkway's Share of Unconsolidated Joint Ventures'  Debt**

** **

**Type of**

** **

** **

**Monthly**

**Loan Balance**

**Loan Balance**

**Description**

**Debt Service**

**Interest Rate**

**Maturity**

**Debt Service**

**12/31/04**

**12/31/03**

Mortgage  Notes Payable:

     233 North Michigan Avenue

Amortizing

7.350%

07/11/11

$     231

$30,040

$30,601

      Viad Corporate Center

Interest Only

LIBOR + 2.600%

03/11/05

52

12,750

12,750

      Wink   Building

Amortizing

8.625%

07/01/09

5

225

263

      Jackson JV

Amortizing

5.840%

05/01/13

14

2,254

2,288

      Rubicon JV 

Interest Only

4.865%

01/01/12

30

7,200

-

$     332

$52,469

$45,902

**Weighted  Average Interest Rate at End of Year**

6.982%

6.396%

       Parkway's share of the scheduledprincipal payments on mortgage debt for the unconsolidated joint ventures foreach of the next five years and thereafter through maturity as of December 31,2004 are as follows (in thousands):

**233 North**

**Viad Corporate**

**Wink**

**Jackson**

**Rubicon**

**Schedule of Mortgage  Maturities by Year:**

**Michigan**

**Center**

**Building**

**JV**

**JV**

**Total**

2005

$      602

$12,750

$  42

$     37

$        -

$13,431

2006

647

-

46

39

-

732

2007

695

-

50

41

-

786

2008

747

-

54

44

-

845

2009

803

-

33

46

96

978

Thereafter

26,546

-

-

2,047

7,104

35,697

$30,040

$12,750

$225

$2,254

$7,200

$52,469

**Note D - Non-Core Assets**

       At December 31, 2004, Parkway'sinvestment in non-core assets consisted of the following (in thousands):
SizeLocationBook Value
12  acres

New Orleans, LA

$1,808
17 acresCharlotte,   NC1,720

$3,528

       During the first quarter of 2004,final payment of $774,000 was received on a mortgage note receivable secured bya retail center in Texas.  A gain of $774,000 was recognized on the notereceivable as it was fully reserved.  

**Note E - Notes Payable**

**Notes Payable to Banks**

       At December 31, 2004, Parkway had $104,618,000outstanding under a three-year $170 million unsecured revolving credit facilitywith a consortium of 11 banks with Wachovia Capital Markets, LLC as Sole LeadArranger and Sole Book Runner, Wachovia Bank, National Association asAdministrative Agent, PNC Bank, National Association as Syndication Agent, andother banks as participants (the "$170 million line"), a $15 million unsecuredline of credit with PNC Bank (the "$15 million line") and a $9 millionunsecured line of credit with Trustmark National Bank (the "$9 million line"). The interest rates on the $170 million line and the $15 million line were equalto the 30-day LIBOR rate plus 100 to 150 basis points, depending upon overallCompany leverage.  The interest rate on the $9 million line was equal to the30-day LIBOR rate plus 132.5 basis points.  The weighted average interest rateon unsecured lines of credit was 3.1% and 2.6% at December 31, 2004 and 2003,respectively.

       Covenantsrelated to the lines of credit include requirements for maintenance of minimumtangible net worth, fixed charge coverage, interest coverage, and debt servicecoverage.  The lines also establish limits on the Company's indebtedness anddividends.

       The $170 million line matures February 6,2007 and contains a one-year extension option available at maturity.  Theline is expected to fund acquisitions of additional investments and has acurrent interest rate of 30-day LIBOR rate plus 132.5 basis points.  TheCompany paid a facility fee of $170,000 (10 basis points) and origination feesof $556,000 (32.71 basis points) upon 

closing of the loan agreement and pays an annualadministration fee of $35,000.  The Company also pays fees on the unusedportion of the line based upon overall Company leverage, with the current rateset at 12.5 basis points.  The $170 million line replaces the line ofcredit with JP Morgan Chase Bank for $135 million, which was scheduled to matureJune 2004.  The new line with Wachovia affords the Company greaterfinancial flexibility at a lower interest cost.

       On February 4, 2005, Parkway amended and renewed the $15 million line.  This line of credit matures February 2,  2006, is unsecured and is expected to fund the daily cash requirements of theCompany's treasury management system.  The $15 million line has a currentinterest rate equal to the 30-day LIBOR rate plus 132.5 basis points.  TheCompany paid a facility fee of $15,000 (10 basis points) upon closing of theloan agreement.  Under the $15 million line, the Company does not pay annualadministration fees or fees on the unused portion of the line.

       The $9 million line with TrustmarkNational Bank is interest only, has a current interest rate equal to the 30-dayLIBOR rate plus 132.5 basis points and matures December 7, 2005.  The proceedsof the loan were used to finance the construction of the City Centre Garage currentlyunder development.

       The Company's interest rate hedgecontracts as of December 31, 2004 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market  Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2004**

**2003**

Swap

$40,000

06/30/06

1-Month LIBOR

3.53%

$(193)

-

Swap

$20,000

12/31/05

1-Month LIBOR

3.18%

(   33)

-

Reverse Swap

$  4,917

07/15/06

1-Month LIBOR + 3.455%

8.08%

-

$243

$(226)

$243

       To protect against the potential forrapidly rising interest rates, the Company entered into two interest rate swapagreements in May 2004. The first interest rate swap agreement is for a $40million notional amount and fixed the 30-day LIBOR interest rate at 3.53% forthe period January 1, 2005 through June 30, 2006. The second interest rate swapagreement is for a $20 million notional amount and fixed the 30-day LIBORinterest rate at 3.18% for the period January 1, 2005 through December 31, 2005.  The Company designated the swaps as hedges of the variable interestrates on the Company's borrowings under the $170 million line.  Accordingly,changes in the fair value of the swap are recognized in accumulated othercomprehensive income until the hedged item is recognized in earnings.** **
**Mortgage notes payable withoutrecourse**
       A summary of fixed rate mortgagenotes payable at December 31, 2004 and 2003 which are non-recourse to theCompany, is as follows (in thousands):

** **

** **

** **

** **

**Carrying**

** **

** **

** **

** **

** **

**Amount**

**Note Balance**

** **

**Interest**

**Monthly**

**Maturity**

**of**

**December 31**

**Office Property**

**Rate**

**Payment**

**Date**

**Collateral**

**2004**

**2003**

Lakewood II  (Note 1)

8.080%

$        -

07/15/06

$            -

$         -

$    5,161

Citrus Center

6.000%

164

08/01/07

32,511

19,809

20,560

Teachers  Insurance and

    Annuity Association  (12 properties)

6.945%

869

07/01/08

151,611

66,857

72,879

Capital City   Plaza (Note 3)

3.670%

298

09/01/08

61,104

47,894

-

Honeywell  (Note 1)

8.125%

-

10/10/08

-

-

4,650

John Hancock Facility (3 properties)

4.830%

97

03/01/09

29,675

24,000

24,000

John Hancock Facility (3 properties)

5.270%

81

05/01/10

29,026

18,800

18,800

Moore Building Associates LP (Note 2)

7.895%

124

06/01/10

23,529

13,423

-

Capitol Center

8.180%

165

09/01/10

36,586

19,697

20,046

One Jackson Place

7.850%

152

10/10/10

17,002

13,233

14,048

Squaw Peak  (Note 4)

4.920%

261

12/01/10

42,499

39,209

-

Maitland

4.390%

71

07/01/11

19,907

19,275

-

Wells Fargo

4.390%

35

07/01/11

11,945

9,675

-

400 North  Belt

8.250%

65

08/01/11

10,786

3,981

4,418

Woodbranch

8.250%

32

08/01/11

4,157

1,917

2,128

Roswell  North (Note 1)

8.375%

-

01/01/12

-

-

2,336

Bank of America   Plaza

7.100%

146

05/10/12

32,280

19,577

19,952

One Park 10  Plaza

7.100%

64

06/01/12

6,574

9,303

9,389

First Tennessee   Plaza

7.170%

136

12/15/12

28,802

9,932

10,820

Morgan Keegan   Tower

7.620%

163

10/01/19

31,000

17,393

18,003

$2,923

$568,994

$353,975

$247,190

(1)  Principal paid on early extinguishment of debt $11,334.

