UNITED STATES SECURITIES AND EXCHANGECOMMISSION

Washington, D.C. 20549

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**Form10-K**

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**                                x                      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

** OF THE SECURITIES EXCHANGE ACT OF 1934Forthe fiscal year ended December 31, 2005OR**

**                                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 StreetJackson, Mississippi 39201-2195**(Address of principal executiveoffices) (Zip Code) **(601) 948-4091**Registrant's telephone number:

**www.pky.com**Registrant's website: 

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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**

        Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.    o   Yes   x No

 

        Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.  o   Yes   x No

 

        Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    x   Yes   o No

        Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.    x  

        Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of "accelerated filer and largeaccelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer   o                               Accelerated filer    x                           Non-accelerated filer  o  

 

        Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).   o   Yes   x No

         The aggregate market value ofthe voting 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 June 30, 2005 was$670,613,000.

                                                                                                                                                                                The number of sharesoutstanding in the registrant's class of common stock as of March 10, 2006 was14,181,883.

**DOCUMENTS INCORPORATED BY REFERENCE**

        Portions of the Registrant'sProxy Statement for the 2006 Annual Meeting of Shareholders are incorporated byreference into Part III.

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

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| **PART I.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Business                                                                                                                                   | 3        |
| Item 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                    | 7        |
| Item 1B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Unresolved Staff Comments                                                                                                                                                                                                                                                                                                                                                                       | 11       |
| Item 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Properties                                                                                                                                      | 11       |
| Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Legal Proceedings                                                              | 15       |
| Item 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                             | 16       |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                            |     |
| **PART II.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Market for Registrant's Common  Equity, Related Stockholder Matters and Issuer Purchases                                                                                                                                                                                                                                                                                                        |          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | of Equity Securities                                                                                                                                                                                                                                                                                                                                                                            | 16       |
| Item 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Selected Financial Data                                                                                                                                                                                                                                                                                                                                                                         | 18       |
| Item 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Management's Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                          | 19       |
| Item 7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                     | 35       |
| Item 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Financial Statements and  Supplementary Data                                                                                                                                                                                                                                                                                                                                                    | 35       |
| Item 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                                                                                                                                                                                                                                                                                           | 74       |
| Item 9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                         | 74       |
| Item 9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Other Information                                                                                                                                                                                                                                                                                                                                                                               | 76       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                            |     |
| **PART III.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Directors and Executive  Officers of the Registrant                                                                                                                                                                                                                                                                                                                                             | 76       |
| Item 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                          | 76       |
| Item 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                                                                                                                                                                                                                                                                                                 | 76       |
| Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certain Relationships and  Related Transactions                                                                                                                                                                                                                                                                                                                                                 | 77       |
| Item 14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Principal Accounting Fees and  Services                                                                                                                                                                                                                                                                                                                                                         | 77       |
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| **PART IV.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibits and Financial  Statement Schedules                                                                                                                                                                                                                                                                                                                                                     | 77       |
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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, 2006, Parkway owned or had an interest in 66 officeproperties located in 11 states with an aggregate of approximately 12.2 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 76 officeproperties, encompassing 14.1 million net rentable square feet, for a totalpurchase price of $1.5 billion; (ii) sold or is in the process of selling allof its non-core assets; (iii) sold 14 office properties, encompassingapproximately 1.5 million net rentable square feet primarily in markets thatposed increasing risks and redeployed these funds; (iv) sold joint ventureinterests in eight office properties encompassing 2.5 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 operation and ownership of office properties. TheCompany accounts for each office property or groups of related officeproperties as an individual operating segment.  Parkway has aggregated itsindividual operating segments into a single reporting segment due to the factthat the individual operating segments have similar operating and economiccharacteristics.   

       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.

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*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.  Parkway prefers assets in centralbusiness districts, but will consider suburban assets in land constrained areasor immediately adjacent to existing properties.  Parkway strives to purchaseoffice buildings at minimum initial unleveraged annual yields on its totalinvestment of 8%.  The Company defines initial unleveraged yield as netoperating income ("NOI") divided by total investment (as previouslydefined), where NOI represents budgeted cash operating income for the currentyear at a stabilized occupancy rate of 92% and at rental rates currently inplace with no adjustments for anticipated expense savings, increases in rentalrates, additional leasing in the first six months or straight line rent.  TheCompany also generally seeks to acquire properties whose total investment pernet rentable square foot is below estimated replacement cost.  Although theCompany seeks to acquire properties which meet all of the acquisition criteria,specific property acquisitions are evaluated individually and may fail to meetone or more of the acquisition criteria at the date of purchase.

**       **During 2005, the Companyacquired five office properties with approximately 1.6 million net rentablesquare feet for a total purchase price of $209 million.  The propertiespurchased are located in Chicago, Jacksonville, Memphis and Phoenix. Consistent with the qualification requirements of a REIT, the Company intendsto hold and operate its portfolio of office buildings for investment purposes,but may determine to sell properties from time to time for various reasons,including the property no longer meets the Company's 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 $1.5 million as of December 31, 2005.

       Since January 1, 1998, the Companyhas sold 14 office properties, encompassing approximately 1.5 million netrentable square feet for net proceeds of $149 million, resulting in aggregategains for financial reporting purposes of $23 million.

       Effective January 1, 2006, Parkwayentered into a new three-year strategic plan referred to as the "GEAR UP"Plan.  Please reference the "Overview" section of Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operations", fora full discussion of the GEAR UP Plan.  The "A" in the GEAR UP Plan stands forAsset Recycling, which has as its focus to pursue sales of office assets tomaximize value and transform Parkway from being an owner-operator of realestate to an operator-owner of real estate.  The GEAR UP Plan anticipates thesale of approximately $600 million in assets, $256 million of which relates to233 North Michigan.  Most of the properties identified are smaller assets orlocated in smaller markets that do not fit with the Company's strategy ofowning larger assets in institutional markets.  In most cases, Parkway expectsto keep a 10 to 30% joint venture interest in the properties and retainmanagement and leasing agreements.  

*Joint Ventures andDiscretionary 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 into fivejoint venture agreements of this nature.

 

       OnJune 16, 2005, the Company closed the joint venture of Maitland 200 to RubiconAmerica Trust ("Rubicon"), an Australian listed property trust.  Maitland 200is a 203,000 square foot office property located in Orlando, Florida.  Theconsideration places total building value at $28.4 million.  Rubicon acquiredan 80% interest in the single purpose entity that owns the property and assumed100% of the existing $19.3 million, 4.4% first mortgage.  Parkway received a$947,000 acquisition fee at closing and retained management and leasing of theproperty and a 20% ownership interest.  Parkway recognized a gain for financialreporting purposes on the transfer of the 80% interest of $1.3 million in thesecond quarter of 2005.  The joint venture is accounted for using the equitymethod of accounting. 

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****        On July 6, 2005, Parkway, through affiliated entities, entered intoa limited partnership agreement forming a $500 million discretionary fund withOhio Public Employees Retirement System ("Ohio PERS") for the purpose ofacquiring high-quality multi-tenant office properties.  Ohio PERS is a 75%investor and Parkway is a 25% investor in the fund, which will be capitalizedwith approximately $200 million of equity capital and $300 million ofnon-recourse, fixed-rate first mortgage debt.  The fund targets acquisitions inthe existing core Parkway markets of Houston, Phoenix, Atlanta, Chicago,Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville.

 

       During2005, the discretionary fund with Ohio PERS acquired two office properties inOrlando, Florida with approximately 230,000 net rentable square feet for a totalpurchase price of $28.4 million.  The purchase was funded with a $17.2 millionfirst mortgage placement by the fund and with equity contributions from thepartners.  There is approximately $472 million remaining capacity for fundoffice investments.  The remaining office investments are expected to be fundedby approximately $283 million in mortgage debt and $189 million in equitycontributions from partners.

       The fund targets properties with acash on cash return greater than 7% and a leveraged internal rate of return ofgreater than 11%.  Parkway serves as the general partner of the fund and willprovide asset management, property management, leasing and constructionmanagement services to the fund, for which it will be paid market-based fees.  Aftereach partner has received a 10% annual cumulative preferred return and a returnof invested capital, 20% of the excess cash flow will be paid to the generalpartner and 80% will be paid to the limited partners.    Through its generalpartner and limited partner ownership interests, Parkway may receive adistribution of the cash flow equivalent to 40%.  Parkway will have three yearsto identify and acquire properties for the fund (the "Commitment Period"), withfunds contributed as needed to close acquisitions.  Parkway will exclusivelyrepresent the fund in making acquisitions within the target markets and withincertain predefined criteria.  Parkway will not be prohibited from makingfee-simple or joint venture acquisitions in markets outside of the targetmarkets, acquiring properties within the target markets that do not meet thefund's specific criteria or selling or joint venturing any currently ownedproperties.  The term of the fund will be seven years from the expiration ofthe Commitment Period, with provisions to extend the term for two additionalone-year periods. 

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

       The Company self-managesapproximately 99.7% of its current portfolio on a net rentable square footagebasis.  In addition, the Company self-leases for renewals and currentlyself-leases approximately 90.1% of its portfolio on a net rentable squarefootage basis.  For new customer 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 newleases.  In order to self-manage properties, the Company seeks to reachcritical mass in a specified market as measured by square footage. Criticalmass varies from market to market and is generally defined by the Company asowning or managing a minimum of 250,000 square feet.  The Company isconsidering the sale of its properties that are not self-managed because theinability to self-manage these properties limits the Company's ability to applyits hands-on operating strategy. In addition to its owned properties, ParkwayRealty currently manages and/or leases approximately 2.8 million net rentablesquare feet for third-party owners (including joint venture interests andminority interest properties).  The Company intends to expand its third partyfee business through the joint ventures and the discretionary fund.

*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, fixed charge and modified fixed charge coverageratios.  In connection with the GEAR UP Plan, Parkway has established a self‐imposedlimit for the modified fixed charge coverage ratio of 2.5 times to serve as apledge not to use leverage to achieve Company goals.  See Item 7. "Management's Discussion and Analysis of Financial Condition and Resultsof Operations - Financial Condition."  Should the opportunity presentitself, Parkway has the ability to issue common stock periodically through itsdividend reinvestment plan and the related approved shelf registration.

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       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)accounting and financial reporting.  Parkway's eleven senior officers have anaverage of over 21 years of real estate industry experience, and have workedtogether at Parkway for an average of over 15 years.  Management has developeda highly service-oriented operating culture and believes that its focus onoperations, proactive leasing, property management and asset managementactivities will result in higher customer retention and occupancy and willcontinue to translate into enhanced stockholder value.

*Administration*       The Company is self-administeredand self-managed and maintains its principal executive offices in Jackson,Mississippi. As of January 1, 2006, the Company had 261 employees. Theoperations of the Company are conducted from approximately 17,000 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 East CapitolStreet, Jackson, Mississippi 39201-2195.

*Recent Developments*

**       **On February 9, 2006, Parkwayentered into a Contribution/Purchase Agreement (the "Agreement") with Estein& Associates USA, Ltd. ("ESA") to form a limited partnership to own the 233North Michigan Building in Chicago, Illinois.  ESA will be a 70% partner in thepartnership, while Parkway will retain a 30% interest and provide management,leasing and construction management services to the partnership.  The Agreementvalues the building at $256 million and is subject to completion of a customary45-day due diligence period, at which time earnest money will be at risk. Based on the terms of the Agreement, closing is expected to occur within thesecond quarter of 2006.  The closing is subject to the satisfaction ofconditions, including acceptable financing being obtained that would closesimultaneously with the asset transfer.  There can be no assurances thatconditions of the Agreement will be satisfied, or if satisfied, that such closingwill occur.

 

**       **OnFebruary 9, 2006, the Board of Directors authorized the repurchase of up to1,000,000 shares of Parkway's outstanding common stock through August 2006. The shares may be purchased in the open market or in privately negotiated transactions,and at times and in amounts that the Company deems appropriate.

** **

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**ITEM 1A.  *RiskFactors.***

*** ***

**       **Inaddition to the other information contained or incorporated by reference inthis document, readers should carefully consider the following risk factors.  Anyof these risks or the occurrence of any one or more of the uncertaintiesdescribed below could have a material adverse effect on the Company's financialcondition and the performance of its business.  The Company refers to itself as"we" or "our" in the following risk factors.

 

*Ourperformance is subject to risks inherent in owning real estate investments.*

 

**       **Ourinvestments are generally made in office properties.  We are, therefore,generally subject to risks incidental to the ownership of real estate.  Theserisks include:

 

?                    changes in supply of or demand for office properties or customersfor such properties in an area in which we have buildings;

 

?                    the ongoing need for capital improvements;

 

?                    increased operating costs, which may not necessarily be offset byincreased rents, including insurance premiums, utilities and real estate taxes,

                         due to inflation and other factors;

 

?                    changes in tax, real estate and zoning laws;

 

?                    changes in governmental rules and fiscal policies; and

 

?                    civil unrest, acts of war, acts of God, including earthquakes andother natural disasters (which may result in uninsured losses) and other factors

                        beyond our control.

 

**       **Shouldany of these events occur, our financial condition and our ability to makeexpected distributions to stockholders could be adversely affected.

 

*Theeconomic conditions of our primary markets affect our operations. *

 

**       **Substantiallyall of our properties are located in the Southeastern and Southwestern UnitedStates and Chicago and, therefore, our financial condition and ability to makedistributions to our stockholders is linked to economic conditions in thesemarkets as well as the market for office space generally in these markets.   Adownturn in these markets may adversely affect our cash flows and ability tomake distributions to stockholders.

 

*Customerdefaults could adversely affect our operations. *

 

**       **Substantiallyall of our revenues and income come from rental income from real property.  Assuch, our revenues and income could be adversely affected if a significantnumber of our customers defaulted under their lease obligations.  Our abilityto manage our assets is also subject to federal bankruptcy laws and state lawsthat limit creditors' rights and remedies available to real property owners tocollect delinquent rents.  If a customer becomes insolvent or bankrupt, wecannot be sure that we could recover the premises from the customer promptly orfrom a trustee or debtor-in-possession in any bankruptcy proceeding relating tothat customer.  We also cannot be sure that we would receive rent in theproceeding sufficient to cover our expenses with respect to the premises.  If acustomer becomes bankrupt, the federal bankruptcy code will apply and, in someinstances, may restrict the amount and recoverability of our claims against thecustomer.  A customer's default on its obligations to us could adversely affectour financial condition and the cash we have available for distributions to ourstockholders.

 

 

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*Illiquidityof real estate may limit our ability to vary our portfolio. *

**       **Realestate investments are relatively illiquid.  Our ability to vary our portfolioby selling properties and buying new ones in response to changes in economicand other conditions will therefore be limited.  In addition, the InternalRevenue Code limits our ability to sell our properties by imposing a penaltytax of 100% on the gain derived from prohibited transactions, which are definedas sales of property held primarily for sale to customers in the ordinary courseof a trade or business.  The frequency of sales and the holding period of theproperty sold are two primary factors in determining whether the property soldfits within this definition.  These considerations may limit our opportunitiesto sell our properties.  If we must sell an investment, we cannot assure youthat we will be able to dispose of the investment in the time period we desireor that the sales price of the investment will recoup or exceed our cost forthe investment, or that the penalty tax would not be assessed.

 

*Ourcurrent and future joint venture investments could be adversely affected by ourlack of sole decision-making authority, our reliance on joint venture partners'financial condition and any disputes that may arise between us and our jointventure partners.*

 

**       **Co-investingwith third parties through joint ventures is a part of our ongoing businessstrategy.  We may not be in a position to exercise sole decision-makingauthority regarding the properties owned through joint ventures.  Investmentsin joint ventures may, under certain circumstances, involve risks not presentwhen a third party is not involved, including reliance on our joint venturepartners and the possibility that joint venture partners might become bankruptor fail to fund their share of required capital contributions, thus exposing usto liabilities in excess of our share of the investment.  Joint venturepartners may have business interests or goals that are inconsistent with ourbusiness interests or goals and may be in a position to take actions contraryto our policies or objectives.  Any disputes that may arise between us andjoint venture partners may result in litigation or arbitration that wouldincrease our expenses.

 

*We areexposed to potential environmental liability. *

 

**       **Undervarious federal, state, and local laws, ordinances and regulations, we may beconsidered an owner or operator of real property and may be responsible forpaying for the disposal or treatment of hazardous or toxic substances releasedon or in our property or disposed of by us, as well as certain other potentialcosts which could relate to hazardous or toxic substances (includinggovernmental fines and injuries to persons and property).  This liability maybe imposed whether or not we knew about, or were responsible for, the presenceof hazardous or toxic substances.

 

*Uninsuredand underinsured losses may adversely affect operations.*

 

**       **We,or in certain instances, customers of our properties, carry commercial generalliability, fire and extended coverage insurance with respect to ourproperties.  This coverage has policy specifications and insured limits that webelieve are customarily carried for similar properties.  We plan to obtainsimilar coverage for properties we acquire in the future.  However, certaintypes of losses, generally of a catastrophic nature, such as earthquakes andfloods, may be either uninsurable or not economically insurable.  Should aproperty sustain damage, we may incur losses due to insurance deductibles, toco-payments on insured losses or to uninsured losses.  In the event of asubstantial property loss, the insurance coverage may not be sufficient to paythe full current market value or current replacement cost of the property.   Inthe event of an uninsured loss, we could lose some or all of our capitalinvestment, cash flow and anticipated profits related to one or moreproperties.  Inflation, changes in building codes and ordinances, environmentalconsiderations, and other factors also might make it not feasible to useinsurance proceeds to replace a property after it has been damaged ordestroyed.  Under such circumstances, the insurance proceeds we receive mightnot be adequate to restore our economic position with respect to suchproperty.  

 

*We haveexisting debt and refinancing risks that could affect our cost of operations.*

 

**       **Wecurrently have both fixed and variable rate indebtedness and may incurindebtedness in the future, including borrowings under our credit facilities,to finance possible acquisitions and for general corporate purposes.  As aresult, we are and expect to be subject to the risks normally associated withdebt financing including:

 

?                    that interest rates may rise; 

 

?                    that our cash flow will be insufficient to make required paymentsof principal and interest;

 

?                    that we will be unable to refinance some or all of our debt;

 

?                    that any refinancing will not be on terms as favorable as thoseof the existing debt; 

 

?                    that required payments on mortgages and on our other debt are notreduced if the economic performance of any property declines;

 

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?                    that debt service obligations will reduce funds available fordistribution to our stockholders; 

 

?                    that any default on our debt could result in acceleration ofthose obligations; and

 

?                    that we may be unable to refinance or repay the debt as itbecomes due.

 

An increasein interest rates would reduce our net income and funds from operations.  Wemay not be able to refinance or repay debt as it becomes due which may force usto refinance or to incur additional indebtedness at higher rates and additionalcost or, in the extreme case, to sell assets or seek protection from ourcreditors under applicable law.

 

*A lack ofany limitation on our debt could result in our becoming more highly leveraged. *

 

**       **Ourgoverning documents do not limit the amount of indebtedness we may incur. Accordingly, our board of directors may incur additional debt and would do so,for example, if it were necessary to maintain our status as a REIT.  We mightbecome more highly leveraged as a result, and our financial condition and cashavailable for distribution to stockholders might be negatively affected and therisk of default on our indebtedness could increase.

 

*The costand terms of mortgage financings may render the sale or financing of a propertydifficult or unattractive.*

 

**       **Thesale of a property subject to a mortgage may trigger pre-payment penalties,yield maintenance payments or make-whole payments to the lender, which wouldreduce the amount of gain or increase our loss on the sale of a property andcould make the sale of a property less likely.  Certain of our mortgages willhave significant outstanding principal balances on their maturity dates,commonly known as "balloon payments."  There is no assurance whetherwe will be able to refinance such balloon payments on the maturity of theloans, which may force disposition of properties on disadvantageous terms orrequire replacement with debt with higher interest rates, either of which wouldhave an adverse impact on our financial performance and ability to paydistributions to investors.

 

*We mayamend our investment strategy and business policies without your approval.*

 

**       **OurBoard of Directors determines our growth, investment, financing,capitalization, borrowing, REIT status, operating and distribution policies. Although the Board of Directors has no present intention to amend or revise anyof these policies, these policies may be amended or revised without notice to andapproval from stockholders.  Accordingly, stockholders may not have controlover changes in our policies.  We cannot assure you that changes in ourpolicies will serve fully the interests of all stockholders.

 

*Loss ofour tax status as a real estate investment trust would have significant adverseconsequences to us and the value of our securities.*

 

**       **Webelieve that we qualify for taxation as a REIT for federal income tax purposes,and we plan to operate so that we can continue to meet the requirements fortaxation as a REIT.  To qualify as a REIT we must satisfy numerous requirements(some on an annual and quarterly basis) established under the highly technicaland complex provisions of the Code applicable to REITs, which include:

 

•                    maintaining ownership of specified minimum levels of real estaterelated assets; 

 

•                    generating specified minimum levels of real estate relatedincome;

 

•                    maintaining certain diversity of ownership requirements withrespect to our shares; and 

 

•                    distributing at least 90% of our taxable income on an annualbasis. 

 

Thedistribution requirement noted above could adversely affect our ability to useearnings for improvements or acquisitions because funds distributed tostockholders will not be available for capital improvements to existingproperties or for acquiring additional properties.

 

**       **Onlylimited judicial and administrative interpretations exist of the REIT rules. In addition, qualification as a REIT involves the determination of variousfactual matters and circumstances not entirely within our control.

 

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**       **Ifwe fail to qualify as a REIT, we will be subject to federal income tax(including any applicable alternative minimum tax) on our taxable income atcorporate rates.  In addition, unless entitled to relief under certainstatutory provisions, we will be disqualified from treatment as a REIT for thefour taxable years following the year during which we failed to qualify.  Thistreatment would reduce net earnings available for investment or distribution tostockholders because of the additional tax liability for the year or yearsinvolved.  In addition, we would no longer be required to make distributions toour stockholders.  To the extent that distributions to stockholders had beenmade based on our qualifying as a REIT, we might be required to borrow funds orto liquidate certain of our investments to pay the applicable tax. 

 

**       **Asa REIT, we have been and will continue to be subject to certain federal, stateand local taxes on our income and property. 

 

*There isa risk of changes in the tax law applicable to real estate investment trusts*. 

 

**       **Sincethe Internal Revenue Service, the United States Treasury Department andCongress frequently review federal income tax legislation, we cannot predictwhether, when or to what extent new federal tax laws, regulations, interpretationsor rulings will be adopted.  Any of such legislative action may prospectivelyor retroactively modify our tax treatment and, therefore, may adversely affecttaxation of us and/or our investors.

 

*Limitationson the ownership of our common stock  may preclude the acquisition or change ofcontrol of our company. *

 

**       **Certainprovisions contained in our charter and bylaws and certain provisions ofMaryland law may have the effect of discouraging a third party from making anacquisition proposal for us and may thereby inhibit a change of control. Provisions of our charter are designed to assist us in maintaining ourqualification as a REIT under the Code by preventing concentrated ownership ofour capital stock that might jeopardize REIT qualification.  Among otherthings, these provisions provide that, if a transfer of our stock or a changein our capital structure would result in (1) any person (as defined in thecharter) directly or indirectly acquiring beneficial ownership of more than9.8% (in value or in number, whichever is more restrictive) of our outstandingequity stock excluding Excess Stock, (2) our outstanding shares beingconstructively or beneficially owned by fewer than 100 persons, or (3) ourbeing "closely held" within the meaning of Section 856(h) of theCode, then:

 

?                    any proposed transfer will be void from the beginning and we willnot recognize such transfer; 

 

?                    we may institute legal proceedings to enjoin such transfer;

 

?                    we will have the right to redeem the shares proposed to be transferred;and 

 

?                    the shares proposed to be transferred will be automaticallyconverted into and exchanged for shares of a separate class of stock, theExcess Stock.

 

**       **ExcessStock has no dividend or voting rights but holders of Excess Stock do havecertain rights in the event of our liquidation, dissolution or winding up.  Ourcharter provides that we will hold the Excess Stock as trustee for the personor persons to whom the shares are ultimately transferred, until the time thatthe shares are retransferred to a person or persons in whose hands the shareswould not be Excess Stock and certain price-related restrictions aresatisfied.  These provisions may have an anti-takeover effect by discouragingtender offers or purchases of large blocks of stock, thereby limiting theopportunity for stockholders to receive a premium for their shares overthen-prevailing market prices.  Under the terms of our charter, our board ofdirectors has the authority to waive these ownership restrictions.  The boardof directors has waived the restrictions with respect to the ownership by FiveArrows Realty Securities III, L.L.C of shares of Series B preferred stock, theshares of common stock into which they may be converted, and the common stockissuable upon exercise of the warrant, subject to requirements that are meantto insure that our REIT qualification will not be jeopardized.

 

**       **Furthermore,under our charter, the board of directors has the authority to classify andreclassify any of our unissued shares of capital stock into shares of capitalstock with such preferences, rights, powers and restrictions as the board ofdirectors may determine. The authorization and issuance of a new class ofcapital stock could have the effect of delaying or preventing someone from takingcontrol of us, even if a change in control were in our stockholders' bestinterests.