(2)  In accordance with FIN 46, Parkway began including MooreBuilding Associates LP ("MBALP") in its consolidated financial statementseffective January 1, 2004.  Parkway owns less than .1% of MBALP.

(3)  The Capital City Plaza mortgage in the amount of $43,692 wasassumed with the purchase of the building on April 2, 2004.  The mortgage notepayable, which has a stated rate of 6.75%, was recorded at $49,073 to reflect thefair value of the financial instrument based on the rate of 3.67% on the dateof purchase.

(4)  The Squaw Peak mortgage in the amount of $33,869 was assumedwith the purchase of the building on August 24, 2004.  The mortgage notepayable, which has a stated rate of 8.16%, was recorded at $39,604 to reflectthe fair value of the financial instrument based on the rate of 4.92% on the dateof purchase.

The aggregate annual maturities of mortgage notes payable at December 31, 2004are as follows (in thousands):

2005

$  14,609

2006

16,272

2007

35,107

2008

98,475

2009

30,517

Subsequently

158,995

$353,975
**Note F - Income Taxes**
       The Company elected to be taxed as areal estate investment trust (REIT) under the Internal Revenue Code, commencingwith its taxable year ended December 31, 1997.  To qualify as a REIT, theCompany must meet a number of organizational and operational requirements,including a requirement that it currently distribute at least 90% of itsadjusted taxable income to its stockholders.  It is management's currentintention to adhere to these requirements and maintain the Company's REITstatus.  As a REIT, the Company generally will not be subject to corporate levelfederal income tax on taxable income it distributes currently to itsstockholders.  If the Company fails to qualify as a REIT in any taxable year,it will be subject to federal income taxes at regular corporate rates(including any applicable alternative minimum tax) and may not be able toqualify as a REIT for four subsequent taxable years.  Even if the Companyqualifies for taxation as a REIT, the Company may be subject to certain stateand local taxes on its income and property, and to federal income and excisetaxes on its undistributed taxable income. In addition, taxable income fromnon-REIT activities managed through taxable REIT subsidiaries is subject tofederal, state and local income taxes.

       In January 1998, the Companycompleted its reorganization into an umbrella partnership REIT("UPREIT") structure under which substantially all of the Company'soffice building real estate assets are owned by an operating partnership,Parkway Properties LP (the "Operating Partnership"). Presently, substantiallyall interests in the Operating Partnership are owned by the Company and awholly-owned subsidiary.

       At December 31, 2004, the Company hadnet operating loss ("NOL") carryforwards for federal income taxpurposes of $8,881,000, which expire at various dates through 2018.  TheCompany expects to utilize the remaining NOL by December 2007.  The utilizationof these NOLs can cause the Company to incur a small alternative minimum taxliability.

       The Company's income differs forincome tax and financial reporting purposes principally because realestate owned has a different basis for tax and financial reportingpurposes, producing different gains upon disposition and different amountsof annual depreciation.  The following reconciles GAAP net income to taxableincome for the years ending December 31, 2004, 2003 and 2002 (in thousands):

**2004**

**2003**

**2002**

**Estimate**

**Actual**

**Actual**

GAAP net income from REIT  operations (1) 

$29,515 

$43,181 

$29,512 

GAAP to tax adjustments:

     Depreciation and  amortization

8,075 

3,642 

3,406 

     Gains and losses from  capital transactions

(730)

(4,485)

2,572 

     Restricted stock  amortization

783 

694 

2,189 

     Restricted stock released  to shareholders

- 

(2,715)

- 

     Stock options exercised

(3,742)

(2,576)

(824)

     Other differences

(670)

(362)

(63)

Taxable income before  adjustments

33,231 

37,379 

36,792 

Less:  NOL carryforward

- 

- 

(1,293)

Adjusted taxable income subject  to 90% dividend requirement

$33,231 

$37,379 

$35,499 

(1)  GAAP net income from REIT operations is net of amountsattributable to minority interest.

       The following reconciles cashdividends paid with the dividends paid deduction for the years ending December31, 2004, 2003 and 2002 (in thousands):

**2004**

**2003**

**2002**

**Estimate**

**Actual**

**Actual**

Cash dividends paid

$39,568 

$37,792 

$35,499 

Less:  Dividends on deferred  compensation plan shares

(337)

(333)

- 

Dividends paid deduction

$39,231 

$37,459 

$35,499 
       Thefollowing characterizes distributions paid per common share for the yearsending December 31, 2004, 2003 and 2002:
 

**2004**

**2003**

**2002**

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$2.00

76.9%

$2.32

89.2%

$2.52

98.4%

Post May 5, 2003 capital gain

.04

1.5%

.16

6.2%

-

-

Unrecaptured Section 1250 gain

.14

5.4%

.12

4.6%

0.04

1.6%

Return of capital

.42

16.2%

-

-

-

-

$2.60

100.0%

$2.60

100.0%

$2.56

100.0%

**Note G - Stock Option and Long-Term Compensation Plans**

       The Company has elected to follow APBNo. 25 and related Interpretations in accounting for its employee stock optionsbecause, as discussed below, the alternative fair value accounting provided forunder SFAS No. 123, "Accounting for Stock-Based Compensation",requires the use of option valuation models that were not developed for use invaluing employee stock options.

       Effective July 1, 2005, Parkway willbegin recording compensation expense based on the grant-date fair value ofemployee stock options in accordance with SFAS No. 123R, "Share-Based Payment." Parkway does not anticipate that the adoption of SFAS No. 123R will have asignificant impact on the Company's consolidated financial statements sinceParkway has begun granting restricted stock and/or deferred incentive shareunits instead of stock options to employees of the Company.  The compensationexpense associated with stock options to be recognized in 2005 is currentlyestimated at $50,000.

       Effective January 1, 2003, thestockholders of the Company approved Parkway's 2003 Equity Incentive Plan ("the2003 Plan") that authorized the grant of up to 200,000 equity based awards toemployees of the Company.  The 2003 Plan replaced the 1994 Stock Option andLong-Term Compensation Plan.  At present, it is Parkway's intention to grantrestricted stock and/or deferred incentive share units instead of stock optionsto employees of the Company, although the 2003 Plan authorizes various forms ofincentive awards, including options.  On each July 1 beginning with July 1,2004, the number of shares available under the plan will increase automaticallyby .25% of the number of shares of common stock outstanding on that date(increase of 28,196 shares in 2004), provided that the number of sharesavailable for grant under this plan and the 2001 Directors' Plan shall notexceed 11.5% of the shares outstanding (less the restricted shares issued andoutstanding) plus the shares issuable on the conversion of outstandingconvertible debt and equity securities or the exercise of outstanding warrantsor other rights to purchase common shares.  The 2003 Plan has a ten-year term.

       The 2001 Directors' Plan provides foroption grants to the directors.  The plan has a ten-year term and options forup to 300,000 shares of common stock may be granted under the plan.  

       Under the prior 1994 Stock Option andLong-Term Compensation Plan, a total of 169,000 shares of restricted stock hadbeen issued to officers of the Company with a vesting period of the earlier of10 years or December 31, 2002 if certain operating results were achievedthrough the ***5 in 50 Plan***.  Parkway met the goals set forth in the***5 in 50 Plan*** and effective February 2003, the Company'sCompensation Committee determined that all of the restricted shares werevested.  The restricted shares were valued at $4,836,000 and had been fullyamortized as of December 31, 2002.  Compensation expense related to therestricted stock of $2,190,000 was recognized in 2002.

       In 2004 and2003, 143,500 shares of restricted stock were issued to certain officers of theCompany in connection with the VALUESQUARE****plan. The restricted shares issued are valued at $5,162,000, and vest at the end of 7years or December 31, 2005 if certain goals of the VALUESQUAREplan are achieved.  Additionally, 9,487deferred incentive share units were granted to employees of the Company in 2004and 2003.  The deferred incentive share units are valued at $436,000, and the unitsvest at the end of 4 years.  Compensation expense related to the restrictedstock and deferred incentive share units of $783,000 and $694,000 wasrecognized in 2004 and 2003, respectively.