 

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*Marylandbusiness statutes may limit the ability of a third party to acquire control ofus.*

 

**       **Marylandlaw provides protection for Maryland corporations against unsolicited takeoversby limiting, among other things, the duties of the directors in unsolicitedtakeover situations.  The duties of directors of Maryland corporations do notrequire them to (a) accept, recommend or respond to any proposal by a person seekingto acquire control of the corporation, (b) authorize the corporation to redeemany rights under, or modify or render inapplicable, any stockholders rightsplan, (c) make a determination under the Maryland Business Combination Act orthe Maryland Control Share Acquisition Act, or (d) act or fail to act solelybecause of the effect of the act or failure to act may have on an acquisitionor potential acquisition of control of the corporation or the amount or type ofconsideration that may be offered or paid to the stockholders in anacquisition.  Moreover, under Maryland law the act of a director of a Marylandcorporation relating to or affecting an acquisition or potential acquisition ofcontrol is not subject to any higher duty or greater scrutiny than is appliedto any other act of a director.  Maryland law also contains a statutorypresumption that an act of a director of a Maryland corporation satisfies theapplicable standards of conduct for directors under Maryland law.

 

**       **TheMaryland Business Combination Act provides that unless exempted, a Marylandcorporation may not engage in business combinations, including mergers,dispositions of 10 percent or more of its assets, certain issuances of sharesof stock and other specified transactions, with an "interestedstockholder" or an affiliate of an interested stockholder for five yearsafter the most recent date on which the interested stockholder became aninterested stockholder, and thereafter unless specified criteria are met.  Aninterested stockholder is generally a person owning or controlling, directly orindirectly, 10 percent or more of the voting power of the outstanding stock ofthe Maryland corporation. 

 

**       **TheMaryland Control Share Acquisition Act provides that "control shares"of a corporation acquired in a "control share acquisition" shall haveno voting rights except to the extent approved by a vote of two-thirds of thevotes eligible to cast on the matter.  "Control Shares" means sharesof stock that, if aggregated with all other shares of stock previously acquiredby the acquirer, would entitle the acquirer to exercise voting power inelecting directors within one of the following ranges of the voting power: one-tenth or more but less than one-third, one-third or more but less than amajority or a majority or more of all voting power.  A "control shareacquisition" means the acquisition of control shares, subject to certainexceptions.

 

**       **Ifvoting rights of control shares acquired in a control share acquisition are notapproved at a stockholder's meeting, then subject to certain conditions andlimitations, the issuer may redeem any or all of the control shares for fairvalue.  If voting rights of such control shares are approved at a stockholder'smeeting and the acquirer becomes entitled to vote a majority of the shares ofstock entitled to vote, all other stockholders may exercise appraisal rights. 

 

**ITEM 1B.  *UnresolvedStaff Comments.***

*** ***

**       **None.

 

**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, 2006, the Company owned or had an interest in 66office properties comprising approximately 12.2 million square feet of officespace located in 11 states.

       Property acquisitions in 2005, 2004 and2003 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,

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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.  All such improvements areexpected to be financed by cash flow from the portfolio of office propertiesand advances on bank lines of credit.  During 2005, the Company completed developmentof a $7.8 million, 517 space parking facility to accommodate building customersat City Centre in Jackson, Mississippi.  

       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.

 

       Thefollowing table sets forth certain information about office properties theCompany owned or had an interest in as of January 1, 2006:

 

| ** **         | ** **        | ** **         | ** **    | ** **   | **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)**  | **2006 (4)** | **1/1/2006** |
| Houston, TX        | 15                | 2,246              | 18.3%         | $18.02       | $16.42        | 14.4%        | 94.2%        |
| Atlanta, GA        | 9                 | 1,382              | 11.2%         | 20.51        | 19.93         | 6.9%         | 89.8%        |
| Chicago, IL        | 1                 | 1,070              | 8.7%          | 33.20        | 31.57         | 5.7%         | 90.8%        |
| Memphis, TN        | 5                 | 1,009              | 8.3%          | 19.86        | 18.43         | 11.8%        | 85.3%        |
| Phoenix, AZ        | 3                 | 872                | 7.1%          | 23.41        | 22.09         | 20.5%        | 92.4%        |
| Columbia, SC       | 3                 | 868                | 7.1%          | 15.27        | 16.09         | 10.6%        | 86.1%        |
| Jackson, MS        | 5                 | 841                | 6.9%          | 17.66        | 17.18         | 11.8%        | 89.0%        |
| Orlando, FL        | 4                 | 691                | 5.7%          | 22.18        | 20.45         | 7.2%         | 81.5%        |
| Knoxville, TN      | 2                 | 547                | 4.5%          | 14.73        | 16.00         | 12.5%        | 88.7%        |
| Charlotte, NC      | 2                 | 511                | 4.2%          | 16.94        | 15.75         | 7.4%         | 84.7%        |
| Richmond, VA       | 6                 | 498                | 4.1%          | 17.24        | 16.37         | 12.7%        | 80.9%        |
| Nashville, TN      | 1                 | 434                | 3.6%          | 13.68        | 16.75         | 3.7%         | 72.2%        |
| Hampton Roads, VA  | 3                 | 384                | 3.1%          | 17.33        | 16.79         | 8.1%         | 92.7%        |
| St. Petersburg, FL | 2                 | 322                | 2.6%          | 18.60        | 18.31         | 5.3%         | 90.3%        |
| Jacksonville, FL   | 2                 | 302                | 2.5%          | 17.44        | 17.64         | 10.6%        | 96.4%        |
| Ft. Lauderdale, FL | 2                 | 215                | 1.8%          | 21.99        | 23.07         | 19.8%        | 98.0%        |
| All Others         | 1                 | 32                 | 0.3%          | 8.00         | 8.00          | 0.0%         | 100.0%       |
| ** **         | 66                | 12,224             | 100.0%        | $19.89       | $19.15        | 10.8%        | 88.9%        |

(1)    Includes 55 office properties owned directly and 11office properties owned through joint ventures or discretionary fund.

 

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(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, 2006.

(3)    Estimated average market rent per square foot isbased upon information obtained from (i) the Company's own experience inleasing space at the properties; (ii) leasing agents in the relevant marketswith respect 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 2006 representsthe ratio of square feet under leases expiring in 2006 divided by total netrentable square feet.

       Thefollowing table sets forth scheduled lease expirations for properties owned asof January 1, 2006 on leases executed as of January 1, 2006, assuming no customerexercises 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)** |
| 2006           | 346        | 1,326              | 10.84%          | $  27,028 | $20.39              | $18.42              |
| 2007           | 286        | 1,514              | 12.38%          | 29,401              | 19.42               | 17.97               |
| 2008           | 273        | 1,699              | 13.90%          | 32,043              | 18.86               | 17.68               |
| 2009           | 183        | 1,624              | 13.29%          | 35,217              | 21.68               | 21.45               |
| 2010           | 165        | 1,444              | 11.81%          | 27,030              | 18.73               | 18.18               |
| 2011           | 53         | 909                | 7.44%           | 20,183              | 22.21               | 20.75               |
| Thereafter     | 103        | 2,352              | 19.24%          | 45,246              | 19.23               | 19.79               |
|                | 1,409      | 10,868             | 88.90%          | $216,148            | $19.89              | $19.15              |

 

(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 as of January 1, 2006.  Estimated average market rent is weightedby the net rentable square feet expiring in each property.

       Fixed-ratemortgage notes payable total $483.3 million at December 31, 2005 and aresecured by 28 properties in various markets with interest rates ranging from 3.67%to 8.25%.  Maturity dates on these mortgage notes payable range from August2007 to October 2019 on 15 to 30 year amortizations.  See Note E - "NotesPayable" to the 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.

 

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**Customers**

****       The office properties are leasedto 1,409 customers, which are in a wide variety of industries includingbanking, professional services (including legal, accounting, and consulting),energy, financial services and telecommunications.  The following table setsforth information concerning the 25 largest customers of the properties owneddirectly or through joint ventures as of January 1, 2006 (in thousands, exceptsquare foot data):

 

| ** **                                                                                                                                                                                                                                                                                                                                                                  | **Leased**   | **Annualized**     | ** **            | **Lease**      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|-----------------------|----------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                  | **Square**   | **Rental**         | ** **            | **Expiration** |
| **Customer**                                                                                                                                                                                                                                                                                                                                                                | **Feet (1)** | **Revenue (1)**    | **Office Property**   | **Date**       |
| General Services  Administration (GSA)                                                                                                                                                                                                                                                                                                                                      | 330,908      | $  7,777 | (2)                   | (2)            |
| Blue Cross Blue Shield of  Georgia, Inc.                                                                                                                                                                                                                                                                                                                                    | 272,718      | 6,558              | Capital City Plaza    | (3)            |
| Cox Enterprises                                                                                                                                                                                                                                                                                                                                                             | 261,360      | 4,988              | (4)                   | (4)            |
| Regions Financial  Corporation                                                                                                                                                                                                                                                                                                                                              | 222,380      | 4,874              | Morgan Keegan Tower   | (5)            |
| Young & Rubicam                                                                                                              | 122,078      | 4,224              | 233 North Michigan    | (6)            |
| Nabors Industries/Nabors  Corporate Services                                                                                                                                                                                                                                                                                                                                | 185,751      | 3,460              | One Commerce Green    | (7)            |
| United Healthcare Services                                                                                                                                                                        | 68,663       | 3,136              | (8)                   | (8)            |
| Honeywell                                                            | 142,464      | 3,035              | Honeywell Building    | (9)            |
| Bank of America, NA                                                                                                                                       | 249,326      | 2,877              | (10)                  | (10)           |
| South Carolina State  Government                                                                                                                                                                                                                         | 189,955      | 2,773              | (11)                  | (11)           |
| Forman, Perry, Watkins,  Krutz & Tardy                                                                                                                                                                                                                                                                                                                                  | 177,719      | 2,756              | (12)                  | (12)           |
| Progress Energy                                                                                                                                                                                                                                                                                                                                                             | 135,105      | 2,554              | (13)                  | (13)           |
| Clear Channel Communications                                                                                                                                                                                                                                                                                                                                                | 72,918       | 2,505              | (14)                  | (14)           |
| Schlumberger Technology                                                                                                                                                                 | 155,324      | 2,408              | Schlumberger          | (15)           |
| Extra Space Storage                                                                                                                                                                                                                                                                                                                                                         | 91,200       | 2,167              | Moore Building        | 04/15          |
| DHL Airways                                                                                   | 98,649       | 2,095              | One Commerce Green    | 11/06          |
| MeadWestvaco Corporation                                                                                                                                                                                         | 100,457      | 1,861              | Westvaco Building     | 03/07          |
| Stein Mart, Inc.                                                                                                                                                                                                                                                                                                                                                            | 98,748       | 1,770              | Stein Mart Building   | 12/10          |
| First Tennessee Bank, NA                                                                                                                                                                          | 111,615      | 1,744              | First Tennessee Plaza | (16)           |
| CB Richard Ellis                                                                                                                                                                                                                                                                                                                                                            | 40,698       | 1,582              | 233 North Michigan    | 11/10          |
| Louisiana-Pacific  Corporation                                                                                                                                                                                                                                                                                                                                              | 84,596       | 1,530              | Bank of America Plaza | 12/15          |
| URS Corporation                                                                                                                                                                                                                                                                                                                                                             | 56,164       | 1,524              | (17)                  | (17)           |
| The CIT Group                                                                                                                                                                                                                                                                                                                                                               | 46,198       | 1,505              | 233 North Michigan    | 02/09          |
| Seven Worldwide                                                                                                                                                                                                                                                                                                                                                             | 45,000       | 1,464              | 233 North Michigan    | 02/09          |
| Viad Corporation                                                                                                       | 158,422      | 1,397              | Viad Corporate Center | (18)           |
|                                                                                                                                                                                                                                                                                                                                                                        | 3,518,416    | $72,564            |                  |           |
| Total Rentable Square  Footage (1)                                                                                                                                                                                                                                                                                                                                          | 12,224,013   |               |                  |           |
| Total Annualized Rental  Revenue (1)                                                                                                                                                                                                                                                                                                                                        | $189,157     |               |                  |           |

 

(1)    AnnualizedRental Revenue represents the gross rental rate (including escalations) persquare foot as of January 1, 2006, multiplied by the number of square feetleased by the customer.  Annualized rent for customers in unconsolidatedjoint ventures is calculated based on our ownership interest.  However,leased square feet represents 100% of square feet leased through directownership or through joint ventures.

 

(2)    GSAoccupies 330,908 square feet in 12 properties under separate leases that expireas follows:  189,316 square feet in November 2009 with a cancellation option inNovember 2006, limited to 33,609 square feet; 25,726 square feet in July 2010,22,973 square feet in January 2013, 22,925 square feet in December 2007, 22,069square feet in March 2008, 13,971 square feet in January 2010, 8,603 squarefeet in June 2013, 6,286 square feet in June 2008, 5,471 square feet in October2012, 5,370 square feet in March 2006, 5,155 square feet in November 2011 and3,043 square feet in April 2014.  

 

(3)    BlueCross Blue Shield of Georgia, Inc. occupies 272,718 square feet expiring inJune 2014 with a cancellation option in June 2012.

 

(4)    CoxEnterprises, Inc. occupies 261,360 square feet in two properties under separateleases that expire as follows:  162,361 square feet in August 2010, 79,790 squarefeet in December 2008 and 19,209 square feet in June 2010.

 

(5)    RegionsFinancial Corporation occupies 222,380 square feet under separate leases thatexpire as follows: 218,464 square feet in September 2007 and 3,916 square feetin November 2010.  Subsequent to January 1, 2006, Parkway renewed its leaseagreement with Morgan Keegan and Company for 218,464 square feet extending theterm until 2016.

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(6)    Young& Rubicam occupies 122,078 square feet expiring in November 2011 with acancellation option beginning in November 2006, limited to 34,000 square feet.

 

(7)    NaborsIndustries/Nabors Corporate Services occupies 185,751 square feet expiring inDecember 2007 with a cancellation option beginning December 31, 2006.

 

(8)    UnitedHealthcare Services occupies 68,663 square feet in two properties and theleases expire as follows: 67,028 square feet in November 2009 and 1,635 squarefeet in December 2006.

 

(9)    Honeywelloccupies 142,464 square feet expiring as follows:  122,489 square feet in July2008 and 19,975 square feet in February 2006.

 

(10)  Bank of America,NA occupies 249,326 square feet in two properties under separate leases thatexpire as follows:  180,530 square feet in March 2012 and 68,796 square feet inJune 2006.

 

(11)  South CarolinaGovernment Agencies occupy 189,955 square feet in two properties under separateleases that expire as follows:  130,260 square feet in June 2010, 42,707 squarefeet in June 2009, 15,711 square feet in June 2011, 927 square feet in June 2006and 350 square feet on a month-to-month lease.  The Budget and Control Board's119,383 square feet lease contains a cancellation option available every June30th, and the SC Dept. of Commerce's 40,099 square feet lease contains acancellation option available every August 1st.

 

(12)  Forman, Perry,Watkins, Krutz & Tardy occupies 177,719 square feet in two properties andthe leases expire as follows:  159,127 square feet in December 2011 and 18,592 squarefeet in July 2009 with a cancellation option after July 2007.  

 

(13)  Progress Energyoccupies 135,105 square feet in two properties and the leases expire asfollows:  133,279 square feet in May 2008 representing the customer's earlytermination date and 1,826 square feet in December 2010.  

 

(14)  Clear ChannelCommunications occupies 72,918 square feet expiring as follows:  69,016 squarefeet expiring in July 2015 and 3,902 square feet expiring in July 2014.

 

(15)  SchlumbergerTechnology occupies 155,324 square feet expiring in February 2012 with a cancellationoption on December 31, 2008.

 

(16)  First TennesseeBank, NA occupies 111,615 square feet expiring in September 2014.  The leasecontains two, one-time contraction options in October 2006 and October 2008 forapproximately 17,000 square feet each.  Subsequent to January 1, 2006, FirstTennessee Bank exercised a contraction option for 16,011 square feet.

 

(17)  URS Corporationoccupies 56,164 square feet in Squaw Peak Corporate Center expiring in November2008.  Subsequent to January 1, 2006, URS Corporation signed a new lease for3,348 square feet in the 111 Capitol Building expiring in February 2011.

 

(18)  Viad Corporationoccupies 158,422 square feet under separate leases that expire as follows:156,564 square feet in August 2011 and 1,858 square feet in April 2008.

**Non-CoreAssets**

       Since January 1, 1996, 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 andrepurchase its own stock.  The Company defines non-core assets as all assetsother than office and parking properties, which at December 31, 2005 consistedof undeveloped land.  The book value of the land, which is available for sale,was $1.5 million as of December 31, 2005 with a carrying cost of approximately$5,000 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.

 

Page 15 of 79

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**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, 2006,was 2,716.

       As of March 1, 2006, the lastreported sales price per common share on the New York Stock Exchange was $44.03. 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,  2005** | ** ** | **December 31,  2004** |
| **Quarter Ended** | **High**               | **Low**    | **Distributions**      | ** ** | **    High** | **Low** | **Distributions** |
| March 31          | $50.57                 | $46.20     | $  .65       |  | $47.95 | $41.95 | $  .65 |
| June 30           | 50.01                  | 45.43      | .65                    |  | 47.35 | 37.65 | .65 |
| September 30      | 53.58                  | 44.60      | .65                    |  | 48.13 | 42.85 | .65 |
| December 31       | 47.01                  | 40.14      | .65                    |  | 51.36 | 46.52 | .65 |
|                   |                        |            | $2.60                  |  |  |  | $2.60 |

       Common stock distributions during 2005and 2004 ($2.60 per share) were taxable as follows for federal income taxpurposes:

 

| ** **                      | **Year  Ended**  |
|---------------------------------|------------------|
| ** **                      | **December  31** |
| ** **                      | **2005**         | **2004** |
| Ordinary income                 | $1.98            | $2.00 |
| Post May 5, 2003  capital gain  | .13              | .04 |
| Unrecaptured Section  1250 gain | .03              | .14 |
| Return of capital               | .46              | .42 |
| ** **                      | $2.60            | $2.60 |

       On January 10, 2005, the Company sold1.6 million shares of common stock to Citigroup Global Markets Inc. The Companyused the net proceeds of $76 million towards the acquisition of the 70%interest held by its joint venture partner in the property known as 233 North  Michigan Avenue in Chicago, IL and the acquisition of two properties in Jacksonville, FL.

       Additionally, through the Company'sDividend Reinvestment and Stock Purchase Plan ("DRIP Plan"), 41,113 commonshares were sold during 2005.  Net proceeds received on the issuance of shareswere $1.9 million , which equates to an average net price per share of $46.19at a discount of 1%.  The proceeds were used to reduce amounts outstandingunder the Company's short-term lines of credit.

       The following table shows the highand low Series D preferred share prices and per share distributions paid foreach quarter of 2005 and 2004 reported by the New York Stock Exchange.

Page 16 of 79

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| ** **        | **Year  Ended**        | ** ** | **Year  Ended**        |
|-------------------|------------------------|------------|------------------------|
| ** **        | **December  31, 2005** | ** ** | **December  31, 2004** |
| **Quarter Ended** | **High**               | **Low**    | **Distributions**      | ** ** | **High** | **Low** | **Distributions** |
| March 31          | $26.80                 | $25.40     | $  .50       |  | $27.90 | $26.35 | $  .50 |
| June 30           | 26.70                  | 25.35      | .50                    |  | 26.75 | 24.75 | .50 |
| September 30      | 26.75                  | 26.01      | .50                    |  | 26.65 | 25.41 | .50 |
| December 31       | 26.60                  | 25.60      | .50                    |  | 26.65 | 25.74 | .50 |
|                   |                        |            | $2.00                  |  |  |  | $2.00 |

 

       Asof January 1, 2006, there were six holders of record of the Company's 2.4million outstanding shares of Series D preferred stock.  Series D preferredstock distributions during 2005 and 2004 were taxable as follows for federalincome tax purposes:

 

|                                 | **Year  Ended December 31** |
|---------------------------------|-----------------------------|
|                                 | **2005**                    | **2004** |
| Ordinary  income                | $1.88                       | $1.86 |
| Post  May 5, 2003 capital gain  | .10                         | .03 |
| Unrecaptured  Section 1250 gain | .02                         | .11 |
|                                 | $2.00                       | $2.00 |

      In 2001, the Company issued 2,142,857shares of 8.34% Series B Cumulative Convertible Preferred stock toRothschild/Five Arrows.  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.  During 2005,no shares of Series B preferred stock were converted into Parkway commonstock.  As of December 31, 2005, there were 803,499 shares of Series Bpreferred stock outstanding.  Dividends of $2.3 million and $5.2 million weredeclared on the stock in 2005 and 2004, respectively.  There is no publicmarket for Parkway's Series B Cumulative Convertible Preferred stock.  

**Purchase of Equity Securities**

** **

      During2005, Parkway did not have an authorized share repurchase program and did notpurchase any Parkway common stock.  On February 9, 2006, the Board of Directorsauthorized the repurchase of up to 1 million shares of Parkway's outstandingcommon stock through August 2006.  The shares may be purchased in the openmarket or in privately negotiated transactions, and at times and in amountsthat the Company deems appropriate.

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

** **

      SeeItem 12 of this Annual Report on Form 10-K, "Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters," for certaininformation regarding the Company's equity compensation plans.

Page 17 of 79

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**ITEM6.  *Selected Financial Data.***

 

|                                                                                       | **Year  Ended  12/31/05**                                                    | **Year  Ended  12/31/04**                       | **Year  Ended  12/31/03**                       | **Year  Ended  12/31/02**                       | **Year  Ended  12/31/01**                       |
|--------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|-------------------------------------------------|-------------------------------------------------|-------------------------------------------------|-------------------------------------------------|
|                                                                                       | (In thousands, except per share data)                                        |
| **Operating  Data**:                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Revenues                                                                                   |                                                                         |                                            |                                            |                                            |                                            |
|      Income  from office and parking properties                   | $   192,645                                              | $157,792                                   | $139,826                                   | $150,877                                   | $135,089                                   |
|      Other  income                                                | 3,252                                                                   | 3,869                                      | 3,854                                      | 2,818                                      | 2,767                                      |
| Total  revenues                                                                            |    195,897                                               | 161,661                                    | 143,680                                    | 153,695                                    | 137,856                                    |
| Expenses                                                                                   |                                                                         |                                            |                                            |                                            |                                            |
|      Operating  expenses:                                         |                                                                         |                                            |                                            |                                            |                                            |
|           Office  and parking properties | 90,121                                                                  | 72,322                                     | 62,279                                     | 65,181                                     | 57,176                                     |
|           Non-core  assets               | 5                                                                       | 22                                         | 37                                         | 34                                         | 39                                         |
|           Interest  expense              | 28,326                                                                  | 21,580                                     | 16,319                                     | 19,839                                     | 21,828                                     |
|           Depreciation  and amortization | 51,753                                                                  | 36,319                                     | 27,757                                     | 27,187                                     | 23,650                                     |
|      Interest  expense on bank notes                              | 7,118                                                                   | 4,237                                      | 3,399                                      | 6,647                                      | 5,497                                      |
|      General  and administrative and other                        | 5,075                                                                   | 4,822                                      | 4,592                                      | 5,445                                      | 5,240                                      |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Income  before equity in earnings,  gain (loss), minority                             |                                                                         |                                            |                                            |                                            |                                            |
|      interest  and discontinued operations                        | 13,499                                                                  | 22,359                                     | 29,297                                     | 29,362                                     | 24,426                                     |
| Equity  in earnings of unconsolidated joint ventures                                       | 1,496                                                                   | 1,697                                      | 2,212                                      | 824                                        | 62                                         |
| Gain  (loss) on joint venture interests, real estate,                                      |                                                                         |                                            |                                            |                                            |                                            |
|      note  receivable and real estate equity securities           | 1,039                                                                   | 4,309                                      | 10,661                                     | (2,068)                                         | 1,611                                      |
| Minority  interest - unit holders                                                          | (2)                                                                          | (2)                                             | (3)                                             | (2)                                             | (3)                                             |
| Minority  interest - real estate partnerships                                              | (187)                                                                        | 127                                        | -                                          | -                                          | -                                          |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Income  before discontinued operations                                                     | 15,845                                                                  | 28,490                                     | 42,167                                     | 28,116                                     | 26,096                                     |
| Income  from discontinued operations                                                       | 781                                                                     | 1,025                                      | 1,014                                      | 626                                        | 452                                        |
| Gain  on sale of real estate from discontinued operations                                  | 4,181                                                                   | -                                          | -                                          | 770                                        | -                                          |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Net  income                                                                                | 20,807                                                                  | 29,515                                     | 43,181                                     | 29,512                                     | 26,548                                     |
| Original  issue costs associated with redemption                                           |                                                                         |                                            |                                            |                                            |                                            |
|      of  preferred stock                                          | -                                                                       | -                                          | (2,619)                                         | -                                               | -                                               |
| Dividends  on preferred stock                                                              | (4,800)                                                                      | (4,800)                                         | (5,352)                                         | (5,797)                                         | (5,797)                                         |
| Dividends  on convertible preferred stock                                                  | (2,346)                                                                      | (5,186)                                         | (6,091)                                         | (6,257)                                         | (3,249)                                         |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Net  income available to common stockholders                                               | $     13,661                                   | $  19,529                        | $  29,119                        | $  17,458                        | $  17,502                        |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Net  income per common share:                                                              |                                                                         |                                            |                                            |                                            |                                            |
|      Basic:                                                       |                                                                         |                                            |                                            |                                            |                                            |
|      Income  from continuing operations                           | $           .62  | $      1.64  | $      2.75  | $      1.72  | $      1.82  |
|      Discontinued  operations                                     | .35                                                                     | .09                                        | .10                                        | .15                                        | .05                                        |
|      Net income                                                   | $           .97  | $      1.73  | $      2.85  | $      1.87  | $      1.87  |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
|      Diluted:                                                     |                                                                         |                                            |                                            |                                            |                                            |
| **     **Income from continuing operations                        | $           .61  | $      1.61  | $      2.69  | $      1.69  | $      1.80  |
|      Discontinued  operations                                     | .35                                                                     | .09                                        | .10                                        | .15                                        | .05                                        |
|      Net income                                                   | $           .96  | $      1.70  | $      2.79  | $      1.84  | $      1.85  |
|                                                                                       |                                                                         |                                            |                                            |                                            |                                            |
| Book value per common share (at end of  year)                                              | $       27.42                        | $    26.44             | $    26.09             | $    25.10             | $    25.33             |
| Dividends per common share                                                                 | $         2.60             | $      2.60  | $      2.60  | $      2.56  | $      2.45  |
| Weighted average shares outstanding:                                                       |                                                                         |                                            |                                            |                                            |                                            |
|      Basic                                                        | 14,065                                                                  | 11,270                                     | 10,224                                     | 9,312                                      | 9,339                                      |
|      Diluted                                                      | 14,233                                                                  | 11,478                                     | 10,453                                     | 9,480                                      | 9,442                                      |
| **Balance Sheet Data**:                                                                    |                                                                         |                                            |                                            |                                            |                                            |
| **     **Office and parking  investments, net of depreciation     | $1,040,929                                                              | $820,807                                   | $728,695                                   | $706,551                                   | $795,860                                   |
| **     **Investment in  unconsolidated joint ventures             | 12,942                                                                  | 25,294                                     | 20,026                                     | 15,640                                     | 412                                        |
| **     **Total assets                                             | 1,188,342                                                               | 931,188                                    | 802,308                                    | 763,937                                    | 840,612                                    |
|      Notes  payable to banks                                      | 150,371                                                                 | 104,618                                    | 110,075                                    | 141,970                                    | 126,044                                    |
|      Mortgage  notes payable                                      | 483,270                                                                 | 353,975                                    | 247,190                                    | 209,746                                    | 304,985                                    |
|      Total  liabilities                                           | 701,010                                                                 | 511,802                                    | 394,287                                    | 387,116                                    | 465,031                                    |
|      Preferred  stock                                             | 57,976                                                                  | 57,976                                     | 57,976                                     | 66,250                                     | 66,250                                     |
|      Convertible  preferred stock                                 | 28,122                                                                  | 28,122                                     | 68,000                                     | 75,000                                     | 75,000                                     |
|      Stockholders'  equity                                        | 474,516                                                                 | 415,648                                    | 407,980                                    | 376,821                                    | 375,581                                    |

** **

Page 18 of79

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**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, 2006 Parkwayowned or had an interest in 66 office properties located in 11 states with anaggregate of approximately 12.2 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 behindParkway's revenues 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 during 2001 through 2003, vacancy rates increased nationally and inParkway's markets.  In 2004, the office sector began to recover from highvacancy rates due to improving job creation.  As of February 1, 2006, occupancyof Parkway's office portfolio was 88.9% compared to 90% as of October 1, 2005and 91% as of January 1, 2005.  Not included in the February 1, 2006 occupancyrate are 27 signed leases totaling 229,000 square feet, which commence duringthe first through third quarters of 2006 and will raise Parkway's percentageleased to 90.7%.  To combat rising vacancy, Parkway utilizes innovativeapproaches to produce new leases.  These include the Broker Bill of Rights, a short-formservice agreement and customer advocacy programs which are models in theindustry and have helped the Company maintain occupancy around 90% during atime when the national occupancy rate is approximately 86%.  Parkway projectsoccupancy ranging from 89% to 93% during 2006 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 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 it isin 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 customers and stockholders.  Over the past nineyears, Parkway maintained an average 73.8% customer retention rate.  Parkway'scustomer retention for the year ending December 31, 2005 was 70.3% compared to 69.8%for the year ending December 31, 2004.  

*****Strategic Planning.*  For many years, Parkway has been engaged in aprocess of strategic planning and goal setting.  The material goals andobjectives of Parkway's earlier strategic plans have been achieved, andbenefited Parkway's stockholders through increased Funds from Operationsavailable to common shareholders ("FFO") and dividend payments per share. Effective January 1, 2003, the Company adopted a three-year strategic planreferred to as VALUE SQUARE, which was completed on December 31, 2005. This plan reflected the employees' commitment to create value for Parkway'sshareholders while holding firm to the core values as espoused in the ParkwayCommitment to Excellence.  Under the VALUE SQUARE Planthe Company created value by Venturing with best partners, Assetrecycling, Leverage neutral growth, Uncompromising focus onoperations and provided an Equity return to its shareholders that was10% greater than that of its peer group, the National Association of Real EstateInvestment Trusts ("NAREIT") office index.  Equity return was defined as growthin FFO per diluted share.

The highlights of 2003, 2004 and 2005 reflect the strategy set forth in VALUESQUAREas described below:

 

•        ***Venture with Best Partners.***  During 2003 through2005, we sold joint venture interests in seven office properties.  Parkwaycontinues to evaluate its existing portfolio for joint venture candidates andanticipates joint venturing more properties, as well as purchasing newproperties with the intention of joint venturing them.  During 2005, Parkway formeda discretionary fund with Ohio PERS and the discretionary fund purchased twooffice buildings totaling $28 million.

Page 19 of79

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•        ***Asset Recycling.*** Parkway sold one office property, while maintaining a 10-year non-cancelablemanagement contract, and a .74 acre parcel of land in 2003 and two officeproperties in 2005.  Using the proceeds from the joint ventures, propertysales, stock offerings and bank lines of credit, Parkway purchased 12 officebuildings totaling $484 million during the three years of VALUE SQUARE.

*** ***

•        ***Leverage Neutral Growth.***  Parkway began 2003 with adebt to total market capitalization of 45% and operated most of the plan below45%, with an average of 43% over the three year period.

 

•        ***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.  During theVALUE SQUARE Plan, Parkway averaged customer retention of 66% annually, howeveroccupancy dropped from 92.3% at the beginning of the plan to 88.9% at the end. The Company's average occupancy during the three years was 90.4%, which wasabove the national average over the same time frame.  

 

•        Equity Returns to Shareholders 10% Greater than the NAREITOffice Index.  Parkway achieved the financial goal of the VALUE SQUARE Plan,which was FFO growth 10% greater than the Company's peer group.  In connectionwith the VALUE SQUARE Plan, restricted stock had been granted to officers of theCompany and would vest early if two performance targets were met.  Parkway hadto achieve FFO growth 10% greater than the peer group and FFO growth had to bepositive.  While Parkway achieved FFO growth greater than 10%, the Company didnot achieve positive FFO growth.  Therefore, the restricted shares were notreleased and will continue to vest over the original seven year vesting period.

****       On January 1, 2006, the Companyinitiated a new operating plan that will be referred to as the "GEAR UP" Plan. At the heart of the GEAR UP Plan are ***Great People***transforming Parkway through ***Equity Opportunities*** and ***AssetRecycling*** from an owner-operator to an operator-owner. Ourlong-standing commitment to ***Retain our Customers*** andprovide an ***Uncompromising Focus on Operations*** remainssteadfast.  We believe that by accomplishing these goals we can deliverexcellent ***Performance*** to our shareholders.  The GEAR UPPlan is more of an evolution from the VALUE SQUARE Plan rather than a revolutionarynew plan as there are many similarities between the two plans.  The goals ofthe GEAR UP Plan are as follows:

 

•        ***Great People***.  Great customer service starts withhiring great people, training them well and retaining them.  It will take greatpeople to accomplish the ambitious goals of the Plan.

*** ***

•        ***Equity Opportunities. ***Over the last several yearsmanagement has created a broad array of equity opportunities for Parkway.  Onthe private equity side this includes the use of joint ventures anddiscretionary funds, such as the new fund with Ohio PERS.  The judicious use ofprivate equity provides a greater return on equity to the public shareholders.Parkway intends to contribute assets from its balance sheet to form new jointventures and expects these subsequent ventures to proximate discretionary fundsin their duration and economics. On the public equity side, this includes thejudicious use of common equity and preferred equity to manage the balance sheetand growth.  

*** ***

•        ***Asset Recycling***. The Company has demonstrated itswillingness in the past to sell assets when management believed the time wasright.  Since the start of the GEAR UP Plan development over 15 months ago, theinvestment market has continued to indicate that now is the time to pursuecertain sales to maximize value; therefore Asset Recycling has risen inimportance.  Parkway has identified 25 buildings in twelve markets which totalalmost 5 million rentable square feet to be part of the asset recycling programduring the GEAR UP Plan.  Most of these properties are smaller assets orlocated in smaller markets that do not fit with the Company strategy of owninglarger assets in institutional markets.  The dispositions that are planned willhelp align the Company's portfolio with its current acquisition criteria, whichfocuses on larger properties in institutional markets.  In most cases, Parkwaywill keep a 10 to 30% joint venture interest in the properties being recycledand retain management and leasing agreements.  

Page 20 of79

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*** ***

Thesetwo goals, ***Equity Opportunities***and***Asset Recycling****,*are what combine to transform Parkway from being first an owner of real estate,and secondarily an operator of real estate for others to being first anoperator of real estate for others that also owns an interest in the realestate.  The three years of the GEAR UP Plan are a springboard for thistransformation.  The plan anticipates the sale, mainly through the jointventure format of almost $600 million in assets, $256 million of which relatesto 233 North Michigan.  Simultaneously, the Plan includes fully investing theremaining $472 million for the OPERS fund and making fee simple acquisitions ofalmost $400 million.  Management strongly believes that these actions willresult in Parkway better leveraging its core strength of operating office propertiesand will be advantageous for the Company's shareholders over the long term. 

 

Thekey to success in GEAR UP will be in the areas of Equity Opportunities andAsset Recycling.  To prepare for the challenges of these goals, Parkway hired afull time fund manager and a full time dispositions officer for the first timein corporate history and both of them are diligently working to achieve thesegoals. 

*** ***

•        ***Retain Customers. ***Customer retention remains thecornerstone of the Company's business and is why partners are venturing with Parkway. The goal is a customer retention rate of 70% to 75%.

*** ***

•        ***Uncompromising Focus on Operations. ***Parkway isreaffirming its commitment to do that which it does best, and that is tooperate office properties for maximum returns.

*** ***

•        ***Performance. ***In the planning process, managementfirst decided what actions to take strategically over the next three years andsecondly, modeled the economic impact of these actions.  Given the largecomponent of Asset Recycling in the Plan, management selected a financialmetric that would be most appropriate to measure the success of the Plan.  This led to the adoption of Cumulative Adjusted Funds Available forDistribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP Plan,with a target of $7.18 per share cumulative over three years.  Additionally,Parkway has established a self-imposed limit for the modified fixed chargecoverage ratio of an average of 2.5 times as a pledge not to use leverage toachieve Company goals.  

For the GEAR UPPlan Parkway is not abandoning Funds from Operations, but rather carrying it astep further to include accountability for capital items and removing theaccounting adjustments which are not directly influenced by the operations ofits properties.   Management believes an Adjusted FAD goal providesan effective alignment with the shareholders by focusing the team on maximizingincome from operations while being mindful of capital expenses and ultimatelythe funds available to cover the dividend.   Cumulative Adjusted FADis calculated as the sum of Adjusted FAD for each of the three years of theplan.    The adjustments that will be made to FAD reported eachquarter principally include charges for impairment of value and expenses relatedto the early extinguishment of debt.  

 

*Discretionary Fund.*  OnJuly 6, 2005, Parkway, through affiliated entities, entered into a limitedpartnership agreement forming a $500 million discretionary fund with Ohio PERSfor the purpose of acquiring high-quality multi-tenant office properties.  OhioPERS is a 75% investor and Parkway is a 25% investor in the fund, which will becapitalized with approximately $200 million of equity capital and $300 millionof non-recourse, fixed-rate first mortgage debt.  The fund targets acquisitionsin the existing core Parkway markets of Houston, Phoenix, Atlanta, Chicago,Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville.

       To date, the discretionary fund haspurchased a two-building office portfolio in Orlando, Florida for a combinedpurchase price of $28.4 million.  The fund expects to spend an additional $3.3million for closing costs, building improvements, leasing costs and tenantimprovements during the first two years of ownership.  The purchase was fundedwith a $17.2 million first mortgage placement by the fund and with equitycontributions from the partners.  There is approximately $472 million remainingcapacity for fund office investments.  The remaining office investments areexpected to be funded by approximately $283 million in mortgage debt and $189million in equity contributions from partners.

** **

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       Thefund targets properties with a cash on cash return greater than 7% and aleveraged internal rate of return of greater than 11%.  Parkway serves as thegeneral partner of the fund and will provide asset management, propertymanagement, leasing and construction management services to the fund, for whichit will be paid market-based fees.  After each partner has received a 10%annual cumulative preferred return and a return of invested capital, 20% of theexcess cash flow will be paid to the general partner and 80% will be paid tothe limited partners.    Through its general partner and limited partnerownership interests, Parkway may receive a distribution of the cash flowequivalent to 40%.  Parkway will have three years to identify and acquireproperties for the fund (the "Commitment Period"), with funds contributed asneeded to close acquisitions.  Parkway will exclusively represent the fund in makingacquisitions within the target markets and within certain predefined criteria. Parkway will not be prohibited from making fee-simple or joint ventureacquisitions in markets outside of the target markets, acquiring propertieswithin the target markets that do not meet the fund's specific criteria orselling or joint venturing any currently owned properties.  The term of thefund will be seven years from the expiration of the Commitment Period, withprovisions to extend the term for two additional one-year periods. 

**Financial Condition**

***Comments are for the balance sheet dated December 31, 2005 compared tothe balance sheet dated December 31, 2004.***

       *Office and Parking Properties. * In2005, 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, 2005, total assets increased$257 million, and office and parking properties and parking development (beforedepreciation) increased $257 million or 26.7%.

**Purchases, Improvements and Dispositions**

       Parkway's investment in office andparking properties increased $220 million net of depreciation, to a carryingamount of $1 billion at December 31, 2005 and consisted of 59 office andparking properties.  During the year ending December 31, 2005, Parkway purchasedseven office properties as follows (in thousands):

| ** **                             | ** **       | ** **      | **Date**      | **Purchase** |
|----------------------------------------|------------------|-----------------|---------------|--------------|
| **Office Property**                    | **Location**     | **Square Feet** | **Purchased** | **Price**    |
| 233 North Michigan (63%  interest) (a) | Chicago, IL      | 1,070           | 01/14/05      | $125,755     |
| 233 North Michigan (7%  interest) (a)  | Chicago, IL      | -               | 04/29/05      | 13,973       |
| Stein Mart Building                    | Jacksonville, FL | 197             | 03/30/05      | 19,785       |
| Riverplace South                       | Jacksonville, FL | 105             | 03/30/05      | 9,500        |
| Forum I (b)                            | Memphis, TN      | 162             | 07/26/05      | 19,250       |
| Maitland 100 (c)                       | Orlando, FL      | 128             | 09/28/05      | 14,700       |
| 555 Winderley Place (c)                | Orlando, FL      | 102             | 09/28/05      | 13,717       |
| Mesa Corporate Center                  | Phoenix, AZ      | 105             | 12/15/05      | 20,300       |
| Total                                  |                  | 1,869           |               | $236,980     |

(a)  Parkway purchased an additional 70% interest in 233 NorthMichigan raising the Company's total investment to 100%.  Parkway assumed itsproportionate share of a $100 million first mortgage with a 7.21% interest rateas part of the 233 North Michigan purchase.  The mortgage has been recorded at$111.7 million to reflect the fair value of the financial instrument based onthe rate of 4.94% on the date of purchase.

(b)  Parkway assumed a $11.7 million first mortgage with an 7.31%interest rate as part of the Forum I purchase.  The mortgage has been recordedat $12.9 million to reflect the fair value of the financial instrument based onthe rate of 5.25% on the date of purchase.

(c)  Two officeproperties were purchased in connection with the discretionary fund formed withOhio PERS.  Parkway's ownership interest is 25% and these properties areincluded in Parkway's consolidated financial statements.

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       Duringthe year ending December 31, 2005, the Company capitalized buildingimprovements, development costs and additional purchase expenses of $29.6million and recorded depreciation expense of $40.5 million related to itsoffice and parking properties.

       On September 9, 2005, the Company sold The Park on Camelback, a 102,000 square foot office property located in Phoenix, Arizona, to an unrelated third party for $17.5 million and recorded a gain of$4.4 million.  On September 14, 2005, the Company sold 250 Commonwealth, a46,000 square foot office property located in Greenville, South Carolina, to anunrelated third party for $4 million and recorded a loss of $238,000.  Inaccordance with generally accepted accounting principles ("GAAP"), the net gainand all current and prior period income from these office properties has beenclassified as discontinued operations.

 

       *LandAvailable for Sale*.  During the quarter ending June 30, 2005, Parkway recorded an impairment loss of $340,000 on approximately 12 acres of land in New  Orleans, Louisiana.  The loss was computed based on market research andcomparable sales in the area. However, during the quarter ending September 30, 2005, the city of New Orleans sustained considerable damage as a result ofHurricane Katrina.  Currently, the Company is unable to assess the damage, ifany, to the 12 acres of land owned in New Orleans or whether the value of theland is impaired.  As of December 31, 2005, the land available for sale in New  Orleans totaled $1.5 million or .1% of total assets.  The Company expects tocontinue its efforts to liquidate this asset.

       *Investment in Unconsolidated JointVentures*.  Parkway is committed to forming joint ventures with bestpartners for the purpose of acquiring office assets in the Southeastern andSouthwestern United States and Chicago.  We believe these investments result ina higher return on equity than 100% owned assets.  Parkway will operate, manageand lease the properties on a day-to-day basis, provide acquisition andconstruction management services to the joint venture, and receive fees forproviding these services.   The joint venture partner will provide 70 to 80% ofthe joint venture capital, with Parkway to provide the balance. In 2005,investment in unconsolidated joint ventures decreased $12.4 million or 48.8%. The primary reason for the decrease is due to the net effect of theconsolidation of 233 North Michigan effective January 14, 2005 and the transferof an 80% interest in Maitland 200 to a joint venture effective June 16, 2005. Seedetailed information regarding the 2005 joint venture transaction under thecaption "Joint Ventures" appearing in Item 1. "Business".  The 2005 jointventure transaction is summarized in the following table (in thousands).

 

| ** **   | **Interest** | ** **   | **Square** | **Date** | **Gross Sales** |
|--------------|--------------|--------------|------------|----------|-----------------|
| **Property** | **Sold**     | **Location** | **Feet**   | **Sold** | **Price**       |
| Maitland 200 | 80%          | Orlando, FL  | 203        | 06/16/05 | $28,416         |

       *Rents Receivable and Other Assets.* Rents receivable and other assets increased $27 million for the year endingDecember 31, 2005. The increase is primarily attributable to the increase instraight line rent receivable of $3.7 million, unamortized lease costs due tothe purchase of office properties in 2005 and an increase in escrow bankaccount balances.  In 2005, the total purchase price allocated to lease costswas $10 million.  The increase in escrow bank account balances of $6.6 millionis primarily due to current period escrow deposit requirements for consolidatedproperties and due to the consolidation of 233 North Michigan as a result ofpurchasing the remaining 70% interest in the property in 2005.

       *Intangible Assets, Net.*  Forthe year ending December 31, 2005, intangible assets net of relatedamortization increased $22 million and was primarily due to the allocation ofthe purchase price of 2005 office property acquisitions to above marketin-place leases and the value of in-place leases.  In 2005, the total purchaseprice allocated to above market in-place leases and the value of in-placeleases was $14.7 million and $22.3 million, respectively.  Additionally, inconnection with the transfer of the 80% joint venture interest in Maitland 200,intangible assets disposed totaled $5.5 million.  Parkway accounts for itsacquisitions 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 acquired tangible andintangible assets.

       *Notes Payable to Banks*.  Notespayable to banks increased $45.8 million or 43.7% for the year ending December31, 2005.  At December 31, 2005, notes payable to banks totaled $150.4 millionand resulted primarily from advances under bank lines of credit to purchaseadditional properties and to make improvements to office properties.

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       *MortgageNotes Payable.* Mortgage notes payable increased $129.3 million or 36.5%during the year ending December 31, 2005, as a result of the following (inthousands):

|                                                            | **Increase**   |
|------------------------------------------------------------|----------------|
|                                                            | **(Decrease)** |
| Assumption of first mortgage on  office property purchases | $124,530  |
| Placement of mortgage debt in  discretionary fund          | 17,160    |
| Placement of mortgage debt                                 | 86,000    |
| Scheduled principal payments                               | (17,724)       |
| Principal paid on early  extinguishment of debt            | (61,396)       |
| Transfer mortgage to joint  venture                        | (19,275)       |
|                                                            | $129,295  |

       Item 7. "Management's Discussion andAnalysis of Financial Condition and Results of Operation - Financial Condition- Purchases, Improvements and Dispositions," includes a description ofmortgages assumed in connection with 2005 office property purchases.

        On June 16, 2005, Parkway transferred an 80% joint venture interest inMaitland 200 to Rubicon.  In addition to acquiring an 80% interest in thesingle purpose entity that owns the property, Rubicon assumed 100% of theexisting $19.3 million, 4.4% first mortgage.   Therefore, this mortgage wastransferred to the Maitland Joint Venture as of June 16, 2005.

 

       In connection with the purchase of Maitland 100 and 555 Winderley Place by thediscretionary fund with Ohio PERS, on September 29, 2005, the fundplaced a $17.2 million seven-year first mortgage at a fixed interest rate of4.92%. Payments during the first five years of the mortgage term will be on aninterest-only basis, and the loan includes provisions for two one‐yearextensions. 

 

       On December 20, 2005 the Company closed an $86 millionnon-recourse first mortgage with Teachers Insurance and Annuity Association ofAmerica ("TIAA"). This loan replaced the Company's indebtedness withTIAA which was due to expire on July 1, 2008, carried an interest rate of6.945%, and had an outstanding balance of $61.4 million as of December 20,2005. The new loan matures on January 1, 2016, carries a fixed interest rate of6.21%, amortizes over a twenty-five year period, and represents a 75% loan tovalue ratio. Additionally, the collateral pool for the mortgage was reducedfrom twelve properties to five, releasing seven properties with a market valueof approximately $65 million.  After re-payment of the original principalbalance and prepayment fees, the Company received net proceeds of $23.7 millionwhich were used to reduce line of credit borrowings. The Company recognizedexpenses for a pre-payment penalty and a write-off of unamortized loan costsfor a combined total of $781,000 during the fourth quarter of 2005.  

       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, fixed charge and modified fixed charge coverageratios.  The interest coverage ratio is computed by comparing the cash interestaccrued to earnings 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 modified fixed charge coverage ratio is computedby comparing cash interest accrued and preferred dividends paid to EBITDA.  Inaccordance with the GEAR UP Plan, Parkway has established a self-imposed limitfor the modified fixed charge coverage ratio of 2.5 times as the Company'spledge not to use leverage to achieve Company goals.