       Pro forma information regarding netincome and net income per share is required by SFAS No. 123, and has beendetermined as if the Company had accounted for its employee stock options underthe fair value method of that Statement.  The fair value for these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted-average assumptions for 2004, 2003 and 2002: risk-freeinterest of 4.5%,  4.0%, and 3.50%, respectively; 

dividend yield of5.71%, 6.41% and 7.30%, respectively; volatility factor of the expected marketprice of the Company's common stock of .194, .129 and .202, respectively; and aweighted-average expected life of the options of five years for the 1994 StockOption Plan in 2004, 2003 and 2002; five years for 2004, 2003 and 2002 for the1991 Directors' Stock Option Plan; and five years for 2004, 2003 and 2002, forthe 2001 Directors' Stock Option Plan.  Because the Company's employeestock options have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management's opinion, the existing model doesnot necessarily provide a reliable single measure of the fair value of itsemployee stock options.  The weighted average fair value of options grantedduring 2003 and 2002 was $2.01 and $2.75, respectively.  No options weregranted during 2004.

       For purposes of pro formadisclosures, the estimated fair value of the options granted in 2003 and 2002is amortized to expense over the options' vesting period.  The Company's proforma information is detailed in Note A - Summary of Significant AccountingPolicies under Stock based compensation.

       A summary of the Company's stockoption activity and related information is as follows:

** **

**1994  Stock**

**1991  Directors**

**2001  Directors**

** **

**Option  Plan**

**Stock  Option Plan**

**Stock  Option Plan**

** **

** **

**Weighted**

** **

**Weighted**

** **

**Weighted**

** **

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Shares**

**Price**

**Shares**

**Price**

**Shares**

**Price**

**Outstanding at December  31, 2001**

869,702 

$28.75

89,500 

$25.91

- 

$        -

Granted                              

72,750 

35.69

- 

-

40,500 

33.31

Exercised                           

(97,084)

29.38

(25,500)

22.32

(3,000)

30.70

Forfeited                              

(17,921)

30.90

- 

-

- 

-

**Outstanding at December  31, 2002**

827,447 

29.24

64,000 

27.34

37,500 

33.52

Granted                                  

- 

-

- 

-

25,500 

40.46

Exercised                                

(183,661)

28.06

(20,500)

23.20

(13,700)

33.75

Forfeited                                       

(23,012)

31.65

- 

-

- 

-

**Outstanding at December  31, 2003**

620,774 

29.52

43,500 

29.29

49,300 

37.05

Granted                                  

- 

- 

- 

- 

- 

-

Exercised                                

(206,155)

27.32

(6,000)

32.56

(4,000)

34.05

Forfeited                                       

(21,262)

33.77

- 

-

- 

-

**Outstanding at December  31, 2004**

393,357 

$30.38

37,500 

$28.76

45,300 

$37.31

       Following is a summary of the statusof options outstanding at December 31, 2004:

**Outstanding Options**

**Exercisable Options**

** **

**Weighted**

** **

** **

** **

** **

**Average**

**Weighted**

** **

**Weighted**

** **

** **

**Remaining**

**Average**

** **

**Average**

** **

** **

**Contractual**

**Exercise**

** **

**Exercise**

**Exercise****Price****Range**

**Number**

**Life**

**Price**

**Number**

**Price**

**1994 Stock Option Plan**

$12.51 - $15.75

17,106

1.1  years

$13.97

17,106

$13.97

$15.76 - $25.63

15,375

1.5  years

$21.00

15,375

$21.00

$25.64 - $29.00

51,868

4.3  years

$27.65

51,868

$27.65

$29.01 - $31.00

73,262

5.4  years

$30.14

70,254

$30.11

$31.01 - $33.50

122,794

4.2  years

$31.30

108,611

$31.24

$33.51 - $36.00

112,952

7.1  years

$34.56

46,363

$34.17

**1991 Directors Stock Option Plan                                                                                           **

$10.01 - $20.01

4,500

1.0  years

$13.08

4,500

$13.08

$25.01 - $30.00

10,500

4.8  years

$28.78

10,500

$28.78

$30.00 - $36.00

22,500

4.2  years

$31.89

22,500

$31.89

**2001 Directors Stock  Option Plan**

$30.00 - $36.00

9,000

6.4  years

$30.70

9,000

$30.70

$36.01 - $40.00

29,800

8.0  years

$37.83

29,800

$37.83

$40.01 - $45.00

6,500

8.8  years

$44.10

6,500

$44.10

** **
**Note H - Commitments andContingencies**
**Legal Matters**

       Parkway is subject to various legalproceedings and claims that arise in the ordinary course of business.  Thesematters are generally covered by insurance.  The Company believes that thefinal outcome of such matters will not have a material effect on our financialstatements.

**Commitments**

       Parkway has an investment in MooreBuilding Associates LP ("MBALP") established for the purpose of owning acommercial office building (the Toyota Center in Memphis, Tennessee).  Parkwayhas less than .1% ownership interest in MBALP and acts as the managing generalpartner of this partnership.  In acting as the general partner, the Company iscommitted to providing additional funding to meet partnership operatingdeficits up to an aggregate of $1 million.

**Note I - Related Party Transactions**

       Matthew W. Kaplan, a director ofthe Company, is a Portfolio Manager for Five Arrows Realty Securities III LLC,which owned 100% of the 803,499 and 1,942,857 shares of Series B ConvertiblePreferred stock at December 31, 2004 and 2003, respectively.  The balance ofSeries B Convertible Preferred stock was $28,122,000 and $68,000,000 at December 31, 2004 and 2003, respectively.

**Note J - Other Matters**

      Through the Company's DividendReinvestment and Stock Purchase Plan ("DRIP Plan"), 296,173 common shares weresold during 2004.  Net proceeds received on the issuance of shares were$11,515,000, which equates to an average net price per share of $38.88 at adiscount of 2.3%.  The proceeds were used to reduce amounts outstanding underthe Company's short-term lines of credit.

      In 2001, the Company issued 2,142,857shares of 8.34% Series B Cumulative Convertible Preferred stock toRothschild/Five Arrows.  Effective after December 31, 2002, the holder has the right to convert each share of Series B Convertible Preferred into ashare of Parkway common stock.  In addition to the issuance of Series B preferredstock, Parkway issued a warrant to Five Arrows to purchase 75,000 shares of theCompany's common stock at a price of $35 for a period of seven years.  During2004, 1,139,358 shares of Series B preferred stock were converted into 1,139,358shares of Parkway common stock.  As of December 31, 2004, there were 803,499shares of Series B preferred stock outstanding.  Dividends of $5,186,000 and$6,091,000 were declared on the stock in 2004 and 2003, respectively.  There isno public market for Parkway's Series B Cumulative Convertible Preferredstock.  

       In connection with the Capital CityPlaza purchase, the limited liability company that owns the building issued$15.5 million in preferred membership interests to the seller.  The preferredmembership interests pay the seller a 7% coupon rate and were issued toaccommodate their tax planning needs.  The seller has the right to redeem $5.5million of the membership interests within six months of closing and$10 million of the membership interests within nine months of closing. Parkway has the right to retire the preferred interest 40 months after closing. During the third quarter in 2004, the seller redeemed $4,750,000 of thepreferred membership interests.

       On January 10, 2005, the Company sold1,600,000 shares of common stock in a public offering in which Citigroup GlobalMarkets, Inc. was the underwriter for net proceeds of approximately $76 millionor $47.50 per share.  The proceeds were used towards the acquisition of the 70%interest held by the Company's joint venture partner in the property known as233 North Michigan Avenue in Chicago, IL and to reduce outstanding variablerate debt.

       On September 7, 1995, the board ofdirectors of our predecessor, The Parkway Company, declared a dividenddistribution of one right for each outstanding share of our common stock tostockholders of record on the terms and conditions set forth in a ShareholderRights Agreement. The Shareholder Rights Agreement and the rights issuedthereunder will expire on September 6, 2005 and the Company does not intend to renewor extend the Shareholder Rights Agreement or the rights when they expire.
**Supplemental Profit and LossInformation**
       Included in operating expenses aretaxes, principally property taxes, of $15,737,000, $14,607,000 and $17,365,000 forthe years ended December 31, 2004, 2003 and 2002, respectively.