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The computationof the interest, fixed charge and modified fixed charge coverage ratios and thereconciliation of net income to EBITDA are as follows for the year endedDecember 31, 2005 and 2004 (in thousands):

|                                                                                                                      | **Year Ended**            |
|---------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                      | **December 31**           |
|                                                                                                                      | **2005**                  | ** ** | **2004** |
| **Net  income**                                                                                                           | $  20,807  |   | $  29,515  |
| **Adjustments  to net income:**                                                                                           |                      |   |   |
|         Interest  expense                                                         | 33,409               |   | 24,309  |
|         Amortization  of financing costs                                          | 1,480                |   | 997  |
|         Prepayment  expenses - early extinguishment of debt                       | 555                  |   | 511  |
|         Depreciation  and amortization                                            | 52,096               |   | 36,843  |
|         Amortization  of deferred compensation                                    | 533                  |   | 783  |
|         Gain  on sale of joint venture interests, real estate and note receivable | (5,220)                   |   | (4,309) |
|         Tax  expenses                                                             | 6                    |   | (49) |
|         EBITDA  adjustments - unconsolidated joint ventures                       | 2,593                |   | 5,929  |
|         EBITDA  adjustments - minority interest in real estate partnerships       | (2,378)                   |   | (1,772) |
| ** **                                                                                                                |                      |   |   |
| **EBITDA  (1)**                                                                                                           | $103,881             |   | $  92,757  |
| ** **                                                                                                                |                      |   |   |
| **Interest  coverage ratio:**                                                                                             |                      |   |   |
| EBITDA                                                                                                                    | $103,881                  |   | $  92,757  |
| Interest  expense:                                                                                                        |                      |   |   |
|         Interest  expense                                                         | $  33,409  |   | $  24,309  |
|         Capitalized  interest                                                     | 52                   |   | 15  |
|         Interest  expense - unconsolidated joint ventures                         | 1,400                |   | 2,927  |
|         Interest  expense - minority interest in real estate partnerships         | (1,328)                   |   | (1,093) |
| Total  interest expense                                                                                                   | $  33,533  |   | $26,158  |
| **Interest  coverage ratio**                                                                                              | 3.10                 |   | 3.55  |
| ** **                                                                                                                |                      |   |   |
| **Fixed  charge coverage ratio:**                                                                                         |                      |   |   |
| EBITDA                                                                                                                    | $103,881             |   | $  92,757  |
| Fixed  charges:                                                                                                           |                      |   |   |
|         Interest  expense                                                         | $  33,533  |   | $  26,158  |
|         Preferred  dividends                                                      | 7,146                |   | 9,986  |
|         Preferred  distributions - unconsolidated joint ventures                  | 21                   |   | 507  |
|         Principal  payments (excluding early extinguishment of debt)              | 17,724               |   | 13,087  |
|         Principal  payments - unconsolidated joint ventures                       | 108                  |   | 633  |
|         Principal  payments - minority interest in real estate partnerships       | (497)                     |   | (399) |
| Total  fixed charges                                                                                                      | $  58,035  |   | $  49,972  |
| **Fixed  charge coverage ratio**                                                                                          | 1.79                 |   | 1.86  |
| ** **                                                                                                                |                      |   |   |
| **Modified  fixed charge coverage ratio:**                                                                                |                      |   |   |
| EBITDA                                                                                                                    | $103,881             |   | $  92,757  |
| Modfied  Fixed charges:                                                                                                   |                      |   |   |
|         Interest  expense                                                         | $  33,533  |   | $  26,158  |
|         Preferred  dividends                                                      | 7,146                |   | 9,986  |
|         Preferred  distributions - unconsolidated joint ventures                  | 21                   |   | 507  |
| Total  fixed charges                                                                                                      | $  40,700  |   | $  36,651 |
| **Modified  fixed charge coverage ratio:**                                                                                | 2.55                 |   | 2.53  |

       (1)  EBITDA, a non-GAAPfinancial measure, means operating income before mortgage and other interestexpense, income taxes, depreciation and amortization.  We believe that EBITDAis useful to investors and Parkway's management as an indication of theCompany's ability to service debt and pay cash distributions.  EBITDA, ascalculated by us, is not comparable to EBITDA reported by other REITs that donot define EBITDA exactly as we do.  EBITDA does not represent cash generatedfrom operating activities in accordance with generally accepted accountingprinciples, and should not be considered an alternative to operating income ornet income as an indicator of performance or as an alternative to cash flowsfrom operating activities as an indicator of liquidity.

 

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       *Accounts Payable and Other Liabilities.* During 2005, accounts payable and other liabilities increased $14.2 million or33.3%.  The increase is primarily due to the impact of consolidating 233 NorthMichigan as a result of purchasing the remaining 70% interest in the propertyin 2005 of $10.8 million and the allocation of purchase price for 2005acquisitions to below market leases of $6.4 million.

 

       *MinorityInterest - Real Estate Partnerships.* During the year ending December 31, 2005, minority interest associated with real estate partnerships increased$9.1 million.  The increase is attributable to the formation of thediscretionary fund with Ohio PERS and represents Ohio PERS' minority interestshare of the discretionary fund.  

 

       *Stockholders'Equity. *Stockholders' equity increased $58.9 million or 14.2% during theyear ended December 31, 2005 as a result of the following (in thousands):

** **

|                                                     | **Increase**                   |
|-----------------------------------------------------|--------------------------------|
|                                                     | **(Decrease)**

**(Decrease)** |
| Net income                                          | $20,807                   |
| Change in  market value of interest rate swap       | 1,131                     |
| Change in  unrealized loss on equity securities     | (79)                           |
| Comprehensive  income                               | 21,859                    |
| Common stock  dividends declared                    | (36,586)                       |
| Preferred  stock dividends declared                 | (7,146)                        |
| Exercise of  stock options                          | 2,104                     |
| Shares  issued - stock offerings                    | 75,810                    |
| Shares  issued - Directors' fees                    | 193                       |
| Amortization  of unearned compensation              | 533                       |
| Shares distributed  from deferred compensation plan | 202                       |
| Shares  issued through DRIP plan                    | 1,899                     |
|                                                     | $58,868                   |

 

       OnJanuary 10, 2005, the Company sold 1.6 million shares of common stock toCitigroup Global Markets Inc. The Company used the net proceeds of $76 milliontowards the acquisition of the 70% interest held by its joint venture partnerin the property known as 233 North Michigan Avenue in Chicago, Illinois and theacquisition of two properties in Jacksonville, Florida.

**Results of Operations**

***Comments are for the year ended December 31, 2005 compared to the year endedDecember 31, 2004.***

       Net income available for commonstockholders for the year ended December 31, 2005 was $13.7 million ($.97 perbasic common share) as compared to $19.5 million ($1.73 per basic common share)for the year ended December 31, 2004.  Net income for the year ending December31, 2005 included a net gain from the sale of real estate and joint ventureinterest of $5.6 million and an impairment loss on land of $340,000.  Netincome for the year ending December 31, 2004 included gains on a notereceivable and the sale of a joint venture interest of $4.3 million.

       *Office and Parking Properties*. The primary reason for the change in the Company's net income from office andparking properties for 2005 as compared to 2004 is the net effect of theoperations of the following properties purchased, properties sold and jointventure interests transferred (in thousands):

**Properties Purchased:**

** **

| **Office Properties**            | ** ** | **Purchase Date** | ** ** | **Square Feet** |
|----------------------------------|------------|-------------------|------------|-----------------|
| Maitland 200                     |       | 01/29/04          |       | 203             |
| Capital City  Plaza              |       | 04/02/04          |       | 408             |
| Squaw Peak  Corporate Center     |       | 08/24/04          |       | 287             |
| 233 North Michigan(63% interest) |       | 01/14/05          |       | 1,070           |
| 233 North Michigan(7% interest)  |       | 04/29/05          |       | -               |
| Stein Mart  Building             |       | 03/30/05          |       | 197             |
| Riverplace South                 |       | 03/30/05          |       | 105             |
| Forum I                          |       | 07/26/05          |       | 162             |
| Mesa Corporate Center            |       | 12/15/05          |       | 105             |

 

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**Properties Sold:**

** **

| **Office Properties** |   | **Date Sold** |   | **Square Feet** |
|-----------------------|--------|---------------|--------|-----------------|
| The Park on Camelback |   | 09/09/05      |   | 102             |
| 250 Commonwealth      |   | 09/14/05      |   | 46              |

** **

**Joint Venture Interests Transferred:**

** **

| **Office Property/Interest Transferred**        |   | **Date Sold** |   | **Square Feet** |
|-------------------------------------------------|--------|---------------|--------|-----------------|
| Falls Point, Lakewood & Carmel Crossing/80% |   | 12/14/04      |   | 550             |
| Maitland 200/80%                                |   | 06/16/05      |   | 203             |

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

|                                           | **Year Ended**

**December 31** |
|-------------------------------------------|---------------------------------|
|                                           | **2005**                        | **2004** |
| Income                                    | $192,645                   | $157,792  |
| Operating expense                         | (90,121)                        | (72,322) |
|                                           | 102,524                    | 85,470  |
| Interest expense                          | (28,326)                        | (21,580) |
| Depreciation and amortization             | (51,753)                        | (36,319) |
| Income from office and parking properties | $  22,445        | $  27,571  |

        *Interest Expense.*  The $6.7 million increase in interest expense onoffice properties in 2005 compared to 2004 is due to the net effect of theearly extinguishment of two mortgages in 2004, the issuance of subsidiaryredeemable preferred membership interests in 2004, new loans assumed or placedin 2004 and 2005, the transfer of a mortgage in connection with the sale of ajoint venture interest in 2005 and the refinancing of the TIAA mortgage.  Theaverage interest rate on mortgage notes payable as of December 31, 2005 and 2004 was 5.7% and 6.0% respectively.

 

        Interest expense on banknotes increased $2.9 million for the year ending December 31, 2005 compared to year ending December 31, 2004.  The change is primarily due to the increase inthe weighted average interest rate on bank lines of credit from 3.1% during theyear ending December 31, 2004 to 4.6% during the same period in 2005.

*** ***

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

       Net income available for commonstockholders for the year ended December 31, 2004 was $19.5 million ($1.73 perbasic common share) as compared to $29.1 million ($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 $4.3 million.  Net income for the year ending December 31, 2003 included gains from the sale of two joint venture interests, an office property andland in the amount of $10.7 million.

       *Office and Parking Properties*. The primary 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 theoperations of the following properties purchased, properties sold and jointventure interests transferred (in thousands):

 

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**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 Transferred:**

** **

| **Office Property/Interest Transferred**         | ** ** | **Date Sold** | ** ** | **Square Feet** |
|--------------------------------------------------|------------|---------------|------------|-----------------|
| Viad Corporate Center/70%                        |            | 03/06/03      |            | 480             |
| UBS Building & River Oaks  Place/80%         |            | 05/28/03      |            | 169             |
| 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                                    | $157,792                   | $139,826  |
| Operating expense                         | (72,322)                        | (62,279) |
|                                           | 85,470                     | 77,547  |
| Interest expense                          | (21,580)                        | (16,319) |
| Depreciation and amortization             | (36,319)                        | (27,757) |
| Income from office and parking properties | $  27,571        | $  33,471  |

       *ManagementCompany Income*.  The increase in management company income of $1.7 millionfor the year ended December 31, 2004 compared to 2003 is primarily due to theacquisition fee of approximately $2 million earned on the Rubicon Joint Venturetransaction on December 14, 2004.  Parkway will continue to pursue jointventure opportunities with best partners while maintaining the management andleasing of the properties on a day-to-day basis.

        *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 $5.3million increase in interest expense on office properties in 2004 compared to2003 is due to the net effect of the early extinguishment of three mortgages in2004 and two mortgages in 2003, new loans placed or assumed in 2004 and 2003,the issuance 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 reinvestingproceeds from the 2003 joint ventures previously used to reduce amountsoutstanding under the Company's lines of credit. 

**Liquidity and Capital Resources**

       *Statement of Cash Flows*.  Cashand cash equivalents were $3.4 million and $1.1 million at December 31, 2005and December 31, 2004, respectively.  Cash flows provided by operatingactivities for the year ending December 31, 2005 were $60.1 million compared to$63.3 million for the same period of 2004.  The change in cash flows fromoperating activities is primarily attributable to the timing of receipt ofrevenues and payment of expenses and the increase in number of propertiesowned.

 

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       Cash used in investing activities was$172.8 million for the year ended December 31, 2005 compared to cash used byinvesting activities of $32.9 million for the same period of 2004.  The decreasein cash provided by investing activities of $139.9 million is primarily due toincreased office property purchases and improvements in 2005.

       Cash provided by financing activitieswas $115 million for the year ended December 31, 2005 compared to cash used infinancing activities of $30.5 million for the same period of 2004.  The increasein cash provided by financing activities of $145.5 million is primarily due tothe proceeds received from a stock offering in 2005 and an increase inborrowings on bank lines of credit to fund office property purchases. 

       *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.  

       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 onearnings and cash flows and to lower its overall borrowing costs.  To achieveits objectives, the Company borrows at fixed rates, but also utilizes athree-year unsecured revolving credit facility and two one-year unsecured linesof credit.

       At December 31, 2005, Parkway had $150.4million outstanding under a three-year $190 million unsecured revolving creditfacility with a consortium of 10 banks with Wachovia Capital Markets, LLC asSole Lead Arranger and Sole Book Runner, Wachovia Bank, National Association asAdministrative Agent, PNC Bank, National Association as Syndication Agent, andother banks as participants (the "$190 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 $190 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 5.3% and 3.1% at December 31, 2005 and 2004, respectively.

 

       The$190 million line matures February 6, 2007 and contains a one-year extensionoption available at maturity.  The line is expected to fund acquisitions ofadditional investments and has a current interest rate of 30-day LIBOR rateplus 132.5 basis points.  The Company paid a facility fee of $170,000 (10 basispoints) and origination fees of $556,000 (32.71 basis points) upon closing ofthe loan agreement and pays an annual administration fee of $35,000.  TheCompany also pays fees on the unused portion of the line based upon overallCompany leverage, with the current rate set at 12.5 basis points.

       The $15 million line matures January 31,  2007, 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, 2006.  The proceeds of the loan were used to finance the construction of the City Centre Garage,which was completed in 2005.

Page 29 of79

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       Toprotect against the potential for rapidly rising interest rates, the Companyentered into a total of four interest rate swap agreements in 2005 and 2004.  TheCompany designated the swaps as hedges of the variable interest rates on theCompany's borrowings under the $190 million line.  Accordingly, changes in thefair value of the swap are recognized in accumulated other comprehensive incomeuntil the hedged item is recognized in earnings.  The Company'sinterest rate hedge contracts as of December 31, 2005 and 2004 are summarizedas follows (in thousands):

 

| ** **  | ** **   | ** **   | ** **           | ** ** | ** **   | **Fair**          |
|-------------|--------------|--------------|----------------------|------------|--------------|-------------------|
| ** **  | ** **   | ** **   | ** **           | ** ** | **Total**    | **Market  Value** |
| **Type of** | **Notional** | **Maturity** | ** **           | **Fixed**  | **Interest** | **December  31**  |
| **Hedge**   | **Amount**   | **Date**     | **Reference Rate**   | **Rate**   | **Rate**     | **2005**          | **2004** |
| Swap        | $20,000      | 12/31/05     | 1- Month  LIBOR | 3.183%     | 4.508%       |  $           | -  |  $ | (33) |
| Swap        | $40,000      | 06/30/06     | 1- Month  LIBOR | 3.530%     | 4.855%       | 245          | (193) |
| Swap        | $40,000      | 12/31/08     | 1- Month  LIBOR | 4.360%     | 5.685%       | 426          | -  |
| Swap        | $20,000      | 12/31/08     | 1- Month  LIBOR | 4.245%     | 5.570%       | 234          | -  |
|             |              |              |                      |            |              |  $           | 905  |  $ | (226) |

       At December 31, 2005, the Company had$483.3 million of fixed rate mortgage notes payable with an average interestrate of 5.7% secured by office properties and $150.4 million drawn under banklines of credit.  Parkway's pro rata share of unconsolidated joint venture debtwas $24.9 million with an average interest rate of 5.8% at December 31, 2005. Based on the Company's total market capitalization of approximately $1.3 billionat December 31, 2005 (using the December 31, 2005 closing price of $40.14 percommon share), the Company's debt represented approximately 49.6% of its totalmarket 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.  

 

       Inaddition to the debt to total market capitalization ratio, the Company alsomonitors interest, fixed charge and modified fixed charge coverage ratios.  Theinterest coverage ratio is computed by comparing the cash interest accrued toearnings before interest, taxes, depreciation and amortization ("EBITDA"). This ratio for the years ending December 31, 2005 and 2004 was 3.10 and 3.55 times,respectively.  The fixed charge coverage ratio is computed by comparing thecash interest accrued, principal payments made on mortgage loans and preferreddividends paid to EBITDA.  This ratio for the years ending December 31, 2005and 2004 was 1.79 and 1.86 times, respectively The modified fixed chargecoverage ratio is computed by comparing the cash interest accrued and preferreddividends paid to EBITDA.  This ratio for the years ending December 31, 2005and 2004 was 2.55 and 2.53 times, respectively.    In accordance with the GEARUP Plan, Parkway has established a self-imposed limit for the modified fixedcharge coverage ratio of 2.5 times as the Company's pledge not to use leverageto achieve Company goals.  Interest, fixed charge and modified fixed chargecoverage ratios were lower in 2005 and 2004 primarily due to lower revenues asa result of lower occupancy.

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

|                        | **Average**       | **Fixed Rate Debt** |
|------------------------|-------------------|---------------------|
|                        | **Interest Rate** | **(In thousands)**  |
| 2006                   | 5.67%             | $  15,346 |
| 2007                   | 5.65%             | 33,927              |
| 2008                   | 5.85%             | 56,853              |
| 2009                   | 5.90%             | 36,841              |
| 2010                   | 5.74%             | 98,145              |
| Thereafter             | 6.83%             | 242,158             |
| Total                  |                   | $483,270            |
|                        |                   |                     |
| Fair value at 12/31/05 |                   | $494,033            |

       The Company presently has plans tomake additional capital improvements at its office properties in 2006 ofapproximately $36 million.  These expenses include tenant improvements,capitalized acquisition costs and capitalized building improvements. Approximately $5 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.

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       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, 2005, Parkway had thefollowing off-balance sheet arrangements: a non-controlling 30% interest inPhoenix OfficeInvest, LLC, a real estate joint venture; a non-controlling 20%interest in Parkway Joint Venture, LLC, a real estate joint venture; anon-controlling 50% interest in Wink/Parkway Partnership, a real estate jointventure; a non-controlling 20% interest in RubiconPark I, LLC, a real estatejoint venture; and a non-controlling 20% interest in RubiconPark II, LLC, areal estate joint venture.

       The above real estate joint venturesown and operate office properties in Phoenix, Arizona; Jackson, Mississippi; New  Orleans, Louisiana; Atlanta, Georgia; Charlotte, North Carolina; and Orlando, Florida, respectively.  Parkway manages all ventures on a day-to-day basis,with the exception of the Wink/Parkway Partnership, and receives market based feesfor these management services.  The Company accounts for its interest in thesejoint ventures using the equity method of accounting.  

       Thefollowing information summarizes the financial position at December 31, 2005for the investments in which we held an interest at December 31, 2005 (inthousands):

** **

| ** **                         | ** **          | **Mortgage**        | ** **       | **Parkway's**            |
|------------------------------------|---------------------|---------------------|------------------|--------------------------|
| **Summary of  Financial Position** | **Total Assets**    | **Debt (1)**        | **Total Equity** | **Investment**           |
| Phoenix OfficeInvest, LLC          | $  65,487 | $  50,000 | $13,704          | $  2,236  |
| Parkway Joint Venture, LLC         | 17,975              | 12,600              | 4,807            | (74)                     |
| Wink/Parkway Partnership           | 1,406               | 366                 | 1,036            | 518                 |
| RubiconPark I, LLC                 | 75,725              | 52,000              | 21,804           | 5,157               |
| RubiconPark II, LLC                | 29,927              | 19,275              | 9,932            | 5,105               |
|                                    | $190,520            | $134,241            | $51,283          | $12,942             |

       (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 $174.4million at December 31, 2005.  Parkway's proportionate share of thenon-recourse mortgage debt totaled $24.9 million at December 31, 2005.

       The following information summarizesthe results of operations for the year ended December 31, 2005 for investmentswhich impacted our 2005 results of operations (in thousands):

| ** **                      | **Total**          | **Net**                       | **Parkway's Share**                |
|---------------------------------|--------------------|-------------------------------|------------------------------------|
| **Summary of  Operations**      | **Revenue**        | **Income**                    | **of Net Income**                  |
| Parkway 233 North Michigan, LLC | $  1,134 | $    (15) | $     (5) |
| Phoenix OfficeInvest, LLC       | 11,739             | 2,010                    | 602                           |
| Parkway Joint Venture, LLC      | 2,781              | 284                      | 57                            |
| Wink/Parkway Partnership        | 303                | 156                      | 78                            |
| RubiconPark I, LLC              | 9,821              | 1,936                    | 550                           |
| RubiconPark II, LLC             | 2,361              | 603                      | 214                           |
|                                 | $28,139            | $4,974                   | $1,496                        |

Page 31 of79

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**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, 2005 (in thousands):

|                                     | **Payments Due By Period** |
|------------------------------------------|----------------------------|
| **Contractual  Obligations**             | **Total**                  | **2006** | **2007** | **2008** | **2009** | **2010** | **Thereafter** |
| Long-Term Debt (Mortgage  Notes Payable) | $635,380                   | $41,928 | $59,671 | $80,032 | $37,210 | $130,811 | $285,728 |
| Capital  Lease Obligations               | 101                        | 32 | 32 | 32 | 5 | - | - |
| Operating  Leases                        | 1,344                      | 652 | 452 | 240 | - | - | - |
| Purchase  Obligations                    | 10,383                     | 9,502 | 216 | 14 | 296 | 11 | 344 |
| Other  Long-Term Liabilities             | 10,741                     | 10,741 | - | - | - | - | - |
| Total                                    | $657,949                   | $62,855 | $60,371 | $80,318 | $37,511 | $130,822 | $286,072 |

       The amounts presented above formortgage notes payable include principal and interest payments.  The amountspresented for purchase obligations represent the remaining tenant improvement allowancesfor leases in place and commitments for building improvements as of December31, 2005.

       The amounts presented above as otherlong-term liabilities represents subsidiary redeemable preferred membershipinterests issued to the seller in connection with the Capital City Plazapurchase in 2004. The preferred membership interests pay the seller a 7% couponrate and were issued to accommodate their tax planning needs.  The seller currentlyhas the right to redeem the remaining balance of the membership interests.  Parkwayhas the right to retire the preferred interest in 2007.

 

       Parkwayhas a less than .1% ownership interest in MBALP and acts as the managinggeneral partner.  MBALP is primarily funded with financing from a third partylender, which is secured by a first lien on the rental property of thepartnership.  The creditors of MBALP do not have recourse to Parkway.  Inacting as the general partner, Parkway is committed to providing additionalfunding to partnership deficits up to an aggregate amount of $1 million.  Todate Parkway has not been required to provide any additional funding to MBALP.  InMarch 2006, Parkway purchased an additional interest in MBALP for $1.4 millionraising Parkway's total ownership to approximately 75%.

**Critical Accounting 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., its majority owned subsidiaries and joint ventures in whichthe Company has a controlling interest. Parkway also consolidates subsidiarieswhere the entity is a variable interest entity and Parkway is the primarybeneficiary, as defined in FASB Interpretation 46R "Consolidation of VariableInterest Entities" ("FIN 46R").  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses for the reportingperiod.  Actual results could differ 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.

Page 32 of79

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       Parkwayconsiders critical accounting policies and estimates to be those used in thedetermination of the reported amounts and disclosure related to the following:

       (1)  Impairment or disposal oflong-lived assets;

       (2) Depreciable lives applied to real estate and 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.

 

*       *Duringthe second quarter of 2005, Parkway recorded an impairment loss of $340,000 on12 acres of land in New Orleans, Louisiana based on market research andcomparable sales in the area.  However, during the quarter ending September 30, 2005, the city of New Orleans sustained considerable damage as a result ofHurricane Katrina.  Currently, the Company is unable to assess the damage, ifany, to the land or whether the value of the land is impaired.  Therefore, noadditional impairment loss has been recorded.  No impairment losses wererecorded in 2004.

*       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, identified intangible assets and liabilities, consisting of thevalue of above and below market leases, customer relationships, lease costs andthe value of  in-place leases and any value attributable to above or belowmarket debt assumed with the acquisition.

*       *Parkway allocates the purchaseprice of properties to tangible and intangible assets based on fair values. TheCompany determines the fair value of the tangible and intangible componentsusing a variety of methods and assumptions all of which result in anapproximation of fair value.  Differing assumptions and methods could result indifferent estimates of fair value and thus, a different purchase priceallocation and corresponding increase or decrease in depreciation andamortization expense.

* *

Page 33 of79

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*       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 ourallowance for doubtful accounts considering such factors as credit quality ofour customers, delinquency of payment, historical trends and current economicconditions.  We provide an allowance for doubtful accounts for customerbalances that are over 90 days past due and for specific customer receivablesfor which collection is considered doubtful.  Actual results may differ fromthese estimates under different assumptions or conditions, which could resultin an increase or decrease 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")definition of FFO.  FFO as reported by Parkway may not be comparable to FFOreported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  We believe FFO is helpful to investors as asupplemental measure that enhances the comparability of our operations byadjusting net income for items not reflective of our principal and recurringoperations.  This measure, along with cash flows from operating, financing andinvesting activities, provides investors with an indication of our ability toincur and service debt, to make capital expenditures and to fund other cashneeds.  In addition, FFO has widespread acceptance and use within the REIT andanalyst communities.  Funds from operations is defined by NAREIT as net income(computed in accordance with generally accepted accounting principles"GAAP"), excluding gains or losses from sales of property andextraordinary items under GAAP, plus depreciation and amortization, and afteradjustments for unconsolidated partnerships and joint ventures.  Adjustmentsfor unconsolidated partnerships and joint ventures will be calculated toreflect funds from operations on the same basis.  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 included elsewhere in this Form 10‐K. Funds from operations do not represent cash generated from operating activitiesin accordance with accounting principles generally accepted in the UnitedStates and is not an indication of cash available to fund cash needs.  Fundsfrom operations should not be considered an alternative to net income as anindicator of the Company's operating performance or as an alternative to cashflow as a measure of liquidity.

 

       Thefollowing table presents a reconciliation of the Company's net income to FFOfor the years ended December 31, 2005 and 2004 (in thousands, except per sharedata):

|  
**Total  Dollar Amount**
**Diluted  Per Share**
 
**Year  Ended**
**Year  Ended**
 
**December  31**
**December  31**
 
**2005**
**2004**
**2005**
**2004**
Net income
$20,807 
$29,515 
$1.46 
$2.57 
Adjustments to derive funds from operations:
 
 
 
 
     Depreciation  and amortization

51,753 

36,319 

3.44 

2.74 

     Depreciation  and amortization - discontinued operations

343 

524 

.02 

.04 

     Minority  interest depreciation and amortization

(1,019)

(654)

(.07)

(.05)

     Adjustments  for unconsolidated joint ventures

1,057 

2,345 

.07 

.18 

     Preferred  dividends
(4,800)
(4,800)
(.34)
(.42)
     Convertible  preferred dividends

(2,346)

(5,186)

(.16)

(.45)

     Gain  on real estate and joint venture interests

(5,512)

(3,535)

(.37)

(.27)

     Minority  interest - unit holders

2 

2 

- 

- 

     Diluted  share adjustment for convertible preferred stock
- 
- 
.11 
.17 
Funds from operations applicable to  common shareholders
$60,285 
$54,530 
$4.16 
$4.51 
 

Page 34 of 79

**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, increased interestrates 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 are cautionednot to place undue reliance on forward-looking statements, which reflectmanagement'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, 2005, total outstanding debt was $633.6 million of which $150.4 million or 23.7%, isvariable rate debt.  If market rates of interest on the variable rate debtfluctuate by 10% (or approximately 53 basis points), the change in interestexpense on the variable rate debt would increase or decrease future earningsand cash flows by approximately $801,000 annually.

** **

**ITEM 8.  *FinancialStatements and Supplementary Data.***

 

**Index to Consolidated  Financial Statements**

**Page**
      
Report  of Independent Registered Public Accounting Firm

36

Consolidated Balance Sheets -  as of December 31, 2005 and 2004

37

Consolidated Statements of  Income - for the years ended December 31, 2005, 2004 and 2003

38

Consolidated Statements of  Stockholders' Equity - for the years ended December 31, 2005, 2004 and 2003

39

Consolidated Statements of Cash  Flows - for the years ended December 31, 2005, 2004 and 2003

40

Notes to Consolidated Financial  Statements

41

Schedule  II - Valuations and Qualifying Accounts

70

Schedule  III - Real Estate and Accumulated Depreciation

71

Note  to Schedule III - Real Estate and Accumulated Depreciation

74

** **

Page 35 of 79

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Shareholders and Board of Directors 

Parkway Properties, Inc.

We have audited the accompanying consolidated balance sheets of Parkway Properties,Inc. (the Company) as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, stockholders' equity, and cash flows foreach of the three years in the period ended December 31, 2005.  Our audits alsoincluded the financial statement schedules listed in the index at Item 15(a)2. These financial statements and financial statement schedules are theresponsibility of the Company's management.  Our responsibility is to expressan opinion on these financial statements and financial statement schedulesbased on 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 accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofParkway Properties, Inc. at December 31, 2005 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, the related financial statement schedules,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Parkway Properties, Inc.'s internalcontrol over financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March9, 2006 expressed an unqualified opinion thereon.

 

 

                                                                                                                                                                                                                       Ernst & Young LLP

New Orleans, LouisianaMarch 14, 2006

** **

Page 36 of79

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

**December 31**

**December 31**

**2005**

**2004**

**Assets**

Real estate related investments:

     Office and parking properties

$1,220,565 

$  959,279 

     Parking development

- 

4,434 

     Accumulated depreciation

(179,636)

(142,906)

1,040,929 

820,807 

     Land available for sale

1,467 

3,528 

     Investment in unconsolidated  joint ventures

12,942 

25,294 

1,055,338 

849,629 

Rents receivable and other assets

69,480 

42,448 

Intangible assets, net

60,161 

38,034 

Cash and cash equivalents

3,363 

1,077 

$1,188,342 

$  931,188 

**Liabilities**

** **

** **

Notes payable to banks

$  150,371 

$  104,618 

Mortgage notes payable  

483,270 

353,975 

Accounts payable and other liabilities

56,628 

42,468 

Subsidiary redeemable preferred membership interests

10,741 

10,741 

701,010 

511,802 

**Minority Interest**

** **

** **

Minority Interest - unit holders

38 

39 

Minority Interest - real estate partnerships

12,778 

3,699 

** **

12,816 

3,738 

**Stockholders' Equity**

** **

** **

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

     2,142,857 shares authorized,  803,499 shares issued and outstanding

28,122 

28,122 

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

     no shares issued in 2004

- 

- 

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, 65,457,143 and 65,057,143  shares authorized 

     in 2005 and 2004,  respectively, 14,167,292 and 12,464,817 shares issued 

     and outstanding in 2005 and 2004,  respectively

14 

12 

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

- 

- 

Common stock held in trust, at cost, 124,000 and 130,000  shares in 2005

     and 2004, respectively  

(4,198)

(4,400)

Additional paid-in capital

389,971 

310,455 

Unearned compensation

(3,101)

(4,122)

Accumulated other comprehensive income (loss)

826 

(226)

Retained earnings

4,906 

27,831 

474,516 

415,648 

$1,188,342 

$  931,188 

See notes to consolidated financial statements.

 

Page 37 of79

**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF INCOME**(In thousands, except per share data)

 

**Year Ended December 31**

 

**2005**

**2004**

**2003**

**Revenues**

 

 

 

Income  from office and parking properties

$192,645 

$157,792 

$139,826 

Management company income

2,997 

3,832 

2,136 

Interest  on note receivable from Moore Building Associates LP

- 

- 

819 

Incentive  management fee from Moore Building Associates LP

- 

- 

300 

Other  income and deferred gains

255 

37 

599 

Total  revenues

195,897 

161,661 

143,680 

** **

 

 

 

**Expenses**

 

 

 

Office  and parking properties:

 

 

 

     Operating  expense

90,121 

72,322 

62,279 

     Interest  expense:

 

 

 

          Contractual

26,043 

19,788 

16,026 

          Subsidiary  redeemable preferred membership interests

752 

725 

- 

          Prepayment  expenses

555 

511 

- 

          Amortization  of loan costs

976 

556 

293 

     Depreciation  and amortization

51,753 

36,319 

27,757 

Operating  expense for other real estate properties

5 

22 

37 

Interest  expense on bank notes:

 

 

 

          Contractual

6,614 

3,796 

2,834 

          Amortization  of loan costs

504 

441 

565 

Management  company expenses

607 

358 

391 

General  and administrative

4,468 

4,464 

4,201 

Total  expenses

182,398 

139,302 

114,383 

** **

 

 

 

**Income  before equity in earnings, gain, minority interest and**

 

 

 

     **discontinued  operations**

13,499 

22,359 

29,297 

Equity  in earnings of unconsolidated joint ventures

1,496 

1,697 

2,212 

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

1,039 

4,309 

10,661 

Minority  interest - unit holders

(2)

(2)

(3)

Minority  interest - real estate partnerships

(187)

127 

-

** **

 

 

 

**Income  from continuing operations**

15,845 

28,490 

42,167 

Discontinued  operations:

 

 

 

     Income  from discontinued operations

781 

1,025 

1,014 

     Gain  on sale of real estate from discontinued operations

4,181 

- 

- 

**Net  income**

20,807 

29,515 

43,181 

Change  in market value of interest rate swaps

1,131 

(226)

170 

Change  in unrealized loss on equity securities

(79)

- 

- 

**Comprehensive  income**

$  21,859 

$  29,289 

$  43,351 

** **

 

 

 

**Net  income available to common stockholders:**

 

 

 

Net  income

$  20,807 

$  29,515 

$  43,181 

Original  issue costs associated with redemption or preferred stock

- 

- 

(2,619)

Dividends  on preferred stock

(4,800)

(4,800)

(5,352)

Dividends  on convertible preferred stock

(2,346)

(5,186)

(6,091)

**Net  income available to common stockholders**

$  13,661 

$  19,529 

$  29,119 

** **

 

 

 

**Net  income per common share:**

 

 

 

Basic:

 

 

 

Income  from continuing operations

$     0.62 

$     1.64 

$     2.75 

Discontinued  operations

0.35 

0.09 

0.10 

Net  income

$     0.97 

$     1.73 

$     2.85 

 

 

 

 

Diluted:

 

 

 

Income  from continuing operations

$     0.61 

$     1.61 

$     2.69 

Discontinued  operations

0.35 

0.09 

0.10 

Net  income

$     0.96 

$     1.70 

$     2.79 

** **

 

 

 

**Dividends per common share**

$     2.60 

$     2.60 

$     2.60 

** **

 

 

 

**Weighted  average shares outstanding:**

 

 

 

Basic

14,065 

11,270 

10,224 

Diluted

14,233 

11,478 

10,453 

See notes to consolidated financial statements.

 

 Page 38 of 79

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

 

**Year Ended December 31**

 

**2005**

**2004**

**2003**

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

 

 

 

     Balance  at beginning of year

$            - 

$            - 

$  66,250 

          Redemption  of preferred stock

- 

- 

(66,250)

     Balance  at end of year

- 

- 

- 

** **

 

 

 

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

 

 

 

     Balance  at beginning of year

28,122 

68,000 

75,000 

          Conversion  of preferred stock to common stock

- 

(39,878)

(7,000)

     Balance  at end of year

28,122 

28,122 

68,000 

** **

 

 

 

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

 

 

 

     Balance  at beginning of year

57,976 

57,976 

- 

          Shares  issued

- 

- 

57,976 

     Balance  at end of year

57,976 

57,976 

57,976 

** **

 

 

 

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

 

 

 

     Balance  at beginning of year

12 

11 

9 

          Shares  issued - stock offering

2 

- 

1 

          Shares  issued - other

- 

1 

1 

     Balance  at end of year

14 

12 

11 

 

 

 

 

**Common  stock held in trust**

 

 

 

     Balance  at beginning of year

(4,400)

(4,321)

- 

          Shares  contributed to deferred compensation plan

202 

(79)

(4,321)

     Balance  at end of year

(4,198)

(4,400)

(4,321)

** **

** **

** **

** **

**Additional  paid-in capital**

** **

** **

** **

     Balance  at beginning of year

310,455 

252,695 

199,979 

          Stock  options exercised

2,104 

5,964 

6,079 

          Shares  issued in lieu of Directors' fees

193 

138 

76 

          Restricted  shares issued (forfeited)

(679)

70 

5,092 

          Deferred  incentive share units issued

191 

201 

236 

          Shares  issued - employee excellence recognition program

- 

- 

3 

          Shares  issued - DRIP Plan

1,899 

11,515 

7,799 

          Shares  issued - stock offerings

75,808 

(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)

     Balance  at end of year

389,971 

310,455 

252,695 

** **

 

 

 

**Unearned  compensation**

 

 

 

     Balance  at beginning of year

(4,122)

(4,634)

- 

          Restricted  shares (issued) forfeited

679 

(70)

(5,092)

          Deferred  incentive share units issued

(191)

(201)

(236)

          Amortization  of unearned compensation

533 

783 

694 

**     **Balance at end of year

(3,101)

(4,122)

(4,634)

** **

** **

** **

** **

**Accumulated  other comprehensive income (loss)**

** **

** **

** **

     Balance  at beginning of year

(226)

- 

(170)

          Change  in unrealized loss on equity securities

(79)

- 

- 

          Change  in market value of interest rate swaps

1,131 

(226)

170 

     Balance  at end of year

826 

(226)

- 

** **

** **

** **

** **

**Retained  earnings**

** **

** **

** **

     Balance  at beginning of year

27,831 

38,253 

35,753 

          Net  income

20,807 

29,515 

43,181 

          Original  issue costs associated with redemption of preferred stock

- 

- 

(2,619)

          Preferred  stock dividends declared

(4,800)

(4,800)

(5,352)

          Convertible  preferred stock dividends declared

(2,346)

(5,186)

(6,091)

          Common  stock dividends declared

(36,586)

(29,951)

(26,619)

     Balance  at end of year

4,906 

27,831 

38,253 

**Total  stockholders' equity**

$474,516 

$415,648 

$407,980 

 

 

 

 

 

See notes to consolidatedfinancial statements.

 

Page 39 of79

**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

**Year  Ended December 31**

**2005**

**2004**

**2003**

**Operating activities**

     Net income

$    20,807 

$    29,515 

$    43,181 

     Adjustments  to reconcile net income to cash

          provided  by operating activities:

          Depreciation  and amortization

51,753 

36,319 

27,757 

          Depreciation  and amortization - discontinued operations

343 

524 

273 

          Amortization  of above (below) market leases

1,970 

139 

(29)

          Amortization  of loan costs

1,480 

997 

858 

          Amortization  of unearned compensation

533 

783 

694 

          Operating  distributions from unconsolidated 

               joint  ventures

2,587 

2,573 

3,148 

          Income  (loss) allocated to minority interests

189 

(125)

3 

          Gain  on note receivable, sale of joint venture 

               interests  and real estate

(5,220)

(4,309)

(10,661)

          Equity  in earnings of consolidated joint ventures

(1,496)

(1,697)

(2,212)

          Other

- 

-

(8)

          Changes  in operating assets and liabilities:

               Increase  in receivables and other assets

(11,571)

(2,559)

(4,243)

               Increase  (decrease) in accounts payable and 

                    other  liabilities

(1,320)

1,177 

(3,181)

     **Cash  provided by operating activities**

60,055 

63,337 

55,580 

** **

**Investing activities**

     Payments  received on mortgage loans

- 

775 

8 

     Distributions  from unconsolidated joint ventures

1,845 

- 

- 

     Investments  in unconsolidated joint ventures

(45)

(286)

(549)

     Purchases  of real estate related investments

(163,238)

(56,625)

(106,258)

     Proceeds  from sales of joint venture interests and real estate

24,153 

58,223 

97,433 

     Real  estate development

(3,087)

(4,434)

- 

     Improvements  to real estate related investments

(32,441)

(30,596)

(22,199)

**     Cash  used in investing activities**

(172,813)

(32,943)

(31,565)

** **

**Financing activities**

     Principal  payments on mortgage notes payable

(79,120)

(24,421)

(26,427)

     Net  proceeds from (payments on) bank borrowings

46,884 

(5,683)

(31,724)

     Proceeds  from long-term financing

103,160 

28,950 

42,800 

     Debt  financing costs

(1,044)

(2,054)

(1,258)

     Stock  options exercised

2,104 

5,964 

6,080 

**     **Dividends  paid on common stock

(36,356)

(29,582)

(26,349)

     Dividends  paid on preferred stock

(7,623)

(10,341)

(11,597)

     Contributions  from minority interest partners

9,864 

- 

- 

     Distributions  to minority interest partners

(534)

(141)

(4)

     Purchase  of Company stock

- 

- 

(366)

     Proceeds  from DRIP Plan

1,899 

11,515 

7,799 

     Redemption  of subsidiary preferred membership

          interests  and preferred stock

- 

(4,750)

(66,250)

     Proceeds  from stock offerings

75,810 

(5)

82,155 

     **Cash  provided by (used in) financing activities**

115,044 

(30,548)

(25,141)

**     Impact  on cash of consolidation of MBALP**

- 

763 

- 

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

2,286 

609 

(1,126)

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

1,077 

468 

1,594 

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

$     3,363 

$     1,077 

$       468 

See notes to consolidatedfinancial statements.

 

Page 40 of79

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2005**

****

**NOTE A - Summary ofSignificant Accounting Policies**

**Principles of consolidation**

       The consolidated financial statementsinclude the accounts of Parkway Properties, Inc. ("Parkway" or"the Company"), its wholly-owned subsidiaries and joint ventures inwhich the Company has a controlling interest.  Third party equity interests inthe consolidated joint ventures are reflected as minority interests in theconsolidated financial statements.  Parkway also consolidates subsidiarieswhere the entity is a variable interest entity and Parkway is the primarybeneficiary, as defined in FASB Interpretation 46R "Consolidation of VariableInterest Entities" ("FIN 46R").  All significant intercompany transactions andaccounts have been eliminated.

**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 its reorganizationinto the UPREIT (Umbrella Partnership REIT) structure effective January 1,1998. The Company anticipates that the UPREIT structure will enable it topursue additional investment opportunities by having the ability to offertax-advantaged operating partnership units to property owners in exchange forproperties.

**Business**

       The Company's operations areexclusively in the real estate industry, principally the operation, management,and ownership 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.

****

Page 41 of79

**Investment in unconsolidated joint ventures**

       As of December 31, 2005, 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 Phoenix OfficeInvest, LLC, a 20% interest in Parkway Joint VentureLLC, a 20% interest in RubiconPark I, LLC and a 20% interest in RubiconPark II,LLC.  The Company has a non-controlling interest in these investments andaccounts for the interest using the equity method of accounting.  Therefore,Parkway reports its share of income and losses based on its ownership interestin these entities.  Parkway classifies its interests as non-controlling when itholds less than a majority voting interest in the entity and does not have thesole ability, based on the terms of the joint venture agreements, to makedecisions about the entities' activities regarding items such as major leases,encumbering the entities with debt, major capital expenditures and whether todispose 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 operatingpartnership pays a regular quarterly distribution to the holders of operatingunits.  Income is allocated to minority interest based on the weighted averagepercentage ownership during the year.  As of December 31, 2005, the minorityinterest 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 ownershipinterest in Moore Building Associates LP ("MBALP") effective January 1, 2004. Parkway has less than .1% ownership interest in MBALP and acts as the managinggeneral partner of this partnership.  In March 2006, Parkway purchased anadditional interest in MBALP for $1.4 million raising Parkway's total ownershipto approximately 75%.

       MBALP was established for the purposeof owning a commercial office building (the Toyota Center in Memphis,Tennessee) and is primarily funded with financing from a third party lender,which is secured by a first lien on the rental property of the partnership. The creditors of MBALP do not have recourse to Parkway.  In acting as thegeneral partner, Parkway is committed to providing additional funding to meetpartnership operating deficits up to an aggregate amount of $1 million.  MBALPhas a fixed rate non-recourse first mortgage in the amount of $13 million thatis secured by the Toyota Center, which has a carrying amount of $22.9 million.

       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.

       On July 6, 2005, Parkway, throughaffiliated entities, entered into a limited partnership agreement forming a$500 million discretionary fund ("the fund") with Ohio Public EmployeesRetirement System ("Ohio PERS") for the purpose of acquiring high-qualitymulti-tenant office properties.  Ohio PERS is a 75% investor and Parkway is a25% investor in the fund.  Parkway serves as the general partner of the fundand provides asset management, property management, leasing and constructionmanagement services to the fund, for which it is paid market-based fees. Thefund has fixed rate non-recourse mortgage debt totaling $17.2 million that issecured by two office properties, Maitland 100 and 555 Winderley Place, whichhave a carrying value of $25.7 million. There is approximately $472 millionremaining capacity for fund office investments.  The remaining officeinvestments are expected to be funded by approximately $283 million in mortgagedebt and $189 million in equity contributions from partners.  

       Since Parkway is the sole generalpartner and has the authority to make major decisions on behalf of the fund, thereby giving Parkway a controllinginterest, Parkway is required to include the discretionary fund in its consolidatedfinancial statements.

       Minority interest in real estatepartnerships represents the other partners' proportionate share of equity inthe partnerships discussed above at December 31, 2005.  Income is allocated tominority interest based on the weighted average percentage ownership during theyear.

 

Page 42 of 79

**Real estate properties**

      Real estate properties are stated at thelower of cost less accumulated depreciation, or fair value.  Cost includes thecarrying amount of the Company's investment plus any additional considerationpaid, liabilities assumed, costs of securing title and improvements madesubsequent to acquisition.  Depreciation of buildings and building improvementsis computed using the straight-line method over the estimated useful lives ofthe assets.  Depreciation of tenant improvements, including personal property,is computed using the straight-line method over the term of the lease involved. Maintenance and repair expenses are charged to expense as incurred.  

       Balances of major classes ofdepreciable assets (in thousands) and their respective estimated useful livesare:

 

** **

** **

**December 31**

**December 31**

**Asset Category**

**Estimated Useful  Life**

**2005**

**2004**

Building and garage

40  years

      $     957,553

        $771,721

Building improvements

7  to 40 years

               64,600

            52,771

Tenant improvements

Term  of lease

             100,632

            63,503

      $  1,122,785

        $887,995

       Depreciation expense related to theseassets of $40.5 million, $31.3 million and $25.0 million was recognized in 2005,2004 and 2003, 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.  The carrying amount includes the net book value oftangible and intangible assets.  Real estate assets are classified as held forsale or held and used in accordance with Statement of Financial AccountingStandards ("SFAS") No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets".  In accordance with SFAS No. 144, Parkwayrecords 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, 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 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, Parkway recognizes an impairment loss to reduce the carryingvalue of the real estate asset to the estimate of its fair value.

       Management continually evaluates the Company'soffice buildings and the markets where the properties are located to ensurethat these buildings continue to meet the Company's investment criteria. Additionally, effective January 1, 2006, Parkway entered into a new three-yearstrategic plan referred to as the "GEAR UP" Plan.  The "A" in the GEAR UP Planstands for Asset Recycling, which has as its focus to pursue sales of officeassets to maximize value and transform Parkway from being first an *owner*of real estate, and secondarily an *operator* of real estate for others tobeing first an *operator* of real estate for others that also *owns*an interest in the real estate.  The GEAR UP Plan includes the sale of almost$600 million in assets.  Most of these properties are smaller assets or locatedin smaller markets that do not fit with the Company's strategy of owning largerassets in institutional markets.  In most cases, Parkway expects to keep a 10to 30% joint venture interest in these properties as well as management andleasing.  Office properties, where Parkway will not retain an interest in theproperty or will not have significant continuing involvement in the operationsof the property after disposal, will be classified as held for sale on thebalance sheet if a sale becomes probable.

 

       Gainsfrom sales of real estate are recognized based on the provisions of Statementof Financial Accounting Standards ("SFAS") No. 66 which require uponclosing, the transfer of rights of ownership to the purchaser, receipt from thepurchaser of an adequate cash down payment and adequate continuing investmentby the purchaser.  If the requirements for recognizing gains have not been met,the sale and related costs are recorded, but the gain is deferred andrecognized generally on the installment method of accounting as collections arereceived.

 

Page 43 of79

       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 2005, an impairment loss of $340,000 was recorded on approximately12 acres of land in New Orleans, Louisiana.  The loss on the land was computedbased on market research and comparable sales in the area.  Subsequent torecording the impairment loss, in the third quarter of 2005 the city of New  Orleans sustained considerable damage as a result of Hurricane Katrina. Currently, the Company is unable to assess the damage, if any, to the land orwhether the value of the land is impaired.  Therefore, no additional impairmentloss has been recorded.

 

**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 share of operatingand administrative expenses and real estate taxes as computed in accordancewith the lease.

       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 based on the most recent quarterlybudget.  After the end of the calendar year, the Company computes eachcustomer's final expense reimbursements and issues a bill or credit for thedifference between the actual amount and the amounts billed monthly during theyear.  These differences are recorded to expense reimbursement income in theperiod the final bills are prepared, usually beginning in February andcompleted by May.  The net amounts of any such adjustments were not materialfor the years ended December 31, 2005, 2004 and 2003.  

       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 and consolidated jointventures are eliminated in consolidation.  Additionally, the portion of feesearned on unconsolidated joint ventures attributable to Parkway's ownershipinterest is eliminated in consolidation.

**Acquired Real Estate Assets**

       Parkway accounts for its acquisitionsof real estate in accordance with Statement of Financial Accounting StandardsNo. 141, "Business Combinations" ("SFAS 141").  Parkway allocates the purchaseprice of real estate to tangible and intangible assets and liabilities based onfair values.  Tangible assets consist of land, building, garage, buildingimprovements and tenant improvements.  Intangible assets and liabilitiesconsist of the value of above and below market leases, lease costs, the valueof in-place leases, customer relationships and any value attributable to aboveor below market debt assumed with the acquisition.

        The Company may engage independent third-partyappraisers to perform the valuations used to determine the fair value of theseidentifiable tangible and 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.

 

Page 44 of79

       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.   Total amortization for above andbelow market leases was a net reduction of rental income of $2 million and$139,000 for the years ending December 31, 2005 and 2004, respectively, and anet increase in rental income of $29,000 for the year ending December 31, 2003.