**Supplemental Cash Flow Information**

** **

** **

**Year Ended  December 31**

** **

**2004**

**2003**

**2002**

(In thousands)

Interest paid

$24,474 

$18,735

$24,740

Income taxes paid

(72)

118

19

Mortgages assumed in purchases

88,677 

21,153

-

Restricted shares and deferred  incentive

     share  units issued

271 

5,328

-

Shares issued in lieu of  Directors' fees

138 

76

62

Issuance of subsidiary  redeemable

     preferred  membership interests

15,491 

-

-

Mortgage transferred in sale of  70% interest in 

     Parkway  233 North Michigan LLC

- 

-

73,289

Note receivable from the sale  of 70% interest in

     Parkway  233 North Michigan LLC

- 

-

747

Original issue costs associated  with redemption

     of  preferred stock

- 

2,619

-

**Rents Receivable and Other Assets**

** **

** **

**December 31**

** **

**2004**

**2003**

** **

(In thousands)

Rents receivable  

$     948 

$  1,484 

Allowance for doubtful accounts

(353)

(376)

Straight line rent receivable

10,369 

7,647 

Other receivables

3,356 

5,793 

Lease costs (net of accumulated  amortization of     

     $9,802 and $7,825, respectively)

12,180 

8,877 

Loan costs (net of accumulated  amortization of     

     $2,302 and $2,395, respectively)

3,695 

2,437 

Escrow and other deposits

9,922 

6,709 

Prepaid items

528 

986 

Other assets

1,803 

1,515 

$42,448 

$35,072 

** **

 

 

 

 

 

 
**Intangible Assets**
       The following table reflects theportion of the purchase price of office properties allocated to intangibleassets in accordance with SFAS 141, as discussed in "Note A".  The portion ofpurchase price allocated to below market lease value and the relatedaccumulated amortization is reflected in the Schedule of Accounts Payable andOther Liabilities within this note.

** **

** **

**December 31**

** **

**2004**

**2003**

** **

(In thousands)

Lease in place value

$37,306 

$8,279 

    Accumulated  amortization

(2,476)

(386)

Above market lease value

4,265 

(190)

    Accumulated  amortization

(1,061)

29 

$38,034 

$7,732 

**Accounts Payable and Other Liabilities**

** **

** **

**December 31**

** **

**2004**

**2003**

** **

(In thousands)

Office property payables:

     Accrued  expenses and accounts payable

$15,643 

$   9,694

     Accrued  property taxes

8,057 

10,360

     Security  deposits

2,479 

2,338

     Below  market lease value

3,739 

- 

     Accumulated  amortization - below market

          lease  value

(965)

- 

Corporate payables

2,733 

3,326

Deferred compensation plan  liability

5,212 

4,673

Dividends payable

2,264 

2,618

Deferred gains

- 

861

Accrued payroll

1,931 

1,607

Interest payable

1,375 

1,255

Other payables

- 

290

$42,468 

$37,022

**Note K - Fair Values of Financial Instruments**

**Cash and cash equivalents**

       The carrying amounts for cashand cash equivalents approximated fair value at December 31, 2004 and 2003.

**Mortgage loans**

       The fair value for the mortgage loanreceivable is estimated based on net realizable value and discounted cashflow analysis, using interest rates currently being offered on loans withsimilar terms to borrowers of similar credit quality.  The fair value ofthe mortgage loan receivable at December 31, 2003 approximated its carryingamount of $861,000.

       The fair value of the mortgage notespayable without recourse are estimated using discounted cash flow analysis, basedon the Company's current incremental borrowing rates for similartypes of borrowing arrangements.  The aggregate fair value of the mortgagenotes payable without recourse at December 31, 2004 was $366,252,000 ascompared to its carrying amount of $353,975,000.  The aggregate fair value ofthe mortgage notes payable without recourse at December 31, 2003 was $259,408,000as compared to its carrying amount of $247,190,000.
****
**Note L - Segment Information**

       Parkway's primary business is theownership and operation of office properties. The Company accounts for eachoffice property or groups of related office properties as an individualoperating segment.  Parkway has aggregated its individual operating segmentsinto a single reporting segment due to the fact that the individual operatingsegments have similar operating and economic characteristics.   

       The Company believes that theindividual operating segments exhibit similar economic characteristics such asbeing leased by the square foot, sharing the same primary operating expensesand ancillary revenue opportunities and being cyclical in the economicperformance based on current supply and demand conditions.  The individualoperating segments are also similar in that revenues are derived from theleasing of office space to customers and each office property is managed andoperated consistently in accordance with Parkway's standard operatingprocedures.  The range and type of customer uses of our properties is similarthroughout our portfolio regardless of location or class of building and theneeds and priorities of our customers do not vary from building to building. Therefore, Parkway's management responsibilities do not vary from location tolocation based on the size of the building, geographic location or class.

       The management of the Companyevaluates the performance of the reportable office segment based on FFO. Parkway computes FFO in accordance with standards established by NAREIT, whichmay not be comparable to FFO reported by other REITs that do not define theterm in accordance with the current NAREIT definition.  FFO is defined as netincome available to common stockholders, computed in accordance with GAAP,excluding gains or losses from sales of properties, plus real estate relateddepreciation and amortization and after adjustments for unconsolidatedpartnerships and joint ventures.  Adjustments for unconsolidated partnershipsand joint ventures will be calculated to reflect funds from operations on thesame basis.

       Management believes that FFO is anappropriate measure of performance for equity REITs.  We believe FFO is helpfulto investors as a supplemental measure that enhances the comparability of ouroperations by adjusting net income for items not reflective of our principaland recurring operations.  This measure, along with cash flows from operating,financing and investing activities, provides investors with an indication ofour ability to incur and service debt, to make capital expenditures and to fundother cash needs.  In addition, FFO has widespread acceptance and use withinthe REIT investor and analyst communities.    We believe that in order tofacilitate a clear understanding of our operating results, FFO should beexamined in conjunction with the net income as presented in our consolidatedfinancial statements and notes thereto.  FFO does not represent cash generatedfrom operating activities in accordance with GAAP and is not an indication ofcash available to fund cash needs.  FFO should not be considered an alternativeto net income as an indicator of the Company's operating performance or as analternative to cash flow as a measure of liquidity.
****       The following is areconciliation of FFO and net income available to common stockholders foroffice properties and total consolidated entities for the years ending December 31, 2004, 2003 and 2002.
** **

** **

**As of or for the year ended December 31, 2004**

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues (a)

$160,506 

$             - 

$160,506 

Property operating expenses (b)

(73,487)

- 

(73,487)

Property net operating income from continuing operations

87,019  

- 

87,019 
            
Management company income

- 

3,832 

3,832 

Other income

- 

37 

37 

Interest expense (c)

(21,580)

(4,237)

(25,817)

Management company expenses

- 

(358)

(358)

General and administrative expenses

- 

(4,464)

(4,464)

Other expense

- 

(22)

(22)

Equity in earnings of unconsolidated joint ventures

1,697 

- 

1,697 

Adjustment for depreciation and amortization -  unconsolidated 

    joint ventures

2,345 

- 

2,345 

Gain on note receivable

- 

774 

774 

Adjustment for minority interest - real estate  partnerships

(527)

- 

(527)

Dividends on preferred stock

- 

(4,800)

(4,800)

Dividends on convertible preferred stock

- 

(5,186)

(5,186)

Funds from operations available to common stockholders

68,954 

(14,424)

54,530 
            
Depreciation and amortization

(36,843)

- 

(36,843)

Depreciation and amortization - unconsolidated joint  ventures

(2,345)

- 

(2,345)

Depreciation and amortization - minority interest - real  estate 

    partnerships

654 

- 

654 

Gain on sale of joint venture interest

3,535 

- 

3,535 

Minority interest - unit holders

- 

(2)

(2)

Net income available to common stockholders

$  33,955 

$ (14,426)

$  19,529 
            
Total assets

$920,780 

$  10,408 

$931,188 
            
Office and parking properties

$820,807 

$            - 

$820,807 
            
Investment in unconsolidated joint ventures

$  25,294 

$            - 

$  25,294 
            
Capital expenditures

$  35,030 

$            - 

$  35,030 
   
(a)  Included  in property operating revenues are rental revenues, customer reimbursements,  parking income and other income.
   
(b)  Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and property operating expenses.
   
(c)  Interest  expense for office properties represents interest expense on property secured  mortgage debt and subsidiary redeemable preferred membership interests.   Interest expense for office properties does not include interest expense on  the unsecured lines of credit.