       Amortizationof above and below market leases is projected as a reduction to rental incomeas follows for the next five years (in thousands):  

 

Amount

2006

$1,518

2007

1,310

2008

1,135

2009

978

2010

756

 

       Thefair value of customer relationships represents the quantifiable benefitsrelated to developing a relationship with the current customer.  Examples ofthese benefits would be growth prospects for developing new business with theexisting customer, the ability to attract similar customers to the building,the tenant's credit quality and expectations of lease renewals (including thoseexisting under the terms of the lease agreement or management's expectation forrenewal), among other factors.  Management believes that there would typicallybe little value associated with customer relationships that is in excess of thevalue of the in-place lease and their typical renewal rates.  Any valueassigned to customer relationships is amortized over the remaining terms of therespective leases plus any expected renewal periods as a lease costamortization expense.  Currently, the Company has no value assigned to customerrelationships.

       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.  Total amortization expense for the value ofin-place leases was $5.5 million, $2.4 million and $.4 million for the yearsending December 31, 2005, 2004 and 2003, respectively.

 

       Amortizationexpense for the value of in-place leases is projected as follows for the nextfive years (in thousands):

 

Amount

2006

$4,390

2007

4,386

2008

4,384

2009

4,349

2010

4,206

 

       Aseparate component of the fair value of in-place leases is identified for thelease costs.  The fair value of lease costs represents the estimatedcommissions or legal fees paid in connection with the current leases in place. Lease costs are amortized over the remaining terms of the respective leases aslease cost amortization expense.

       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 thetenant improvement, in-place lease value, lease cost and customer relationshipintangibles would be charged to expense.  Additionally, the unamortized portionof above market in-place leases would be recorded as a reduction to rentalincome and the below market in-place lease value would be recorded as anincrease 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.

 

Page 45 of79

**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, isimmediately recognized 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.

       Effective January 1, 2006, Parkwaywill begin 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 is estimated at approximately $30,000 for2006.

Page 46 of79

       Thefollowing table illustrates the effect on net income and earnings per share ifthe company had applied the fair value recognition provisions of FASB StatementNo. 123R, *Share-Based Payment,*to stock-based employee compensation (inthousands, except per share amounts)

 

**Year Ended  December 31**

**2005**

**2004**

**2003**

Net income available to common  stockholders, as reported

$13,661 

$19,529 

$29,119 

Add:  Stock based compensation  expense included in reported net income

533 

783 

694 

Deduct:  Stock based  compensation expense assuming fair value method

        for all awards

(641)

(1,032)

(1,119)

Pro forma net income available  to common stockholders

$13,553 

$19,280 

$28,694 

Earnings per common share:

        Basic - as reported

$    0.97 

$    1.73 

$    2.85 

        Basic - pro forma

$    0.96 

$    1.71 

$    2.81 

        Diluted - as reported

$    0.96 

$    1.70 

$    2.79 

        Diluted - pro forma

$    0.95 

$    1.68 

$    2.75 

       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 (NYSEticker 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 $533,000, $783,000 and $694,000 was recognized in 2005,2004 and 2003, respectively.

       The restricted stock granted to officers of the Company under the 2003Plan vests the earlier of seven years from grant date or effective December 31,2005 if certain goals of the VALUE SQUARE Plan were met.  The VALUE SQUAREPlan had as its goal to achieve fundsfrom operations available to common stockholders ("FFO") growth that is 10%higher than that of the National Association of Real Estate Investment Trusts("NAREIT") Office Index peer group.  Furthermore, for the early vesting tooccur, the Company had to achieve positive FFO growth during the three years ofthe plan.  Based on the results of the Company and the results of other REITsin the Office Index peer group, Parkway met the equity return goal of theplan.  However, the Company did not achieve positive FFO growth during theVALUE SQUARE Plan and, therefore, the early vesting of the restricted stockdid not occur.  The value of the restricted shares will continue to beamortized ratably over the seven-year period. 

 

       Thedeferred incentive share units granted to employees under the 2003 Plan vestfour years from grant date and are being amortized ratably over the four-yearperiod.

 

       Restrictedstock and deferred incentive share units are forfeited if an employee leavesthe Company before the vesting date.  Shares and/or units that are forfeitedbecome available for future grant under the 2003 Plan.  In connection with theforfeited shares/units, the value of the forfeited shares/units, unearnedcompensation, accumulated amortization of unearned compensation and accumulateddividends, if any, 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 taxable income.

 

Page 47 of79

**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**

**2005**

**2004**

**2003**

(in thousands, except  per share data)

Numerator:

    Basic  and diluted net income

        available  to common stockholders

$13,661

$19,529

$29,119

Denominator:

    Basic  weighted average shares

14,065

11,270

10,224

    Effect  of employee stock options, deferred

        incentive  share units and warrants

168

208

229

    Diluted  weighted average shares

14,233

11,478

10,453

Diluted  earnings per share

$      .96

$    1.70

$    2.79

       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 2004 and 2003 consolidated financial statements to conform to the2005 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 services receivedin exchange for an award of equity instruments based on the grant-date fairvalue of the award.

       Effective January 1, 2006, Parkwaywill adopt 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 2006 is currently estimated at $30,000.

Page 48 of 79

**Note B - Investment in Officeand Parking Properties**

****       Included in investment in officeand parking properties at December 31, 2005 are 59 office and parkingproperties located in nine states with an aggregate of 10,790,000 square feet of leasable space.  This excludesoffice properties in unconsolidated joint ventures, which are outlined in NoteC - Investment in Unconsolidated Joint Ventures. The purchase price of officeproperties acquired during the year ended December 31, 2005 is as follows:

 

** **

**Cost**

**Market Location**

**(in thousands)**

Chicago, Illinois

$139,728

Jacksonville, Florida

29,285

Orlando, Florida

28,417

Phoenix, Arizona

20,300

Memphis, Tennessee

19,250

$236,980

 

       TheCompany's acquisitions are accounted for by the purchase method.  The resultsof each acquired property are included in the Company's results of operationsfrom their respective purchase dates.

*Summary of Acquisitions and Dispositions*

       On January 5, 2005, the Companyentered into an agreement to purchase the 70% interest held by InvestcorpInternational, Inc., its joint venture partner, in the property known as233 North Michigan Avenue in Chicago, Illinois. The gross purchase pricefor the 70% interest was $139.7 million, and the Company closed the investmentin two stages. The Company closed 90% of the purchase on January 14, 2005. Thesecond closing for the remainder of Investcorp's interest occurred on April 29,2005, following lender and rating agencyapproval. The Company earned a $400,000 incentive fee from Investcorp basedupon the economic returns generated over the life of the partnership.  Thepurchase was funded with a portion of the proceeds from the sale of 1.6 millionshares of common stock to Citigroup Global Markets Inc. on January 10, 2005 andthe assumption of an existing first mortgage on the property. 

 

       The following tablesummarizes the fair value of the assets acquired and liabilities assumed withthe 233 North Michigan purchase (in thousands): 

 

Real estate investments:

        Land

$    18,181

        Building  

130,129

        Garage

3,718

        Tenant improvements

22,410

        Total real estate investments acquired

174,438

Rents receivable and other assets

1,847

Lease costs

7,723

Intangible assets:

        Above-market leases

13,482

        Lease in place value

16,037

Cash and cash equivalents

104

Total assets acquired

$213,631

Liabilities assumed:

        Mortgage note payable

$  99,971

        Mortgage debt valuation adjustment

11,709

        Below market leases

4,162

        Accounts payable and other liabilities

3,827

Total liabilities assumed

$119,669

Net assets acquired

$  93,962

 

       The weighted averageamortization period is six years for tenant improvements, lease costs and aboveand below market leases and 13 years for lease in place value.

 

Page 49 of 79

       The unaudited pro forma effect on theCompany's results of operations for the 233 North Michigan purchase as if thepurchase had occurred on January 1, 2004 is as follows (in thousands, exceptper share data):

 

Year Ended

December 31

2005

2004

Revenues

 $

1,099

 $

31,122 

Net income available to common stockholders

 $

221

 $

175 

Basic earnings per share

 $

.01

 $

(.20)

Diluted earnings per share

 $

.01

 $

(.19)

 

Pro forma results do not purport to be indicative of actualresults had the purchase been made at January 1, 2004, or the results that mayoccur in the future.

 

**       **OnFebruary 9, 2006, Parkway entered into a Contribution/Purchase Agreement (the"Agreement") with Estein & Associates USA, Ltd. ("ESA") to form a limitedpartnership to own the 233 North Michigan Building in Chicago, Illinois.  ESAwill be a 70% partner in the partnership, while Parkway will retain a 30%interest and provide management, leasing and construction management servicesto the partnership.  The Agreement values the building at $256 million and issubject to completion of a customary 45-day due diligence period, at which timeearnest money will be at risk.  Based on the terms of the Agreement, closing isexpected to occur within the second quarter of 2006.  The closing is subject tothe satisfaction of conditions, including acceptable financing being obtainedthat would close simultaneously with the asset transfer.  There can be noassurances that conditions of the Agreement will be satisfied, or if satisfied,that such closing will occur.

              On March 30, 2005, theCompany purchased for $29.3 million the Stein Mart Building and RiverplaceSouth in downtown Jacksonville, Florida. In addition to the purchase price theCompany expects to invest an additional $4.8 million in improvements andclosing costs during the first two years of ownership.  The buildings total 302,000square feet, and the purchase was funded with the remaining proceeds from theCompany's January 2005 equity offering as well as funds obtained under itsexisting line of credit.  

       On June 16, 2005, the Company closedthe joint venture of Maitland 200 to Rubicon America Trust ("Rubicon"), anAustralian listed property trust.  Maitland 200 is a 203,000 square foot officeproperty located in Orlando, Florida.  The consideration places total buildingvalue at $28.4 million.  Rubicon acquired an 80% interest in the single purposeentity that owns the property and assumed 100% of the existing $19.3 million,4.4% first mortgage.  Parkway received a $947,000 acquisition fee at closingand retained management and leasing of the property and a 20% ownershipinterest.  Parkway recognized a gain for financial reporting purposes on thetransfer of the 80% interest of $1.3 million in the second quarter.  The jointventure is accounted for using the equity method of accounting.

**       **On July 26, 2005, the Companypurchased for $19.25 million Forum I in Memphis, Tennessee.** **In additionto the purchase price, the Company expects to invest an additional $1.9 millionin improvements and closing costs during the first two years of ownership.  Thebuilding totals 162,000 square feet, and the purchase was funded with theCompany's existing lines of credit and the assumption of an $11.7 million firstmortgage, of which $5 million is recourse debt.

       On September 9, 2005, the Companysold The Park on Camelback for $17.5 million.  The Park is a 102,000 squarefoot office property located in Phoenix, Arizona. The Company recorded a gainon the sale of $4.4 million in 2005.  In accordance with GAAP, the gain andincome from The Park on Camelback has been classified as discontinuedoperations for all current and prior periods presented.

       On September 14, 2005, the Companysold 250 Commonwealth, a 46,000 square foot office property located inGreenville, South Carolina, for $4 million. The Company recorded a loss on thesale of $238,000 in 2005.  In accordance with GAAP, the loss and income from250 Commonwealth has been classified as discontinued operations for all currentand prior periods presented.

 

Page 50 of 79

       On September 28, 2005, the discretionaryfund the Company has with Ohio Public Employees Retirement System ("Ohio PERS")purchased a two-building office portfolio in Orlando, Florida.  Parkway is a25% investor and Ohio PERS is a 75% investor in the fund.  The two properties,Maitland 100 and 555 Winderley Place, total 230,000 square feet, and the twobuildings were acquired for a combined purchase price of $28.4 million. Thefund expects to spend an additional $3.3 million for closing costs, buildingimprovements, leasing costs and tenant improvements during the first two yearsof ownership.  The purchase was funded with a $17.2 million first mortgageplacement by the fund and with equity contributions from the partners.  Parkwaywill provide management and renewal leasing services through its existing teamin Orlando. New leasing services will be provided by an unaffiliatedthird-party leasing agency.   Since Parkway is the sole general partner and hasthe authority to make major decisions on behalf of the fund, thereby givingParkway a controlling interest, Parkway has included the discretionary fund inits consolidated financial statements.  

**       **On December 15, 2005, theCompany purchased Mesa Corporate Center, a 105,000 square foot office buildinglocated in Phoenix, Arizona.  Mesa Corporate Center was purchased for $20.3million plus $236,000 in closing costs and anticipated capital expendituresduring the first year of ownership.  The purchase was funded with the Company'sexisting lines of credit.

 

       Thetotal amount of purchase price allocated to intangible assets and (liabilities)and weighted average amortization period for each class of asset or liabilityis as follows for 2005 office property acquisitions (in thousands):

 

** **

**Weighted**

**Amount**

**Average Life**

Lease in place value

$22,320 

12

Above market leases

14,653 

7

Below market leases

(6,357)

6

 

*Contractual Obligations andMinimum Rental Receipts*

       Purchase obligations for tenantimprovement allowances for leases in place and commitments for buildingimprovements as of December 31, 2005 are as follows (in thousands):

2006

$  9,502

2007

216

2008

14

2009

296

2010

11

Thereafter

344

Total

$10,383

       Minimum future operating leasepayments for various equipment leased at the office properties is as followsfor operating leases in place as of December 31, 2005 (in thousands):

2006

$652

2007

452

2008

240

Total

$1,344

       The following is a schedule by yearof future approximate minimum rental receipts under noncancelable leasesfor office buildings owned as of December 31, 2005 (in thousands):

2006

$155,440

2007

140,918

2008

115,889

2009

92,454

2010

70,024

Thereafter

170,219

$744,944

Page 51 of79

**Note C - Investment inUnconsolidated Joint Ventures**

****       In addition to the 59 office andparking properties included in the consolidated financial statements, theCompany is also invested in five unconsolidated joint ventures with unrelatedinvestors.  Parkway retained a minority interest of 30% in one joint venture,20% in three joint ventures and 50% in one joint venture.  These investmentsare accounted for using the equity method of accounting, as Parkway does notcontrol any of these joint ventures.  Accordingly, the assets and liabilitiesof the joint ventures are not included on Parkway's consolidated balance sheetsas of December 31, 2005 and 2004.  Information relating to these unconsolidatedjoint ventures is detailed below (in thousands).

 

** **

** **

** **

**Parkway's**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership %**

**Feet**

**Leased**

Phoenix  OfficeInvest, LLC ("Viad JV")

Viad  Corp Center

Phoenix,  AZ

30.0%

480

96.3%

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%

169

93.5%

RubiconPark  I, LLC ("Rubicon JV")

Lakewood/Falls  Pointe

Atlanta,  GA

20.0%

550

92.2%

 

Carmel  Crossing

Charlotte,  NC

 

 

 

RubiconPark  II, LLC ("Maitland JV")

Maitland  200

Orlando,  FL

20.0%

203

96.0%

 

 

 

 

1,434

94.4%

       During 2005, the city of New Orleanssustained considerable damage as a result of Hurricane Katrina.  Parkway hasbeen able to assess the physical damage to the Wink Building, which is locatedin New Orleans and owned by the Wink/Parkway Partnership, and expects thatdamages will be covered by insurance.  Therefore, the Company's investment inthe Wink/Parkway Partnership is not impaired.  Parkway's investment in thepartnership was $518,000 or .04% of total assets as of December 31, 2005.

 

       Parkway providesmanagement, construction and leasing services for all of the unconsolidatedjoint ventures except for the Wink/Parkway Partnership, and receives marketbased fees for these services.  The portion of fees earned on unconsolidatedjoint ventures attributable to Parkway's ownership interest is eliminated inconsolidation. 

 Page 52 of79

              Balancesheet information for the unconsolidated joint ventures is summarized below asof December 31, 2005 and December 31, 2004 (in thousands):

 

 
**Balance Sheet Information**

 
 

**December 31, 2005**

 
 

**233 North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
 

**Michigan**

**JV**

**Building**

**JV**

**JV**

**JV**

**Total**

 
**Unconsolidated  Joint**

** **

** **

** **

** **

** **

** **

** **

 
**     Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

** **

 
Real Estate, Net

 $

- 

 $

58,247 

 $

1,237 

 $

16,728 

 $

68,792 

 $

29,408 

 $

174,412 

 
Other Assets

- 

7,240 

169 

1,247 

6,933 

519 

16,108 

 
Total Assets

 $

- 

 $

65,487 

 $

1,406 

 $

17,975 

 $

75,725 

 $

29,927 

 $

190,520 

 
 

 

 

 

 

 

 

 

 
Mortgage Debt

 $

- 

 $

50,000 

 $

366 

 $

12,600 

 $

52,000 

 $

19,275 

 $

134,241 

 
Other Liabilities

- 

1,783 

4 

568 

1,921 

720 

4,996 

 
Partners'/Shareholders'  Equity

- 

13,704 

1,036 

4,807 

21,804 

9,932 

51,283 

 
Total Liabilities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Partners'/Shareholders'  Equity

 $

- 

 $

65,487 

 $

1,406 

 $

17,975 

 $

75,725 

 $

29,927 

 $

190,520 

 
    

 

 

 

 

 

 

 

 
**Parkway's Share of**

 

 

 

 

 

 

 

 
**    Unconsolidated Joint  Ventures:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Real Estate, Net

 $

- 

 $

17,474 

 $

618 

 $

3,346 

 $

13,758 

 $

5,882 

 $

41,078 

 
Mortgage Debt

 $

- 

 $

15,000 

 $

183 

 $

2,520 

 $

7,200 

 $

- 

 $

24,903 

 
Net Investment in Joint  Ventures

 $

- 

 $

2,236 

 $

518 

 $

(74)

 $

5,157 

 $

5,105 

 $

12,942 

 

** **

** **

**December 31, 2004**

 
 

**233   North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
 

**Michigan**

**JV**

**Building**

**JV**

**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 Joint  Ventures:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
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 

 
 

 

 

 

 

 

 

 

 

 

Page 53 of79

       Incomestatement information for the unconsolidated joint ventures is summarized belowfor the years ending December 31, 2005 and 2004 (in thousands):

 

 
**Results of Operations**

 
 

**Year Ended December 31, 2005**

 
 

**233 North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
 

**Michigan**

**JV**

**Building**

**JV**

**JV**

**JV**

**Total**

 
 

 

 

 

 

 

 

 

 
**Unconsolidated  Joint**

** **

** **

** **

** **

** **

** **

** **

 
**     Ventures (at 100%):**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues

 $

1,134 

 $

11,739 

 $

303 

 $

2,781 

 $

9,821 

 $

2,361 

 $

28,139 

 
Operating  Expenses

(619)

(4,934)

(86)

(1,304)

(3,749)

(990)

(11,682)

 
Net  Operating Income

515 

6,805 

217 

1,477 

6,072 

1,371 

16,457 

 
Interest  Expense

(252)

(2,705)

(35)

(699)

(2,566)

(458)

(6,715)

 
Loan  Cost Amortization

(4)

(318)

(3)

(47)

(62)

(7)

(441)

 
Depreciation  and Amortization

(205)

(1,772)

(23)

(447)

(1,508)

(303)

(4,258)

 
Preferred  Distributions

(69)

- 

- 

- 

- 

- 

(69)

 
Net  Income

 $

(15)

 $

2,010 

 $

156 

 $

284 

 $

1,936 

 $

603 

 $

4,974 

 
 

 

 

 

 

 

 

 

 
**Parkway's  Share of**

** **

** **

** **

** **

** **

** **

** **

 
**     Unconsolidated Joint Ventures:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net  Income

 $

(5)

 $

602 

 $

78 

 $

57 

 $

550 

 $

214 

 $

1,496 

 
Depreciation  and Amortization

62 

531 

12 

89 

302 

61 

1,057 

 
Funds  from Operations

 $

57 

 $

1,133 

 $

90 

 $

146 

 $

852 

 $

275 

 $

2,553 

 
 

 

 

 

 

 

 

 

 
Interest  Expense

 $

75 

 $

812 

 $

18 

 $

138 

 $

357 

 $

- 

 $

1,400 

 
Loan Cost Amortization

 $

1 

 $

96 

 $

1 

 $

9 

 $

8 

 $

- 

 $

115 

 
Preferred  Distributions

 $

21 

 $

- 

 $

- 

 $

- 

 $

- 

 $

- 

 $

21 

 
 

 

 

 

 

 

 

 

 
**Other  Supplemental Information:**

 

 

 

 

 

 

 

 
Distributions  from Unconsolidated

 

 

 

 

 

 

 

 
     Joint Ventures

 $

64 

 $

2,754 

 $

40 

 $

150 

 $

1,259 

 $

165 

 $

4,432 

 

** **

 
 

**Year Ended December 31, 2004**

 
 

**233 North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
 

**Michigan**

**JV**

**Building**

**JV**

**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 Joint Ventures:**

** **

** **

** **

** **

** **

** **

** **

 
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

 

 

 

 

 

 

 

 
     Joint Ventures

 $

1,509 

 $

907 

 $

46 

 $

111 

 $

- 

$

- 

 $

2,573 

 

 

Page 54 of79

       Parkway'sshare of the unconsolidated joint ventures' debt is as follows for December 31,2005 and 2004 (in thousands):

                                                                                      

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

** **

**Type of**

** **

** **

**Parkway's**

**Monthly**

**Loan Balance**

**Loan Balance**

**Description**

**Debt Service**

**Interest Rate**

**Maturity**

**Share of Debt**

**Debt Service**

**12/31/05**

**12/31/04**

Mortgage  Notes Payable:

 

 

 

 

 

 

 

      Viad JV

Interest Only

LIBOR + 2.150%

05/12/07

30.00%

 $

74 

 $

15,000 

 $

12,750 

      Wink Building

Amortizing

8.625%

07/01/09

50.00%

5 

183 

225 

      Maitland JV

Interest Only

4.390%

06/01/11

0.00%

- 

- 

- 

      233 North Michigan 

 

 

 

 

 

 

 

           Avenue

Amortizing

7.350%

07/11/11

30.00%

- 

- 

30,040 

      Rubicon JV

Interest Only

4.865%

01/01/12

13.85%

30 

7,200 

7,200 

      Jackson JV

Interest Only

5.840%

07/01/15

20.00%

12 

2,520 

2,254 

 

 

 

 

 

 $

121 

 $

24,903 

 $

52,469 

 

 

 

 

 

 

 

 

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

 

 

 

5.838%

6.982%

****       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 31,2005 are as follows (in thousands):

 

 

**Viad**

**Wink**

**Maitland**

**Rubicon**

**Jackson**

 

**Schedule of Mortgage  Maturities by Year:**

**JV**

**Building**

**JV**

**JV**

**JV**

**Total**

2006

 $

- 

 $

46 

 $

- 

 $

- 

 $

- 

 $

46 

2007

15,000 

50 

- 

- 

- 

15,050 

2008

- 

54 

- 

- 

- 

54 

2009

- 

33 

- 

100 

13 

146 

2010

- 

- 

- 

114 

33 

147 

Thereafter

- 

- 

- 

6,986 

2,474 

9,460 

 

 $

15,000 

 $

183 

 $

- 

 $

7,200 

 $

2,520 

 $

24,903 

**Note D - Non-Core Assets**

****       At December 31, 2005, Parkway's investment in non-core assets consisted of 12 acres of land in New Orleans, Louisianawith a book value of $1.5 million or .1% of total assets.  During the quarterending June 30, 2005, Parkway recorded an impairment loss of $340,000 on theland, which is included in the net gain on real estate.  The loss was computedbased on market research and comparable sales in the area. However, during thequarter ending September 30, 2005, the city of New Orleans sustainedconsiderable damage as a result of Hurricane Katrina.  Currently, the Companyis unable to assess the damage, if any, to the land or whether the value of theland is impaired.  Therefore, no additional impairment loss has been recorded. 

**Note E - Notes Payable**

**Notes Payable to Banks**

       At December 31, 2005, Parkway had $150.4million outstanding under a three-year $190 million unsecured revolving creditfacility with a consortium of 10 banks with Wachovia Capital Markets, LLC asSole Lead Arranger and Sole Book Runner, Wachovia Bank, National Association asAdministrative Agent, PNC Bank, National Association as Syndication Agent, andother banks as participants (the "$190 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 $190 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 5.3% and 3.1% at December 31, 2005 and 2004,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.

 

Page 55 of 79

       The $190 million line maturesFebruary 6, 2007 and contains a one-year extension option available atmaturity.  The line is expected to fund acquisitions of additional investmentsand has a current interest rate of 30-day LIBOR rate plus 132.5 basis points. The Company paid a facility fee of $170,000 (10 basis points) and originationfees of $556,000 (32.71 basis points) upon closing of the loan agreement andpays an annual administration fee of $35,000.  The Company also pays fees onthe unused portion of the line based upon overall Company leverage, with thecurrent rate set at 12.5 basis points.

       The $15 million line matures January31, 2007, is unsecured and is expected to fund the daily cash requirements ofthe Company'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, 2006.  The proceedsof the loan were used to finance the construction of the City Centre Garage,which was completed in 2005.