** **

**As of or for the year ended December 31, 2003**

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues (a)

$142,196 

$             - 

$142,196 

Property operating expenses (b)

(63,362)

- 

(63,362)

Property net operating income from continuing operations

78,834  

- 

78,834 
            
Management company income

- 

2,136 

2,136 

Interest on note receivable from MBALP

- 

819 

819 

Incentive management fee income from MBALP

- 

300 

300 

Other income

- 

573 

573 

Interest expense (c)

(16,319)

(3,399)

(19,718)

Management company expenses

- 

(391)

(391)

General and administrative expenses

- 

(4,201)

(4,201)

Other expense

- 

(37)

(37)

Equity in earnings of unconsolidated joint ventures

2,212 

- 

2,212 

Adjustment for depreciation and amortization -  unconsolidated 

    joint ventures

2,030 

- 

2,030 

Gain on sale of land

- 

362 

362 

Original issue costs associated with redemption of  preferred stock

- 

(2,619)

(2,619)

Dividends on preferred stock

- 

(5,352)

(5,352)

Dividends on convertible preferred stock

- 

(6,091)

(6,091)

Funds from operations available to common stockholders

66,757 

(17,900)

48,857 
            
Depreciation and amortization

(28,030)

- 

(28,030)

Depreciation and amortization - unconsolidated joint  ventures

(2,030)

- 

(2,030)

Deferred gain income 

- 

26 

26 

Gain on sale of joint venture interests and office  property

10,299 

- 

10,299 

Minority interest - unit holders

- 

(3)

(3)

Net income available to common stockholders

$  46,996 

$ (17,877)

$  29,119 
            
Total assets

$785,949 

$16,359 

$802,308 
            
Office and parking properties

$728,695 

$          - 

$728,695 
            
Investment in unconsolidated joint ventures

$  20,026 

$          - 

$  20,026 
            
Capital expenditures

$  22,199 

$          - 

$  22,199 
   
(a)  Included  in property operating revenues are rental revenues, customer reimbursements,  parking income and other income.
   
(b)  Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and property operating expenses.
   
(c)  Interest  expense for office properties represents interest expense on property secured  mortgage debt and does not include interest expense on the unsecured lines of  credit.

** **

**As of or for the year ended December 31, 2002**

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues (a)

$152,442 

$             - 

$152,442 

Property operating expenses (b)

(65,942)

- 

(65,942)

Property net operating income from continuing operations

86,500 

- 

86,500 
            
Management company income

- 

1,197 

1,197 

Interest on note receivable from MBALP

- 

895 

895 

Incentive management fee income from MBALP

- 

325 

325 

Other income

- 

390 

390 

Interest expense (c)

(19,839)

(6,647)

(26,486)

Management company expenses

- 

(416)

(416)

General and administrative expenses

- 

(5,029)

(5,029)

Other expense

- 

(34)

(34)

Equity in earnings of unconsolidated joint ventures

824 

- 

824 

Adjustment for depreciation and amortization -  unconsolidated 

    joint ventures

861 

- 

861 

Impairment loss on office property and land

(1,594)

(205)

(1,799)

Income from discontinued operations

47 

- 

47 

Adjustment for depreciation and amortization -  discontinued

    operations

22 

- 

22 

Dividends on preferred stock

- 

(5,797)

(5,797)

Dividends on convertible preferred stock

- 

(6,257)

(6,257)

Funds from operations available to common stockholders

66,821 

(21,578)

45,243 
            
Depreciation and amortization

(27,412)

- 

(27,412)

Depreciation and amortization - unconsolidated joint  ventures

(861)

- 

(861)

Depreciation and amortization - discontinued operations

(22)

- 

(22)

Deferred gain income 

- 

11 

11 

Loss on sale of joint venture interest

(269)

- 

(269)

Gain on sale of real estate from discontinued operations

770 

- 

770 

Minority interest - unit holders

- 

(2)

(2)
            
Net income available to common stockholders

$  39,027 

$ (21,569)

$  17,458 
            
Total assets

$745,618 

$18,319 

$763,937 
            
Office and parking properties

$706,551 

$          - 

$706,551 
            
Investment in unconsolidated joint ventures

$  15,640 

$          - 

$  15,640 
            
Capital expenditures

$  20,293 

$          - 

$  20,293 
   
(a)  Included  in property operating revenues are rental revenues, customer reimbursements,  parking income and other income.
   
(b)  Included  in property operating expenses are real estate taxes, insurance, contract  services, repairs and maintenance and property operating expenses.
   
(c)  Interest  expense for office properties represents interest expense on property secured  mortgage debt and does not include interest expense on the unsecured lines of  credit.
**Note M - Selected QuarterlyFinancial Data (Unaudited):**
       Summarized quarterly financial datafor the years ended December 31, 2004 and 2003 are as follows (in thousands,except per share data):

**2004**

**First**

**Second**

**Third**

**Fourth**

Revenues  (other than gains)

$  37,327 

$  40,658 

$  42,656 

$  43,734 

Expenses

(32,136)

(34,167)

(37,832)

(36,856)

Equity  in earnings of unconsolidated joint ventures

743 

367 

359 

228 

Gain on note receivable and sale of  joint venture

      interest

774 

- 

- 

3,535 

Minority  interest - unit holders

- 

(1)

(1)

- 

Minority  interest - real estate partnerships

22 

101 

(31)

35 

Net  income

6,730 

6,958 

5,151 

10,676 

Dividends  on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Dividends  on convertible preferred stock

(1,409)

(1,363)

(1,350)

(1,064)

Net  income available to common stockholders

$    4,121 

$    4,395 

$    2,601 

$    8,412 

Net  income per common share:

      Basic

$        .38 

$        .40 

$        .23 

$        .71 

      Diluted

$        .37 

$        .39 

$        .23 

$        .70 

Dividends  per common share

$        .65 

$        .65 

$        .65 

$        .65 

Weighted  average shares outstanding:

     Basic

10,864 

11,085 

11,330 

11,794 

     Diluted

11,095 

11,258 

11,528 

12,006 
               
**2003**

**First**

**Second**

**Third**

**Fourth**

Revenues  (other than gains)

$  37,994 

$  36,415 

$  35,771 

$  35,870 

Expenses

(30,407)

(28,374)

(27,856)

(29,102)

Equity  in earnings of unconsolidated joint ventures

431 

623 

590 

568 

Gain  on note receivable, sale of joint venture interests

      and  real estate

1,096 

4,545 

5,020 

- 

Minority  interest - unit holders

(1)

- 

(1)

(1)

Net  income

9,113 

13,209 

13,524 

7,335 

Original  issue costs associated with redemption

      of  preferred stock

- 

(2,619)

- 

- 

Dividends  on preferred stock

(1,449)

(1,503)

(1,200)

(1,200)

Dividends  on convertible preferred stock

(1,564)

(1,564)

(1,545)

(1,418)

Net  income available to common stockholders

$    6,100 

$    7,523 

$  10,779 

$    4,717 

Net  income per common share:

      Basic

$      0.65 

$      0.74 

$      1.04 

$      0.44 

      Diluted

$      0.63 

$      0.72 

$      0.96 

$      0.43 

Dividends  per common share

$      0.65 

$      0.65 

$      0.65 

$      0.65 

Weighted  average shares outstanding:

     Basic

9,449 

10,224 

10,411 

10,795 

     Diluted

9,610 

10,457 

12,790 

11,030 

**SCHEDULEII - VALUATIONS AND QUALIFYING ACCOUNTS**

(In thousands)

Balance

Additions

Deductions

Balance

Beginning

Consolidation

Charged to

Written Off as

Assets Sold or

End

Description

of Period

of MBALP

Costs & Expenses

Uncollectible

Joint Ventured

of Period

Allowance for Doubtful  Accounts:

Year Ended:

December 31, 2004

376     

131

169 

(312)

(11)

353

December 31, 2003

742

-

(2)

(360)

(4)

376

December 31, 2002

610

-

456 

(314)

(10)

742
****
**SCHEDULEIII - REAL ESTATE AND ACCUMULATED DEPRECIATION**

**DECEMBER31, 2004**

(Inthousands)

 
    ** **** ****Initial Cost to the Company**** **** **** **** **** ****Subsequent**** **** **** ****Building and****Capitalized****Description****Encumbrances****Land****Improvements****Costs****Office and Parking Properties:**** **** **** **** **
     The  Park on Camelback - AZ