 

       Toprotect against the potential for rapidly rising interest rates, the Companyentered into a total of four interest rate swap agreements in 2005 and 2004.  TheCompany designated the swaps as cash flow hedges of the variable interest rateson the Company's borrowings under the $190 million line.  Accordingly, changesin the fair value of the swap are recognized in accumulated other comprehensiveincome until the hedged item is recognized in earnings.  TheCompany's interest rate hedge contracts as of December 31, 2005 and 2004 aresummarized as follows (in thousands):

 

** **

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Total**

**Market  Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**Interest**

**December  31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**Rate**

**2005**

**2004**

Swap

$20,000

12/31/05

1- Month  LIBOR

3.183%

4.508%

 $

- 

 $

(33)

Swap

$40,000

06/30/06

1- Month  LIBOR

3.530%

4.855%

245 

(193)

Swap

$40,000

12/31/08

1- Month  LIBOR

4.360%

5.685%

426 

- 

Swap

$20,000

12/31/08

1- Month  LIBOR

4.245%

5.570%

234 

- 

 $

905 

 $

(226)

Page 56 of79

**Mortgage notes payable**

       A summary of fixed rate mortgagenotes payable at December 31, 2005 and 2004 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**

**2005**

**2004**

Citrus  Center

6.000%

$    164

08/01/07

$  31,971

$  19,011

$  19,809

Teachers  Insurance and

    Annuity Association  (12 properties) (5)

6.945%

-

07/01/08

-

-

66,857

Capital City  Plaza

3.670%

298

09/01/08

60,967

46,065

47,894

John Hancock Facility (3 properties)

4.830%

97

03/01/09

29,010

23,536

24,000

John Hancock Facility (3 properties)

5.270%

81

05/01/10

23,010

18,800

18,800

Moore Building Associates LP

7.895%

124

06/01/10

22,877

12,988

13,423

Capitol Center

8.180%

165

09/01/10

35,455

19,320

19,697

One Jackson Place

7.850%

152

10/10/10

17,057

12,487

13,233

Squaw Peak 

4.920%

261

12/01/10

42,104

37,981

39,209

Forum I (3)

5.250%

91

06/01/11

18,272

12,630

-

Maitland 200  (2)

4.390%

-

07/01/11

-

-

19,275

Wells Fargo

4.390%

35

07/01/11

12,122

9,675

9,675

233 N.  Michigan (1)

4.940%

763

07/11/11

167,843

108,272

-

400 North  Belt

8.250%

65

08/01/11

10,463

3,506

3,981

Woodbranch

8.250%

32

08/01/11

4,333

1,688

1,917

Bank of  America Plaza

7.100%

146

05/10/12

33,582

19,237

19,577

One Park 10  Plaza

7.100%

64

06/01/12

6,302

9,201

9,303

Maitland 100  (4)

4.920%

36

10/07/12

13,339

8,820

-

555  Winderley Place (4)

4.920%

34

10/07/12

12,367

8,340

-

First  Tennessee Plaza

7.170%

136

12/15/12

28,130

8,978

9,932

Teachers  Insurance and

    Annuity  Association (5 properties) (5)

6.210%

565

01/01/16

109,698

86,000

-

Morgan  Keegan Tower

7.620%

163

10/01/19

30,127

16,735

17,393

$3,472

$709,029

$483,270

$353,975

(1)  Parkway purchased an additional 70% interest in 233 North Michigan raising the Company'stotal investment to 100%.  In accordance with GAAP, Parkway began including 233North Michigan in its consolidated financial statements January 14, 2005. Parkway assumed its proportionate share of a $100 million first mortgage with a7.21% interest rate as part of the purchase.  The mortgage has been recorded at$111.7 million to reflect the fair value of the financial instrument based onthe rate of 4.94% on the date of purchase.

(2)  On June 16, 2005 Parkway sold an 80% joint venture interest inMaitland 200.  The mortgage was assumed by the joint venture.

(3)  The Forum I mortgage in the amount of $11.7 million, of which $5million is recourse debt, was assumed with the purchase of the building on July 26, 2005.  The mortgage, whichhas a stated rate of 7.31%, was recorded at $12.9 million to reflect the fairvalue of the financial instrument based on the rate of 5.25% on the date ofpurchase.

(4)  In connection with the purchase of Maitland 100 and 555 Winderley Place on behalf of thediscretionary fund with OPERS, the fund placed a $17.2 million, 7-year firstmortgage.  Payments during the first five years of the mortgage term will be onan interest-only basis, and the loan includes provisions for two one-yearextensions.  Parkway's proportionate share of this mortgage is 25%.

Page 57 of 79

(5)  Parkway refinanced the Teachers ("TIAA") mortgage for $86million in December 2005.  This loan replaces the Company's previousindebtedness with TIAA which was due to expire on July 1, 2008, carried aninterest rate of 6.945%, and had an outstanding balance of $61,396 as ofDecember 20, 2005.  The new loan matures in January of 2016, carries a fixedinterest rate of 6.21%, and amortizes over a 25-year period.  Additionally, thebuildings securing the mortgage were reduced from 12 properties to 5 propertieswhich now include Hillsboro I-IV, Hillsboro V, Peachtree Dunwoody Pavilion, OneCommerce Green & Comerica Bank Building.

The aggregate annual maturities of mortgage notes payable at December 31, 2005are as follows (in thousands):

 

2006

$15,346

2007

33,927

2008

56,853

2009

36,841

2010

98,145

Subsequently

242,158

$483,270

**Note F - DiscontinuedOperations**

       On September 9, 2005, the Company sold The Park on Camelback,a 102,000 square foot office property located in Phoenix, Arizona, for $17.5 million and recorded a gain of $4.4 million. On September 14, 2005, the Company sold 250 Commonwealth, a46,000 square foot office property located in Greenville, South Carolina, for $4 million and recorded a loss of$238,000.  The net gain and all current and prior period income from the officeproperties have been classified as discontinued operations.

****       The amount of revenue and expensefor these two office properties reported in discontinued operations for theyears ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

** **

** **

**Year Ended  December 31**

** **

**2005**

** **

**2004**

** **

**2003**

Revenues

Income from office and parking properties

$

1,925

$

2,714

$

2,370

** **

1,925

2,714

2,370

Expenses

Office and parking properties:

        Operating expense

801

1,165

1,083

        Depreciation and amortization

343

524

273

** **

1,144

1,689

1,356

Income from discontinued operations

781

1,025

1,014

Gain on sale of real estate from discontinued operations

4,181

-

-

Total discontinued operations

$

4,962

$

1,025

$

1,014

**Note G - 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 corporatelevel federal 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 Company completedits reorganization into an umbrella partnership REIT ("UPREIT")structure under which substantially all of the Company's office building realestate assets are owned by an operating partnership, Parkway Properties LP (the"Operating Partnership"). Presently, substantially all interests inthe Operating Partnership are owned by the Company and a wholly-ownedsubsidiary.

 

Page 58 of 79

       At December 31, 2005, the Company hadnet operating loss ("NOL") carryforwards for federal income taxpurposes of $8,881,000 which expire at various dates through 2018.  The Companyexpects to utilize the remaining NOL by December 2008.  The utilization ofthese 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, 2005, 2004 and 2003 (in thousands):

 

**2005**

**2004**

**2003**

**Estimate**

**Actual**

**Actual**

GAAP net income from REIT  operations (1) 

$20,807 

$29,515 

$43,181 

GAAP to tax adjustments:

     Depreciation and  amortization

17,696 

8,623 

3,642 

     Gains and losses from  capital transactions

(2,636)

(1,504)

(4,485)

     Restricted stock  amortization

533 

783 

694 

     Restricted stock released  to shareholders

- 

- 

(2,715)

     Stock options exercised

(1,161)

(3,604)

(2,576)

     Other differences

8 

(745)

(362)

Taxable income before  adjustments

35,247 

33,068 

37,379 

Less:  NOL carryforward

- 

- 

- 

Adjusted taxable income subject  to 90% dividend requirement

$35,247 

$33,068 

$37,379 

(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, 2005, 2004 and 2003 (in thousands):

**2005**

**2004**

**2003**

**Estimate**

**Actual**

**Actual**

Cash distributions paid

$43,502 

$39,568 

$37,792 

Less:  Dividends on deferred  compensation plan shares

(330)

(337)

(333)

Less:  Return of capital

(7,925)

(6,163)

(80)

Dividends paid deduction

$35,247 

$33,068 

$37,379 

       The following characterizesdistributions paid per common share for the years ending December 31, 2005, 2004and 2003:

 

**2005**

**2004**

**2003**

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$1.98

76.2%

$2.00

76.9%

$2.32

89.2%

Post May 5, 2003 capital gain

.13

5.0%

.04

1.5%

.16

6.2%

Unrecaptured Section 1250 gain

.03

1.1%

.14

5.4%

.12

4.6%

Return of capital

.46

17.7%

.42

16.2%

-

-

$2.60

100.0%

$2.60

100.0%

$2.60

100.0%

**Note H - 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.

 

Page 59 of 79

       Effective January 1, 2006, Parkwaywill begin recording compensation expense based on the grant-date fair value ofemployee stock options in accordance with SFAS No. 123R, "Share-BasedPayment."  Parkway does not anticipate that the adoption of SFAS No. 123R willhave a significant impact on the Company's consolidated financial statementssince Parkway has begun granting restricted stock and/or deferred incentiveshare units instead of stock options to employees of the Company.  Thecompensation expense associated with stock options to be recognized in 2006 iscurrently estimated at $30,000.

       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 35,256 and 28,196 shares in 2005 and 2004, respectively), providedthat the number of shares available for grant under this plan and the 2001Directors' Plan shall not exceed 11.5% of the shares outstanding (less therestricted shares issued and outstanding) plus the shares issuable on the conversionof outstanding convertible debt and equity securities or the exercise ofoutstanding warrants or other rights to purchase common shares.  The 2003 Planhas 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.  

       As of December 31, 2005, 124,000 shares of restricted stock have beenissued to officers of the Company in connection with the VALUE SQUARE Plan. The restricted shares are valued at $4.5 million ($36.16 per share) and vest theearlier of seven years from grant date or effective December 31, 2005 if certaingoals of the VALUE SQUARE Plan were met. The VALUE SQUARE Plan had as its goal to achieve FFO growththat is 10% higher than that of the NAREIT Office Index peer group. Furthermore, for the early vesting to occur, the Company had to achievepositive FFO growth during the three years of the plan.  Based on the resultsof the Company and the results of other REITs in the Office Index peer group,Parkway met the equity return goal of the plan.  However, the Company did notachieve positive FFO growth during the VALUE SQUARE Plan and, therefore,the early vesting of the restricted stock did not occur.  The value of therestricted shares will continue to be amortized ratably over the seven-yearperiod. As of December 31, 2005, 13,828 deferred incentive share units weregranted to employees of the Company.  The deferred incentive share units arevalued at $627,000 ($45.38 per share), and the units vest at the end of fouryears.  Compensation expense related to the restricted stock and deferredincentive share units of $533,000, $783,000 and $694,000 was recognized in 2005,2004 and 2003, respectively.

 

       Asummary of the Company's restricted stock and deferred incentive share unitactivity under the 2003 Equity Incentive Plan is as follows:

 

** **

**Weighted**

**Deferred**

**Weighted**

**Restricted**

**Average**

**Incenetive**

**Average**

**Shares**

**Price**

**Share Units**

**Price**

Granted

150,000 

$35.83

5,246 

$44.84

Forfeited

(8,000)

35.19

- 

-

**Outstanding at December 31, 2003**

142,000 

35.86

5,246 

44.84

Granted

1,500 

46.72

5,875 

46.72

Forfeited

-

-

(1,634)

45.02

**Outstanding at December 31, 2004**

143,500 

35.97

9,487 

35.97

Granted

500 

50.57

6,145 

44.61

Forfeited

(20,000)

35.19

(1,804)

45.90

**Outstanding at December 31, 2005**

124,000 

$36.16

13,828 

$45.38

 

Page 60 of 79

       Pro forma information regarding netincome and net income per share is required by SFAS No. 123R, 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 2005, 2004 and 2003: risk-freeinterest of 4.3%  4.5%, and 4.0%, respectively; dividend yield of 5.55%, 5.71%and 6.41%, respectively; volatility factor of the expected market price of theCompany's common stock of .196, .194 and .129, respectively; and aweighted-average expected life of the options of five years for the 1994 StockOption Plan in 2005, 2004 and 2003; five years for 2005, 2004 and 2003 for the1991 Directors' Stock Option Plan; and five years for 2005, 2004 and 2003, forthe 2001 Directors' Stock Option Plan.  Because the Company's employee stockoptions 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 modeldoes not necessarily provide a reliable single measure of the fair value of itsemployee stock options.  The weighted average fair value of options grantedduring 2003 was $2.01.  No options were granted during 2004 and 2005.

       For purposes of pro formadisclosures, the estimated fair value of the options granted in 2003 isamortized to expense over the options' vesting period.  The Company's pro formainformation is detailed in Note A - Summary of Significant Accounting Policiesunder 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, 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

Granted                                  

- 

- 

- 

- 

- 

- 

Exercised                                

(74,412)

27.97

(2,250)

10.17

- 

- 

Forfeited                                       

(18,270)

34.72

- 

-

- 

- 

**Outstanding at December  31, 2005**

300,675 

$30.72

35,250 

$29.95

45,300

$37.31

 

       Following is asummary of the status of options outstanding at December 31, 2005:
 
**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**

$15.17 - $20.23

3,973

0.5  years

$15.75

3,973

$15.75

$20.24 - $25.29

15,375

0.5  years

$21.00

15,375

$21.00

$25.30 - $30.34

96,017

3.7  years

$29.11

96,017

$29.11

$30.35 - $35.40

159,640

3.9  years

$32.16

156,381

$32.09

$35.41 - $40.46

25,670

6.7  years

$35.91

16,151

$35.91

**1991 Directors Stock Option Plan**

$10.00 - $20.00

2,250

0.5  years

$16.00

2,250

$16.00

$20.01 - $30.00

10,500

3.8  years

$28.78

10,500

$28.78

$30.01 - $36.00

22,500

3.2  years

$31.89

22,500

$31.89

**2001 Directors Stock  Option Plan**

$30.00 - $35.00

9,000

5.4  years

$30.70

9,000

$30.70

$35.01 - $40.00

29,800

7.0  years

$37.83

29,800

$37.83

$40.01 - $45.00

6,500

7.8  years

$44.10

6,500

$44.10

** **

**Note I - 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.

 

Page 61 of 79

**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 operating deficitsup to an aggregate of $1 million.

**Note J - 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 shares of Series B Convertible Preferred stockat December 31, 2005 and 2004.  The balance of Series B Convertible Preferredstock was $28.1 million at December 31, 2005 and 2004.

**Note K - Other Matters**

****      Through the Company's DividendReinvestment and Stock Purchase Plan ("DRIP Plan"), 41,113 common shares weresold during 2005.  Net proceeds received on the issuance of shares were $1.9million, which equates to an average net price per share of $46.19 at adiscount of 1%.  The proceeds were used to reduce amounts outstanding under theCompany'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 theright to convert each share of Series B Convertible Preferred into a share ofParkway common stock.  In addition to the issuance of Series B preferred stock,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.  Noshares of Series B preferred stock were converted into shares of Parkway commonstock during 2005.  As of December 31, 2005, there were 803,499 shares ofSeries B preferred stock outstanding.  Dividends of $2.3 million and $5.2 millionwere declared on the stock in 2005 and 2004, respectively.  There is no publicmarket for Parkway's Series B Cumulative Convertible Preferred stock.  

       In connection with the Capital CityPlaza purchase in 2004, the limited liability company that owns the buildingissued $15.5 million in preferred membership interests to the seller.  Thepreferred membership interests pay the seller a 7% coupon rate and were issuedto accommodate their tax planning needs.  The seller has the right to redeem$5.5 million 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 $4.8 million of thepreferred membership interests.  As of December 31, 2005 and 2004, the balanceof the subsidiary redeemable preferred interests was $10.7 million.

       On January 10, 2005, the Company sold 1.6 million shares of common stock in a public offering in which CitigroupGlobal Markets, Inc. was the underwriter for net proceeds of approximately $76million or $47.50 per share.  The proceeds were used towards the acquisition ofthe 70% interest held by the Company's joint venture partner in the propertyknown as 233 North Michigan Avenue in Chicago, IL and to reduce outstandingvariable rate 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 expired on September 6, 2005 and the Company did not renew or extendthe Shareholder Rights Agreement.

** **

       On February 9, 2006, the Board of Directors authorized the repurchase of up to 1million shares of Parkway's outstanding common stock through August 2006.  Theshares may be purchased in the open market or in privately negotiatedtransactions, and at times and in amounts that the Company deems appropriate.

**Supplemental Profit and Loss Information**

       Included in operating expenses aretaxes, principally property taxes, of $24.6 million, $15.7 million and $14.6million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

Page 62 of 79

**Supplemental Cash Flow Information and Schedule of Non-Cash Investing andFinancing Activity**

** **

** **

**Year Ended  December 31**

** **

**2005**

**2004**

**2003**

(In thousands)

**Supplemental cash flow  information:**

         Interest  paid

$  33,374 

$24,474 

$18,735

         Income  taxes paid (refunded)

(86)

(72)

118

**Supplemental schedule of  non-cash investing    **

**         and  financing activity:**

         Mortgages  assumed in purchases

124,530 

88,677 

21,153

         Mortgage  transferred to joint venture

(19,275)

- 

-

         Restricted  shares and deferred incentive

               share  units issued (forfeited)

(488)

271 

5,328

         Shares  issued in lieu of Directors' fees

193 

138 

76

         Issuance  of subsidiary redeemable

               preferred  membership interests

- 

15,491 

-

         Original  issue costs associated with redemption

               of  preferred stock

- 

- 

2,619

** **

**Rents Receivable and OtherAssets**

** **

** **

**December 31**

** **

**2005**

**2004**

** **

(In thousands)

Rents receivable  

$  2,473 

$     948 

Allowance for doubtful accounts

(450)

(353)

Straight line rent receivable

14,106 

10,369 

Other receivables

5,619 

3,356 

Lease costs (net of accumulated  amortization of

     $12,246 and $9,802,  respectively)

22,090 

12,180 

Loan costs (net of accumulated  amortization of

     $2,695 and $2,302,  respectively)

3,667 

3,695 

Escrow and other deposits

16,537 

9,922 

Prepaid items

3,104 

528 

Other assets

2,334 

1,803 

$69,480 

$42,448 

** **

**In****tangible 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**

** **

**2005**

**2004**

** **

(In thousands)

Lease in place value

$52,732 

$37,306 

    Accumulated  amortization

(6,105)

(2,476)

Above market lease value

17,283 

4,265 

    Accumulated  amortization

(3,749)

(1,061)

$60,161 

$38,034 

** **

Page 63 of 79

**Accounts Payable and Other Liabilities**

** **

** **

**December 31**

** **

**2005**

**2004**

** **

(In thousands)

Office property payables:

     Accrued  expenses and accounts payable

$16,412 

$15,643 

     Accrued  property taxes

17,614 

8,057 

     Security  deposits

3,371 

2,479 

     Below  market lease value

9,563 

3,739 

     Accumulated  amortization - below market

          lease  value

(2,558)

(965)

Corporate payables

1,378 

2,733 

Deferred compensation plan  liability

5,270 

5,212 

Dividends payable

1,787 

2,264 

Accrued payroll

1,639 

1,931 

Interest payable

2,152 

1,375 

$56,628 

$42,468 

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

**Cash and cash equivalents**

       The carrying amounts for cashand cash equivalents approximated fair value at December 31, 2005 and 2004.

**Mortgage loans**

       The fair value of the mortgage notespayable are estimated using discounted cash flow analysis, based on theCompany's current incremental borrowing rates for similar types ofborrowing arrangements.  The aggregate fair value of the mortgage notes payablewithout recourse at December 31, 2005 was $494 million as compared to itscarrying amount of $483.3 million.  The aggregate fair value of the mortgagenotes payable without recourse at December 31, 2004 was $366.3 million ascompared to its carrying amount of $354 million.

**Note M - Segment Information**

       Parkway's primary business is theownership and operation of office properties in the Southeastern andSouthwestern United States and Chicago. The Company accounts for each officeproperty or groups of related office properties as an individual operatingsegment.  Parkway has aggregated its individual operating segments into asingle reporting segment due to the fact that the individual operating segmentshave 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 economic performancebased on current supply and demand conditions.  The individual operatingsegments are also similar in that revenues are derived from the leasing ofoffice space to customers and each office property is managed and operatedconsistently in accordance with Parkway's standard operating procedures.  Therange and type of customer uses of our properties is similar throughout ourportfolio regardless of location or class of building and the needs andpriorities of our customers do not vary from building to building.  Therefore,Parkway's management responsibilities do not vary from location to locationbased 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.

 

Page 64 of 79

       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.

** **

Page 65 of 79

** **

** **

       Thefollowing is a reconciliation of FFO and net income available to commonstockholders for office properties and total consolidated entities for theyears ending December 31, 2005, 2004 and 2003.  Amounts presented as"Unallocated and Other" represent primarily income and expense associated withproviding management services,  acquisition fees, corporate general andadministration expense, interest expense on unsecured lines of credit andpreferred dividends.

** **

** **

**As of or for the year ended December 31, 2005**

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues  (a)

 $

192,645 

 $

- 

 $

192,645 

Property operating expenses  (b)

(90,121)

- 

(90,121)

Property net operating  income from continuing operations

102,524 

- 

102,524 

 

 

 

 

Management company income

- 

2,997 

2,997 

Other income

- 

255 

255 

Interest expense (c)

(28,326)

(7,118)

(35,444)

Management company expenses

- 

(607)

(607)

General and administrative  expenses

- 

(4,468)

(4,468)

Other expense

- 

(5)

(5)

Equity in earnings of  unconsolidated joint ventures

1,496 

- 

1,496 

Adjustment for depreciation  and amortization - unconsolidated 

 

 

 

    joint  ventures

1,057 

- 

1,057 

Adjustment for depreciation  and amortization - discontinued operations

343 

- 

343 

Adjustment for minority  interest - real estate partnerships

(1,206)

- 

(1,206)

Gain (loss) on real estate

48 

(340)

(292)

Income from discontinued  operations

781 

- 

781 

Dividends on preferred stock

- 

(4,800)

(4,800)

Dividends on convertible  preferred stock

- 

(2,346)

(2,346)

Funds from operations  available to common stockholders

76,717 

(16,432)

60,285 

 

 

 

 

Depreciation and  amortization

(51,753)

- 

(51,753)

Depreciation and  amortization - unconsolidated joint ventures

(1,057)

- 

(1,057)

Depreciation and  amortization - discontinued operations

(343)

- 

(343)

Depreciation and  amortization - minority interest - real estate partnerships

1,019 

- 

1,019 

Gain on sale of joint  venture interest

1,331 

- 

1,331 

Gain on sale of real estate  from discontinued operations

4,181 

- 

4,181 

Minority interest - unit  holders

- 

(2)

(2)

Net income available to  common stockholders

 $

30,095 

 $

(16,434)

 $

13,661 

 

 

 

 

Total assets

 $

1,181,263 

 $

7,079 

 $

1,188,342 

 

 

 

 

Office and parking  properties

 $

1,040,929 

 $

- 

 $

1,040,929 

 

 

 

 

Investment in unconsolidated  joint ventures

 $

12,942 

 $

- 

 $

12,942 

 

 

 

 

Capital expenditures

 $

32,441 

 $

- 

 $

32,441 

 

 

 

 

(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, utilities, insurance, contract services,  repairs and maintenance, personnel expenses and property operating expenses.

 

 

 

 

(c)  Interest expense for office properties  represents interest expense on property secured mortgage debt and interest on  subsidiary redeemable preferred membership interests.  It does not include  interest expense on unsecured lines of credit.

 

Page 66 of 79

** **

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

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues (a)

 $

157,792 

 $

- 

 $

157,792 

Property operating expenses (b)

(72,322)

- 

(72,322)

Property net operating income from continuing operations

85,470 

- 

85,470 

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 

Adjustment for depreciation and amortization -  discontinued

    operations

524 

- 

524 

Adjustment for minority interest - real estate  partnerships

(527)

- 

(527)

Gain on note receivable

- 

774 

774 

Income from discontinued operations

1,025 

- 

1,025 

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

(36,319)

- 

(36,319)

Depreciation and amortization - unconsolidated joint  ventures

(2,345)

- 

(2,345)

Depreciation and amortization - discontinued operations

(524)

- 

(524)

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, utilities, insurance,  contract services, repairs and maintenance, personnel expenses and property  operating expenses.

(c)  Interest  expense for office properties represents interest expense on property secured  mortgage debt and interest on subsidiary redeemable preferred membership  interests.  It does not include interest expense on the unsecured lines of  credit.