$            -

$  7,478

$  4,902

$    651

     Squaw  Peak Corp Center - I- AZ

39,209

5,800

35,160

2,263

     Squaw  Peak Corp Center - II - AZ

-

-

-

57

     Hillsboro  Center V - FL

-

1,325

12,249

1,835

     Hillsboro  Center I-IV - FL

-

1,129

7,734

1,240

     Southtrust  Bank Building - FL

-

785

18,071

2,186

     Central  Station - FL

-

-

16,511

-

     Citrus  Center - FL

19,809

4,000

26,757

3,465

     Maitland  200 - FL

19,275

2,330

16,812

1,408

     Waterstone  - GA

-

859

7,207

1,438

     Roswell  North - GA

-

594

4,072

1,176

     Meridian  - GA

-

994

9,547

1,967

     Hightower  - GA

-

530

6,201

1,600

     Pavilion  Center - GA

-
510
4,005

560

     Peachtree  Dunwoody Pavilion- GA

-
9,373
24,580

3,520

     Capital  City Plaza - GA
47,8943,640
58,087

1,546

     One  Jackson Place - MS

13,233
1,799
19,730

7,739

     City  Centre - MS

-

1,662

13,102

7,078

     111  Capitol Building - MS

-

915

10,830

4,974

     Charlotte  Park - NC

-

1,400

12,911

3,993

     Tower  at Gervais - SC

-

316

20,350

2,533

     250  Commonwealth - SC

-

382

3,130

940

     Atrium  at Stoneridge - SC

-

572

7,775

1,138

     Capitol  Center - SC

19,697

973

37,232

4,811

     Forum  II & III - TN

-

2,634

13,886

1,775

     First  Tennessee Plaza - TN

9,932

457

29,499

5,928

     Morgan  Keegan Tower - TN

17,393

-

36,549

1,954

     Cedar  Ridge - TN

-

741

8,631

1,837

     Falls  Building - TN

-

-

7,628

1,567

     Toyota  Center - TN

13,423

190

25,017

64

     Toyota  Garage - TN

-

727

7,939

159

     Bank  of America Plaza - TN

19,577

1,464

28,712

4,499

     One  Park Ten Plaza- TX

9,303

606

6,149

2,881

     400  Northbelt - TX

3,981

419

9,655

3,224

     Woodbranch  - TX

1,917

303

3,805

1,796

     Tensor  Building- TX

-

273

2,567

672

     Ashford  II - TX

-

163

2,069

816

     Sugar  Grove - TX

-

364

7,385

2,723

     Honeywell  - TX

-

856

15,175

1,108

     Schlumberger  Building- TX

-

1,039

11,102

2,338

     One  Commerce Green - TX

-

489

37,103

3,318

     Comerica  Bank Building - TX

-

1,921

21,221

1,810

     550  Greens Parkway - TX

-

1,006

8,014

97

     1717  St. James Place - TX

-

430

6,340

1,057

     5300  Memorial - TX

-

682

11,716

1,608

     Town  & Country - TX

-

436

7,673

2,137

     Wells  Fargo Building - TX

9,675

2,600

8,247

1,520

     Glen  Forest Building - VA

-

537

8,503

1,282

     Lynnwood  Plaza - VA

-

985

8,306

1,771

     Moorefield  II - VA

-

469

4,752

258

     Moorefield  III - VA

-

490

5,135

537

     Town  Point Center - VA

-

-

10,756

2,152

     Westvaco  Building- VA

-

1,265

11,825

1,781

     Greenbrier  Tower I - VA

-

584

7,503

1,617

     Greenbrier  Tower II - VA

-

573

7,354

1,640

     Winchester  Building - VA

-

956

10,852

1,557

     Moorefield  I - VA

-

260

3,698

672

     John  Hancock Mortgage (5)

24,000

-

-

-

     John  Hancock Mortgage (6)

18,800

-

-

-

     TIAA  (12 properties) (4)

66,857

-

-

-
** **$353,975$71,285$771,721116,273**Parking  Development:**    City Centre Garage - MS--4,434-** **--4,434-** **    **Total Real Estate  Owned**$353,975$71,285$776,155$116,273****SCHEDULE III - REAL ESTATEAND ACCUMULATED DEPRECIATION - (Continued)**

**DECEMBER 31, 2004**

(In thousands)

 
 **Gross Amount at Which** **Carried at Close of Period**     **Net Book**     **Bldg. &** **Accum.****Value of****Year****Year****Depreciable****Description****Land****Imprv.****Total (1)****Depr.****Real Estate****Acquir.****Constructed****Lives (years)****Office  and Parking Properties:**        
     The Park on Camelback -  AZ

$  7,478

$  5,553

$  13,031

$       492

$  12,539

2002

1981

(3)

     Squaw Peak Corp Center  - I - AZ

5,800

37,423

43,223

778

42,445

204

1999/2000

(3)

     Squaw Peak Corp Center  - II - AZ

-

57

57

3

54

2004

19999/2000

(3)

     Hillsboro Center V - FL

1,325

14,084

15,409

2,921

12,488

1998

1985

(3)

     Hillsboro Center I-IV -  FL

1,129

8,974

10,103

1,971

8,132

1998

1985

(3)

     Southtrust Bank  Building - FL

785

20,257

21,042

3,737

17,305

1998

1985

(3)
     Central  Station - FL-16,51116,5111,82614,68520001990
(3)

     Citrus Center - FL

4,000

30,222

34,222

1,711

32,511

2003

1971

(3)

     Maitland 200 - FL

2,330

18,220

20,550

643

19,907

2004

1984

(3)

     Waterstone - GA

859

8,645

9,504

2,454

7,050

1995

1987

(3)

     Roswell North - GA

594

5,248

5,842

1,425

4,417

1996

1986

(3)

     Meridian - GA

994

11,514

12,508

2,615

9,893

1997

1985

(3)

     Hightower - GA

530

7,801

8,331

1,865

6,466

1997

1983

(3)
     Pavilion  Center - GA5104,5655,0759764,09919981984
(3)
     Peachtree  Dunwoody Pavilion GA9,37328,10037,4731,21136,26220031976/80
(3)

     Capital City Plaza - GA

3,640

59,633

63,273

2,169

61,104

2004

1989

(3)
     One  Jackson Place - MS1,79927,46929,26812,26617,00219861986
(3)

     City Centre - MS

1,662

20,180

21,842

3,828

18,014

1995

(2) 1987

(3)

     111Capitol Building -  MS

915

15,804

16,719

3,703

13,016

1998

1983

(3)

     Charlotte Park - NC

1,400

16,904

18,304

4,699

13,605

1997

1982/84/86

(3)

     Tower at Gervais - SC

316

22,883

23,199

4,359

18,840

1997

1973

(3)

     250 Commonwealth - SC

382

4,070

4,452

333

4,119

1998

1986

(3)

     Atrium at Stoneridge -  SC

572

8,913

9,485

1,831

7,654

1998

1986

(3)

     Capitol Center - SC

973

42,043

43,016

6,430

36,586

1999

1987

(3)

     Forum II & III - TN

2,634

15,661

18,295

3,370

14,925

1997

1985

(3)
     First Tennessee Plaza - TN45735,42735,8847,08228,80219971978
(3)

     Morgan Keegan Tower - TN

-

38,503

38,503

7,502

31,001

1997

1985

(3)

     Cedar Ridge - TN

741

10,468

11,209

2,189

9,020

1998

1982

(3)

     Falls Building - TN

-

9,195

9,195

1,721

7,474

1998

(2)1982/84/90

(3)

     Toyota Center - TN

190

25,081

25,271

2,791

22,480

2000

2000

(3)

     Toyota Garage  - TN

727

8,098

8,825

960

7,865

2000

2000

(3)

     Bank of America Plaza - TN

1,464

33,211

34,675

2,395

32,280

2001

1977

(3)

     One Park Ten Plaza- TX

606

9,030

9,636

3,061

6,575

1996

1982

(3)

     400 Northbelt - TX

419

12,879

13,298

2,512

10,786

1996

1982

(3)

     Woodbranch - TX

303

5,601

5,904

1,747

4,157

1996

1982

(3)

     Tensor Building- TX

273

3,239

3,512

690

2,822

1996

1983

(3)

     Ashford II - TX

163

2,885

3,048

753

2,295

1997

1979

(3)

     Sugar Grove - TX

364

10,108

10,472

2,423

8,049

1997

1982

(3)

     Honeywell - TX

856

16,283

17,139

2,908

14,231

1997

1983

(3)

     Schlumberger Building - TX

1,039

13,440

14,479

2,919

11,560

1998

1983

(3)

     One Commerce Green - TX

489

40,421

40,910

7,974

32,936

1998

1983

(3)

     Comerica Bank Bldg. -  TX

1,921

23,031

24,952

4,421

20,531

1998

1983

(3)

     550 Greens Pkwy.  - TX

1,006

8,111

9,117

680

8,437

2001

1999

(3)

     1717 St. James Place - TX

430

7,397

7,827

555

7,272

2002

1975/94

(3)

     5300 Memorial - TX

682

13,324

14,006

1,048

12,958

2002

1982

(3)

     Town & Country - TX

436

9,810

10,246

803

9,443

2002

1982

(3)

     Wells Fargo Building - TX

2,600

9,767

12,367

422

11,945

2003

1978

(3)

     Glen Forest Building - VA

537

9,785

10,322

1,768

8,554

1998

1985

(3)

     Lynnwood Plaza - VA

985

10,077

11,062

1,855

9,207

1998

1986

(3)

     Moorefield II - VA

469

5,010

5,479

920

4,559

1998

1985

(3)

     Moorefield III - VA

490

5,672

6,162

1,149

5,013

1998

1985

(3)

     Town Point Center - VA

-

12,908

12,908

2,632

10,276

1998

1987

(3)

     Westvaco Building- VA

1,265

13,606

14,871

2,716

12,155

1998

1986

(3)

     Greenbrier Tower I - VA

584

9,120

9,704

1,971

7,733

1997

1985/87

(3)

     Greenbrier Tower II -  VA

573

8,994

9,567

1,889

7,678

1997

1985/87

(3)

     Winchester Building - VA

956

12,409

13,365

2,116

11,249

1998

1987

(3)

     Moorefield I - VA

260

4,370

4,630

718

3,912

1999

1984

(3)

     John Hancock Mortgage  (5)

-

-

-

-

-

-

-

     John Hancock Mortgage  (6)

-

-

-

-

-

-

-

     TIAA (12 properties)  (4)

-

-

-

-

-

-

-

 

$71,285

$887,994

$959,279

$142,906

$816,373

**Parking Development:**

City Centre Garage - MS

-

4,434

4,434

-

4,434

-

In process

(3)

** **

-

4,434

4,434

-

4,434

** **

**Total Real Estate Owned**

$71,285

$892,428

$963,713

$142,906

$820,807

 

(1)  The aggregate cost for federal income  tax purposes was approximately $985,861.

(2)  The dates of major renovations.

(3)  Depreciation of buildings and  improvements is calculated over lives ranging from the life of the lease to  40 years.

(4)  The properties secured on the Teachers  Insurance and Annuity Association loan are Comerica Bank Building, One  Commerce Green, Charlotte Park, 

       Cedar  Ridge, Greenbrier I and II, Lynnwood Plaza, Glen Forest, Moorefield II,  Moorefield III, Westvaco, Hillsboro I-IV and Hillsboro V.

(5)  The properties secured on the John  Hancock loan are 1717 St. James Place, 5300 Memorial and Town and Country.

(6)  The properties secured on the John  Hancock loan are The Park on Camelback, Sugar Grove and 550 Greens Parkway.

**                                                                                                       **

**NOTE TO SCHEDULEIII**

**As of December 31,2004 and 2003**

(In thousands)

       Asummary of activity for real estate and accumulated depreciation is as follows:

**December 31**

**2004**

**2003**

**Real  Estate:**

** **

** **

**Office and Parking Properties:**

** **

** **

     Balance at beginning of year

$844,168 

$806,000 

     Additions:

          Acquisitions  and improvements

152,570 

137,171 

          Parking  development

4,434 

- 

     Consolidation of Moore Building  Associates LP

25,271 

- 

     Cost of real estate sold or  disposed

(901)

(26,930)

     Joint venture of office properties

(61,829)

(72,073)

     Balance at end of year

$963,713 

$844,168 

** **

**Accumulated Depreciation:**

     Balance at beginning of year

$115,473 

$  99,449 

     Depreciation expense

31,251 

25,037 

     Consolidation of Moore Building  Associates LP

2,137 

- 

     Real estate sold or disposed

(644)

(5,228)

     Joint venture of office properties

(5,311)

(3,785)

     Balance at end of year

$142,906 

$115,473 

** **

 

 

 

 

 

 

 

**Item 9.  Changes in and Disagreements with Accountants on Accountingand Financial Disclosure.**

       None.

**Item 9A.  Controls and Procedures. **

      The Company'smanagement, with the participation of the Company's Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of Parkway's disclosurecontrols and procedures as of December 31, 2004.  Based on that evaluation,the Company's Chief Executive Officer and Chief Financial Officer concluded thatParkway's disclosure controls and procedures were effective as of December 31,2004.  There were no changes in the Company's internal control overfinancial reporting during the fourth quarter of 2004 that has materiallyaffected, or is reasonably likely to affect, the Company's internal control overfinancial reporting.

              TheCompany's internal control system was designed to provide reasonable assuranceto the company's management and board of directors regarding the preparationand fair presentation of published financial statements. All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to the financial statement preparation and presentation.

**Management's Report onInternal Control Over Financial Reporting**

              TheCompany's management, with the participation of the Company's Chief ExecutiveOfficer and Chief Financial Officer, is responsible for establishing andmaintaining adequate internal control over financial reporting.  The Company'smanagement has assessed the effectiveness of the company's internal controlover financial reporting as of December 31, 2004.  In making this assessment, weused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *Internal Control - Integrated Framework*. Based on our assessment we have concluded that, as of December 31, 2004, the company's internal control over financial reporting is effective based onthose criteria.  Our independent registered public accounting firm, Ernst &Young LLP, have provided an attestation report on management's assessment ofthe Company's internal control over financial reporting as of December 31,2004.
****
**Report of Independent Registered Public Accounting Firm onInternal Control over Financial Reporting**

Shareholders and Board of Directors

Parkway Properties, Inc.

       We have audited management'sassessment, included in the accompanying Management's Report on InternalControl Over Financial Reporting, that Parkway Properties, Inc. and subsidiariesmaintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in *Internal Control - IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (the COSO criteria).  Parkway Properties, Inc. andsubsidiaries' management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.  Our responsibility is to express anopinion on management's assessment and an opinion on the effectiveness of thecompany's internal control over financial reporting based on our audit.

       We conducted our audit in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances.  We believe that our audit providesa reasonable basis for our opinion.       A company's internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles.  A company's internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany's assets that could have a material effect on the financial statements.

       Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

       In our opinion, management'sassessment that Parkway Properties, Inc. and subsidiaries maintained effectiveinternal control over financial reporting as of December 31, 2004, is fairlystated, in all material respects, based on the COSO criteria.  Also, in ouropinion, Parkway Properties, Inc. and subsidiaries maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

       We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Parkway Properties, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the related consolidatedstatements of income, shareholders' equity, and cash flows for each of thethree years in the period ended December 31, 2004 of Parkway Properties, Inc.and subsidiaries and our report dated February 28, 2005 expressed anunqualified opinion thereon.

                                                                                                                                           Ernst & Young LLP

 February 28, 2005

**Item 9B.  Other Information.**

       None.

**PART III**

**Item 10.  Directors and Executive Officers of the Registrant.**

       The Registrant's definitive proxystatement which will be filed with the Commission pursuant to Regulation14A within 120 days of the end of Registrant's fiscal year is incorporatedherein by reference.

**Item 11.  Executive Compensation.**

      The Registrant's definitive proxy statementwhich will be filed with the Commission pursuant to Regulation 14A within120 days of the end of Registrant's fiscal year is incorporatedherein by reference.

**Item 12.  Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.**

      The Registrant's definitive proxy statementwhich will be filed with the Commission pursuant to Regulation 14A within120 days of the end of Registrant's fiscal year is incorporated hereinby reference.

      Also incorporated herein by referenceis the information in the table under the heading "Equity CompensationPlans" included in Item 5 of this form 10-K.

**Item 13.  Certain Relationships and Related Transactions.**

      The Registrant's definitive proxy statementwhich will be filed with the Commission pursuant to Regulation 14A within120 days of the end of Registrant's fiscal year is incorporated hereinby reference.

**Item 14.  Principal Accountant Fees and Services.**

       The Registrant's definitive proxystatement which will be filed with the Commission pursuant to Regulation 14Awithin 120 days of the end of the Registrant's fiscal year is incorporatedherein by reference.

**PART IV**

**Item 15.  Exhibits and Financial Statement Schedules.**

 

(a)   1           Consolidated Financial Statements 

                      Report of IndependentAuditors

                      Consolidated Balance Sheets-asof December 31, 2004 and 2003

                      Consolidated Statements ofIncome-for the years ended December 31, 2004, 2003 and 2002

                      Consolidated Statements ofCash Flows-for the years ended December 31, 2004, 2003 and 2002

                      Notes to ConsolidatedFinancial Statements

2           ConsolidatedFinancial Statement Schedules

Schedule II - Valuations and Qualifying Accounts

                      Schedule III - Real Estateand Accumulated Depreciation

                      Notes to Schedule III

                  Allother schedules for which provision is made in the applicable accountingregulation of the Securities and Exchange Commission are not required under therelated instructions or are inapplicable and therefore have been omitted.

        3            Form 10-K Exhibits requiredby Item 601 of Regulation S-K:

**        Exhibit**

**        No.       Description**

        3.1       Articles of Incorporation, as amended, of Parkway(incorporated by reference to Exhibit B to The Parkway Company's Proxy Materialfor its Annual Meeting of Stockholders held on July 18, 1996).

         3.2       Bylaws of Parkway (incorporated by reference toExhibit 4(c) to the Company's Registration Statement on Form S-8 filed October13, 1999).

         3.3      Articles Supplementary of the Registrant datedOctober 6, 2000 creating the Registrant's Series B Convertible CumulativePreferred Stock (incorporated by reference to the Registrant's Form 8-K filedOctober 10, 2000).

        3.4      Articles Supplementary creating the Series CPreferred Stock of the Company (incorporated by reference to Amendment No. 1 tothe Company's Form 8-A filed March 4, 2002).

        3.5      Articles Supplementary creating the Company'sSeries D Cumulative Redeemable Preferred Stock (incorporated by reference tothe Company's Form 8-A filed May 29, 2003).

         4.1       Investment Agreement dated as of October 6, 2000between the Registrant and Five Arrows Realty Securities III L.L.C.(incorporated by reference to the Registrant's Form 8-K filed October 10,2000).

        4.2        Operating Agreement dated as of October 6, 2000between the Registrant and Five Arrows Realty Securities III L.L.C.(incorporated by reference to the Registrant's Form 8-K filed October 10,2000).

        4.3        Agreement and Waiver between the Registrant andFive Arrows Realty Securities III L.L.C. (incorporated by reference to theRegistrant's Form 8-K filed October 10, 2000).

        4.4      Common Stock Purchase Warrant dated as of October6, 2000 issued by the Registrant to Five Arrows Realty Securities III L.L.C.(incorporated by reference to the Registrant's Form 8-K filed October 10,(2000).

       4.5        The Company Amended and Restated Shareholder Rights Plan dated February 21, 2002(incorporated by reference to Amendment No. 1 to the Registrant's Form 8-A filedMarch 4, 2002).

        10          Material Contracts:

       10.1*   Form of Change-in-Control Agreement that Registranthas entered into with Leland R. Speed, Steven G. Rogers, Marshall A. Loeb, G. Mitchel Mattingly, Thomas C. Maloney and James M. Ingram (filed herewith).

       10.2*   Form of Change-in-Control Agreement that theRegistrant has entered into with Sarah P. Clark, David R. Fowler, Mandy M. Popeand Jack R. Sullenberger (filed herewith).

        10.3*    The Registrant's 1997 Non-Employee Directors StockOwnership Plan (incorporated by references to Appendix B in the Registrant'sProxy Material for its June 6, 1997 Annual Meeting).

        10.4      Amended and Restated Agreement of LimitedPartnership of Parkway Properties LP (incorporated by reference to theRegistrant's Form 8-K filed July 15, 1998).

         10.5    Admission Agreement between Parkway Properties LPand Lane N. Meltzer (incorporated by reference to the Registrant's Form 8-Kfiled July 15, 1998).

      10.6     Promissory Note between Parkway Properties LP andTeachers Insurance and Annuity Association of America (incorporated byreference to the Registrant's Form 8-K filed July 15, 1998).

       10.7      Form of Mortgage, Assignment of Leases and Rents, Security Agreement and FixtureFiling Statement by Parkway Properties LP as borrower for the benefit ofTeachers Insurance and Annuity Association of America as lender (incorporated byreference to the Registrant's Form 8-K filed July 15,1998).

        10.8       Conversion and Note Agreement between ParkwayProperties LP, Parkway Properties, Inc. and Teachers Insurance and AnnuityAssociation of America (incorporated by reference to the Registrant's Form  8-Kfiled July 15, 1998). 

        10.9*     Parkway Properties, Inc. 1994 Stock Option andLong-Term Incentive Plan (incorporated by reference to Appendix A to theCompany's proxy material for its June 3, 1999 Annual Meeting).

        10.10     Credit Agreement dated February 6, 2004 by and amongParkway Properties LP; Wachovia Capital Markets, LLC as sole lead arranger andsole book runner; Wachovia Bank, National Association as administrative agent;PNC Bank, National Association as syndication agent; Bank One, NA as co‐documentationagent; Wells Fargo Bank, NA as co-documentation agent and the Lenders (incorporatedby reference to the Registrant's Form 10-K for the year ended December 31, 2003).

        10.11    Indenture of Mortgage, Security Agreement FinancingStatement Fixture Filing and Assignment of Leases, Rents and Security Depositsdated June 22, 2001 made by Parkway 233 North Michigan, LLC to German AmericanCapital Corporation (incorporated by reference to the Registrant's Form 8-Kfiled July 3, 2001).

       10.12    Promissory Note made as of June 22, 2001 by Parkway233 North Michigan, LLC in favor of German American Capital Corporation(incorporated by reference to the Registrant's Form 8-K filed July 3, 2001).

       10.13*  Parkway Properties, Inc. 2003 Equity Incentive Plan(incorporated by reference to Appendix B to the Company's proxy materials forits May 8, 2003 Annual Meeting).

        10.14     Purchase Agreement by and between Parkway PropertiesLP, a Delaware limited partnership and 233 Chicagoinvest, Inc., a Delawarecorporation (incorporated by reference to the Registrants Form 8-K/A filedJanuary 13, 2005).

        21          Subsidiaries of the Registrant (filed herewith).

        23          Consent of Ernst & Young LLP (filed herewith).

        31.1       Certification of Chief Executive Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

        31.2       Certification of Chief Financial Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

        32.1       Certification of Chief Executive Officer pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

        32.2       Certification of Chief Financial Officer pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

*Denotes management contract or compensatory plan orarrangement.
**SIGNATURES**

     Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

PARKWAY  PROPERTIES, INC.

Registrant

/s/ Steven G. Rogers

Steven G. Rogers

President, Chief Executive

Officer and Director

March 4, 2005

/s/  Marshall A. Loeb

Marshall  A. Loeb

Chief  Financial Officer

March 4, 2005

/s/  Mandy M. Pope

Mandy  M. Pope

Chief  Accounting Officer

March 4, 2005

     Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.  

/s/ Daniel P. Friedman

/s/ Michael J. Lipsey

Daniel P. Friedman, Director

Michael J. Lipsey, Director

March 4, 2005

March 4, 2005

/s/ Roger P. Friou

/s/  Joe F. Lynch

Roger P. Friou, Director

Joe F. Lynch, Director

March 4, 2005

March 4, 2005

/s/ Martin L. Garcia

/s/ Steven G. Rogers

Martin L. Garcia, Director

Steven G. Rogers

March 4, 2005

President, Chief Executive  Officer and Director

March 4, 2005

/s/ Matthew W. Kaplan

/s/ Leland R. Speed

Matthew W. Kaplan, Director

Leland R. Speed

March 4, 2005

Chairman of the Board and  Director

March 4, 2005

/s/  Lenore M. Sullivan

Lenore M. Sullivan, Director

March 4, 2005**** |
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