 

Page 67 of 79

** **

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

** **

**Office**

**Unallocated**

** **

** **

**Properties**

**and Other**

**Consolidated**

** **

** **

(In thousands)

** **

** **

** **

** **

** **

Property operating revenues (a)

 $

139,826 

 $

- 

 $

139,826 

Property operating expenses (b)

(62,279)

- 

(62,279)

Property net operating income from continuing operations

77,547 

- 

77,547 

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 

Adjustment for depreciation and amortization -  discontinued

    operations

273 

- 

273 

Gain on sale of land

- 

362 

362 

Income from discontinued operations

1,014 

- 

1,014 

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

(27,757)

- 

(27,757)

Depreciation and amortization - unconsolidated joint  ventures

(2,030)

- 

(2,030)

Depreciation and amortization - discontinued operations

(273)

- 

(273)

Deferred gain income  

- 

26 

26 

Gain on sale of joint venture interests and real estate

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 

 $

- 

 $

728,685 

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, utilities, insurance,  contract services, repairs and maintenance, personnel expenses 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.

 

Page 68 of 79

**Note N - Selected QuarterlyFinancial Data (Unaudited):**

       Summarized quarterly financial datafor the years ended December 31, 2005 and 2004 are as follows (in thousands,except per share data):

 

**2005**

**First**

**Second**

**Third**

**Fourth**

Revenues  (other than gains)

 $

47,775 

 $

49,308 

 $

48,350 

 $

50,464 

Expenses

(42,015)

(46,675)

(44,605)

(49,103)

Equity  in earnings of unconsolidated joint ventures

515 

250 

330 

401 

Gain (loss) on sale of joint venture  interests

      and  real estate

- 

991 

(26)

74 

Minority  interest - unit holders

(1)

- 

- 

(1)

Minority  interest - real estate partnerships

(305)

(16)

20 

114 

Income  from continuing operations

5,969 

3,858 

4,069 

1,949 

Income  from discontinued operations

307 

220 

250 

4 

Gain  on sale of real estate from discontinued operations

- 

- 

4,181 

- 

Net  income

6,276 

4,078 

8,500 

1,953 

Dividends  on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Dividends  on convertible preferred stock

(587)

(586)

(586)

(587)

Net  income available to common stockholders

 $

4,489 

 $

2,292 

 $

6,714 

 $

166 

Net  income per common share:

      Basic

 $

0.32 

 $

0.16 

 $

0.50 

 $

0.01 

      Diluted

 $

0.32 

 $

0.16 

 $

0.50 

 $

0.01 

Dividends  per common share

 $

0.65 

 $

0.65 

 $

0.65 

 $

0.65 

Weighted  average shares outstanding:

     Basic

13,907 

14,080 

14,035 

14,154 

     Diluted

14,095 

14,250 

14,216 

14,281 

**2004**

**First**

**Second**

**Third**

**Fourth**

Revenues  (other than gains)

 $

36,707 

 $

39,995 

 $

41,889 

 $

43,070 

Expenses

(31,784)

(33,725)

(37,387)

(36,406)

Equity  in earnings of unconsolidated joint ventures

743 

367 

359 

228 

Gain  on note receivable, sale of joint venture interests

      and  real estate

774 

- 

- 

3,535 

Minority  interest - unit holders

- 

(1)

(1)

- 

Minority  interest - real estate partnerships

22 

101 

(31)

35 

Income  from continuing operations

6,462 

6,737 

4,829 

10,462 

Income  from discontinued operations

268 

221 

322 

214 

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

 $

0.38 

 $

0.40 

 $

0.23 

 $

0.71 

      Diluted

 $

0.37 

 $

0.39 

 $

0.23 

 $

0.70 

Dividends  per common share

 $

0.65 

 $

0.65 

 $

0.65 

 $

0.65 

Weighted  average shares outstanding:

     Basic

10,864 

11,085 

11,330 

11,794 

     Diluted

11,095 

11,258 

11,528 

12,006 

 

Page 69 of 79

**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 Entities**

**Cost & Expenses**

**Uncollectible**

**Joint Ventured**

**Of Period**

 

 

 

 

 

 

 

Allowance for Doubtful Accounts:

 

 

 

 

 

Year Ended:

 

 

 

 

 

 

December 31, 2005

353

210

34 

(137)

(10)

450

December 31, 2004

376

131

169 

(312)

(11)

353

December 31, 2003

742

-

(2)

(360)

(4)

376

 

Page 70 of 79

**SCHEDULEIII - REAL ESTATE AND ACCUMULATED DEPRECIATION**

**DECEMBER 31, 2005**

(In thousands)

 
 
 
 
 
** **
** **
**Initial Cost to the Company**
** **
** **
** **
** **
** **
** **
**Subsequent**
** **
** **
** **
** **
**Building and**
**Capitalized**
**Total**
**Description**
**Encumbrances**
**Land**
**Improvements**
**Costs**
**Real Estate**
**Office and Parking Properties:**
** **
** **
** **
** **
** **
  Arizona

 

 

 

 

 

     Squaw  Peak Corp Center

$  37,982

$  5,800

$  35,169

$    3,051

$     44,020

     Mesa  Corporate Center

-

3,353

15,251

784

19,388

  Florida

 

 

 

 

 

     Maitland  100

8,820

2,667

10,329

706

13,702

     555  Winderley

8,340

2,100

9,837

742

12,679

     Hillsboro  Center V

11,000

1,325

12,249

2,312

15,886

     Hillsboro  Center I-IV

7,500

1,129

7,734

1,678

10,541

     Wachovia  Plaza

-

785

18,071

2,427

21,283

     Central  Station

-

-

16,511

-

16,511

     Citrus  Center

19,011

4,000

26,757

3,980

34,737

     Stein  Mart Building

-

1,653

16,654

1,602

19,909

     Riverplace  South

-

2,316

5,412

1,047

8,775

  Georgia

 

 

 

 

 

     Waterstone

6,400

859

7,207

1,710

9,776

     Roswell  North

-

594

4,072

1,472

6,138

     Meridian

-

994

9,547

1,992

12,533

     Hightower

-

530

6,201

1,657

8,388

     Pavilion  Center

-

510
4,005

805

5,320

     Peachtree  Dunwoody Pavilion

31,500

9,373
24,580

4,884

38,837

     Capital  City Plaza

46,065
3,625
58,087

2,157

63,869

  Illinois

 

 
 

 

 

     233  North Michigan

98,126

18,181
133,846

22,897

174,924

  Mississippi

 

 
 

 

 

     One  Jackson Place

22,633

1,799
19,730

8,786

30,315

     City  Centre

-

1,662

19,950

9,763

31,375

     111  Capitol Building

-

915

10,830

5,249

16,994

  North  Carolina

 

 

 

 

 

     Charlotte  Park

-

3,120

12,911

4,770

20,801

  South  Carolina

 

 

 

 

 

     Tower  at 1301 Gervais

-

316

20,350

3,752

24,418

     Atrium  at Stoneridge

-

572

7,775

1,237

9,584

     Capitol  Center

19,320

973

37,232

5,028

43,233

  Tennessee

 

 

 

 

 

     Forum  II & III

-

2,634

13,886

1,935

18,455

     First  Tennessee Plaza

8,978

457

29,499

6,486

36,442

     Morgan  Keegan Tower

16,735

-

36,549

2,215

38,764

     Cedar  Ridge

-

741

8,631

1,977

11,349

     Falls  Building

-

-

7,628

1,653

9,281

     Toyota  Center

12,988

190

25,017

69

25,276

     Toyota  Garage

-

727

7,939

207

8,873

     Bank  of America Plaza

19,237

1,464

28,712

6,944

37,120

     Forum  I

12,629

4,737

12,488

1,349

18,574

  Texas

 

 

 

 

 

     One  Park Ten Plaza

9,201

606

6,149

3,069

9,824

     400  Northbelt

3,506

419

9,655

3,327

13,401

     Woodbranch

1,688

303

3,805

2,238

6,346

     Richmond  Centre

-

273

2,567

2,017

4,857

     Ashford  II

-

163

2,069

841

3,073

     Sugar  Grove

7,000

364

7,385

2,812

10,561

     Honeywell

-

856

15,175

1,157

17,188

     Schlumberger  Building

-

1,013

11,102

2,356

14,471

     One  Commerce Green

21,000

489

37,103

3,924

41,516

     Comerica  Bank Building

15,000

1,921

21,221

2,591

25,733

     550  Greens Parkway

5,400

1,006

8,014

169

9,189

     1717  St. James Place

5,051

430

6,341

1,206

7,977

     5300  Memorial

10,542

682

11,716

1,940

14,338

     Town  & Country

7,943

436

7,674

2,253

10,363

     Wells  Fargo Building

9,675

2,600

8,247

2,067

12,914

  Virginia

 

 

 

 

 

     Glen  Forest Building 

-

537

8,503

1,358

10,398

     Lynnwood  Plaza

-

985

8,306

2,299

11,590

     Moorefield  II

-

469

4,752

422

5,643

     Moorefield  III

-

490

5,135

783

6,408

     Town  Point Center

-

-

10,756

2,762

13,518

     Westvaco  Building

-

1,265

11,825

2,027

15,117

     Greenbrier  Tower I

-

584

7,503

1,689

9,776

     Greenbrier  Tower II

-

573

7,354

1,766

9,693

     Winchester  Building

-

956

10,852

2,006

13,814

     Moorefield  I

-

260

3,698

829

4,787

**Total Real Estate  Owned**
$483,270
$97,781
$957,553
$165,231
$1,220,565
 

Page 71 of 79

****

 

**SCHEDULE  III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (Continued)**
**DECEMBER  31, 2005**
(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:**
 
 
 
 
 
 
 
 
  Arizona

 

 

 

 

 

 

 

 

     Squaw  Peak Corp Center

$  5,800

$   38,220

$     44,020

$    1,915

$    42,105

2004

1999/2000

(3)

     Mesa  Corporate Center

3,353

16,035

19,388

21

19,367

2005

2000

(3)

  Florida

 

 

 

 

 

 

 

 

     Maitland  100

2,667

11,035

13,702

132

13,570

2005

1981

(3)

     555  Winderley

2,100

10,579

12,679

108

12,571

2005

1985

(3)

     Hillsboro  Center V

1,325

14,561

15,886

3,461

12,425

1998

1985

(3)

     Hillsboro  Center I-IV

1,129
9,412
10,541
2,273
8,268
1998
1985
(3)

     Wachovia  Plaza

785

20,498

21,283

4,436

16,847

1998

1985

(3)

     Central  Station

-

16,511

16,511

2,239

14,272

2000

1990

(3)

     Citrus  Center

4,000

30,737

34,737

2,766

31,971

2003

1971

(3)

     Stein  Mart Building

1,653

18,256

19,909

534

19,375

2005

1985

(3)

     Riverplace  South

2,316

6,459

8,775

342

8,433

2005

1981

(3)

  Georgia

 

 

 

 

 

 

 

 

     Waterstone

859

8,917

9,776

2,767

7,009

1995

1987

(3)

     Roswell  North

594
5,544
6,138
1,654
4,484
1996
1986
(3)

     Meridian

994
11,539
12,533
3,048
9,485
1997
1985
(3)

     Hightower

530

7,858

8,388

2,136

6,252

1997

1983

(3)

     Pavilion  Center

510
4,810
5,320
1,125
4,195
1998
1984
(3)

     Peachtree  Dunwoody Pavilion

9,373

29,464

38,837

2,331

36,506

2003

1976/80

(3)

     Capital  City Plaza

3,625

60,244

63,869

2,902

60,967

2004

1989

(3)

  Illinois

 

 

 

 

 

 

 

 

     233  North Michigan

18,181

156,743

174,924

7,082

167,842

2005

(2) 2000

(3)

  Mississippi

 

 

 

 

 

 

 

 

     One  Jackson Place

1,799

28,516

30,315

13,258

17,057

1986

1986

(3)

     City  Centre

1,662

29,713

31,375

5,172

26,203

1995

(2) 1987/2005

(3)

     111  Capitol Building

915

16,079

16,994

4,296

12,698

1998

1983

(3)

  North  Carolina

 

 

 

 

 

 

 

 

     Charlotte  Park

3,120

17,681

20,801

5,282

15,519

1997

1982/84/86

(3)

  South  Carolina

 

 

 

 

 

 

 

 

     Tower  at 1301 Gervais

316

24,102

24,418

5,055

19,363

1997

1973

(3)

     Atrium  at Stoneridge

572
9,012
9,584
2,129
7,455
1998
1986
(3)

     Capitol  Center

973

42,260

43,233

7,778

35,455

1999

1987

(3)

  Tennessee

 

 

 

 

 

 

 

 

     Forum  II & III

2,634

15,821

18,455

4,038

14,417

1997

1985

(3)

     First  Tennessee Plaza

457

35,985

36,442

8,312

28,130

1997

1978

(3)

     Morgan  Keegan Tower

-

38,764

38,764

8,637

30,127

1997

1985

(3)

     Cedar  Ridge

741

10,608

11,349

2,602

8,747

1998

1982

(3)

     Falls  Building

-

9,281

9,281

2,023

7,258

1998

(2) 1982/84/90

(3)

     Toyota  Center

190

25,086

25,276

3,448

21,828

2000

2000

(3)

     Toyota  Garage

727

8,146

8,873

1,174

7,699

2000

2000

(3)

     Bank  of America Plaza

1,464

35,656

37,120

3,538

33,582

2001

(2) 2004

(3)

     Forum  I

4,737

13,837

18,574

297

18,277

2005

1982

(3)

Texas

 

 

 

 

 

 

 

 

     One  Park Ten Plaza

606

9,218

9,824

3,521

6,303

1996

1982

(3)

     400  Northbelt

419

12,982

13,401

2,938

10,463

1996

1982

(3)

     Woodbranch

303

6,043

6,346

2,013

4,333

1996

1982

(3)

     Richmond  Centre 

273

4,584

4,857

813

4,044

1996

1983

(3)

     Ashford  II

163

2,910

3,073

895

2,178

1997

1979

(3)

     Sugar  Grove

364

10,197

10,561

2,856

7,705

1997

1982

(3)

     Honeywell

856

16,332

17,188

3,385

13,803

1997

1983

(3)

     Schlumberger  Building

1,013

13,458

14,471

3,535

10,936

1998

1983

(3)

     One  Commerce Green

489

41,027

41,516

9,553

31,963

1998

1983

(3)

     Comerica  Bank Building

1,921

23,812

25,733

5,194

20,539

1998

1983

(3)

     550  Greens Parkway

1,006

8,183

9,189

894

8,295

2001

1999

(3)

     1717  St. James Place

430

7,547

7,977

836

7,141

2002

1975/94

(3)

     5300  Memorial

682

13,656

14,338

1,569

12,769

2002

1982

(3)

     Town  & Country

436

9,927

10,363

1,261

9,102

2002

1982

(3)

     Wells  Fargo Building

2,600

10,314

12,914

792

12,122

2003

1978

(3)

 

Page 72 of 79

**SCHEDULE  III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (Continued)**
**DECEMBER  31, 2005**
(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:**
 
 
 
 
 
 
 
 
Virginia

 

 

 

 

 

 

 

 

     Glen  Forest Building

537

9,861

10,398

2,187

8,211

1998

1985

(3)

     Lynnwood  Plaza

985

10,605

11,590

2,313

9,277

1998

1986

(3)

     Moorefield  II

469

5,174

5,643

1,063

4,580

1998

1985

(3)

     Moorefield  III

490

5,918

6,408

1,351

5,057

1998

1985

(3)

     Town  Point Center

-

13,518

13,518

3,110

10,408

1998

1987

(3)

     Westvaco  Building

1,265

13,852

15,117

3,210

11,907

1998

1986

(3)

     Greenbrier  Tower I

584

9,192

9,776

2,277

7,499

1997

1985/87

(3)

     Greenbrier  Tower II

573

9,120

9,693

2,267

7,426

1997

1985/87

(3)

     Winchester  Building

956

12,858

13,814

2,611

11,203

1998

1987

(3)

     Moorefield  I

260

4,527

4,787

881

3,906

1999

1984

(3)

**Total Real Estate Owned**

$97,781

$1,122,784

$1,220,565

$179,636

$1,040,929

 

 

 

 

(1)  The aggregate cost for federal income  tax purposes was approximately $1,248,615.

(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.

 

Page 73 of 79

**NOTE TO SCHEDULEIII**

**As of December 31,2005 and 2004**

(In thousands)

 

       A summary of activity for real estate and accumulateddepreciation is as follows:

 

**December 31**

**2005**

**2004**

**Real  Estate:**

** **

** **

**Office and Parking Properties:**

** **

** **

     Balance at beginning of year

 $

963,713 

 $

844,168 

     Additions:

          Acquisitions  and improvements

292,908 

152,570 

          Parking  development

3,087 

4,434 

     Reclassification of land  available for sale

1,721 

- 

     Consolidation of Moore  Building Associates LP

- 

25,271 

     Cost of real estate sold or  disposed

(19,272)

(901)

     Joint venture of office  properties

(21,592)

(61,829)

     Balance at end of year

 $

1,220,565 

 $

963,713 

** **

**Accumulated Depreciation:**

     Balance at beginning of year

 $

142,906 

 $

115,473 

     Depreciation expense

40,478 

31,251 

     Consolidation of Moore  Building Associates LP

- 

2,137 

     Real estate sold or disposed

(2,744)

(644)

     Joint venture of office  properties

(1,004)

(5,311)

     Balance at end of year

 $

179,636 

 $

142,906 

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

       None.

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

       The Company's management, with theparticipation of the Company's Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of Parkway's disclosure controls andprocedures as of December 31, 2005.  Based on that evaluation, the Company'sChief Executive Officer and Chief Financial Officer concluded that Parkway'sdisclosure controls and procedures were effective as of December 31, 2005. There were no changes in the Company's internal control over financialreporting during the fourth quarter of 2005 that has materially affected, or isreasonably likely to affect, the Company's internal control over financialreporting.

              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 on Internal Control Over Financial Reporting**

              TheCompany's management, with the participation of the Company's Chief ExecutiveOfficer and Chief Financial Officer, is responsible for establishing and maintainingadequate internal control over financial reporting.  The Company's managementhas assessed the effectiveness of the company's internal control over financialreporting as of December 31, 2005.  In making this assessment, we used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *Internal Control - Integrated Framework*.  Based onour assessment we have concluded that, as of December 31, 2005, the company'sinternal control over financial reporting is effective based on thosecriteria.  Our independent registered public accounting firm, Ernst & YoungLLP, have provided an attestation report on management's assessment of theCompany's internal control over financial reporting as of December 31, 2005.

 

Page 74 of 79

**Report of Independent Registered Public Accounting Firm**

****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. (the Company)maintained effective internal control over financial reporting as of December31, 2005, based on criteria established in *Internal Control - IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  Parkway Properties, Inc.'s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management'sassessment and an opinion on the effectiveness of the Company's internalcontrol 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. maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the criteria established in COSO.  Also, in ouropinion, Parkway Properties, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31, 2005,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, 2005 and 2004, and the related consolidatedstatements of income, shareholders' equity, and cash flows for each of thethree years in the period ended December 31, 2005 of Parkway Properties, Inc.and subsidiaries and our report dated March 9, 2006 expressed an unqualifiedopinion thereon.

 

 

 

New Orleans, Louisiana                                                                                                                                                    Ernst & Young LLP

March 14, 2006

Page 75 of 79

**Item 9B.  *Other Information*.**

       None.

**PART III**

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

       The Company'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 Company's definitive proxy statementwhich will be filed with the Commission pursuant to Regulation 14A within 120 daysof the end of Registrant's fiscal year is incorporated herein byreference.

**Item 12.  *Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters.***

      The Company'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.

Equity Compensation Plans

       The following table sets forth thesecurities authorized for issuance under Parkway's equity compensation plans asof December 31, 2005:

(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

395,053

$31.43

359,624

Equity compensation plans  

not approved by security

holders

-

-

-

Total

395,053

$31.43

359,624

       Effective January 1, 2003, the stockholders of the Company approvedParkway's 2003 Equity Incentive Plan that authorized the grant of up to 200,000equity based awards to employees of the Company.  At present, it isParkway's intention to grant restricted stock and/or deferred incentive shareunits instead of stock options to employees of the Company, although the 2003Plan authorizes various forms of incentive awards, including options.  Asof December 31, 2005, 124,000 shares of incentive restricted stock have beenissued to certain officers of the Company in connection with the VALUE SQUAREPlan.  The restricted shares issued are valued at $4.5 million, and vestthe earlier of seven years or December 31, 2005 if certain goals of the VALUESQUARE Plan were achieved.  The VALUE SQUAREPlan had as its goal to achieve FFO growth that is 10% higher than that of theNAREIT Office Index peer group.  Furthermore, for the early vesting to occur,the Company had to achieve positive FFO growth during the three years of theplan.  Based on the results of the Company and the results of other REITs inthe Office Index peer group, Parkway met the equity return goal of the plan.  However,the Company did not achieve positive FFO growth during the VALUE SQUAREPlan and, therefore, the early vesting of the restricted stock did not occur.  Asof December 31, 2005, 13,828 deferred incentive share units were granted toemployees of the Company.  The deferred incentive share units are valued at $627,000,and vest at the end of four years.  Compensation expense related to therestricted stock and deferred incentive share units of $533,000 and $783,000 wasrecognized in 2005 and 2004, respectively.

 

Page 76 of 79

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

      The Company'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 herein by reference.

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

****       The Company'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 incorporated hereinby reference.

 

**PART IV**

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

(a)   1            Consolidated Financial Statements

                      Report of IndependentAuditors

                      Consolidated BalanceSheets-as of December 31, 2005 and 2004

                      Consolidated Statements ofIncome-for the years ended December 31, 2005, 2004 and 2003

                      Consolidated Statements ofCash Flows-for the years ended December 31, 2005, 2004 and 2003

                      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            Form10-K Exhibits required by Item 601 of Regulation S-K:

**                     **

**                     ****Exhibit                                **

**        No.        Description**

        3.1         Articles of Incorporation, as amended, of theCompany (incorporated by reference to Exhibit B to The Parkway Company's proxymaterial for its July 18, 1996 Annual Meeting).

        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 creating the Company'sSeries B Convertible Cumulative Preferred Stock (incorporated by reference to Exhibit3(i) to the Company's Form 8-K filed October 10, 2000).

        3.4         Articles Supplementary creating the Company'sSeries D Cumulative Redeemable Preferred Stock (incorporated by reference toExhibit 4 to the Company's Form 8-A filed May 29, 2003).

        4.1         Investment Agreement dated as of October 6, 2000between the Company and Five Arrows Realty Securities III L.L.C. (incorporatedby reference to Exhibit 99(a) to the Company's Form 8-K filed October 10,2000).

        4.2         Operating Agreement dated as of October 6, 2000between the Company and Five Arrows Realty Securities III L.L.C. (incorporatedby reference to Exhibit 99(b) to the Company's Form 8-K filed October 10,2000).

        4.3         Agreement and Waiver between the Company and FiveArrows Realty Securities III L.L.C. (incorporated by reference to Exhibit 99(c)to the Company's Form 8-K filed October 10, 2000).

        4.4         Common Stock Purchase Warrant dated as of October6, 2000 issued by the Company to Five Arrows Realty Securities III L.L.C.(incorporated by reference to Exhibit 99(d) to the Company's Form 8-K filedOctober 10, 2000).

        10          Material Contracts:

        10.1*     Form of Change-in-Control Agreement that Company hasentered into with Leland R. Speed, Steven G. Rogers, William R. Flatt, James M.Ingram, Thomas C. Maloney and G. Mitchel Mattingly (incorporated by referenceto Exhibit 10.1 the Company's Form 10-K for the year ended December 31, 2004).

        10.2*     Form of Change-in-Control Agreement that the Companyhas entered into with Roy Butts, Sarah P. Clark, David R. Fowler, Mandy M.Pope, Warren Speed and Jack R. Sullenberger (incorporated by reference toExhibit 10.2 to the Company's Form 10-K for the year ended December 31, 2004).

        10.3*     Parkway Properties, Inc. 1991 Directors Stock OptionPlan, as Amended (incorporated by reference to Appendix C to the Company'sproxy material for its June 6, 1997 Annual Meeting).

 

Page 77 of 79

        10.4*     Parkway Properties, Inc. 1994 Stock Option andLong-Term Incentive Plan (incorporated by reference to Appendix A to the Company'sproxy material for its June 3, 1999 Annual Meeting).

        10.5*     Parkway Properties, Inc. 2001 Non-employee DirectorsEquity Compensation Plan, as amended (incorporated by reference to Appendix Bto the Company's proxy material for its May 5, 2005 Annual Meeting).

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

        10.7       Amended and Restated Agreement of LimitedPartnership of Parkway Properties LP (incorporated by reference to Exhibit99(a) to the Company's Form 8-K filed July 15, 1998).

        10.8       Admission Agreement between Parkway Properties LPand Lane N. Meltzer (incorporated by reference to Exhibit 99(b) to the Company'sForm 8-K filed July 15, 1998).

        10.9       Promissory Note between Parkway Properties LP andTeachers Insurance and Annuity Association of America (incorporated byreference to Exhibit 10.1 to the Company's Form 8-K filed December 22, 2005).

        10.10     Form of Deed of Trust, Assignment of Leases andRents, Security Agreement and Fixture Filing by and between Parkway PropertiesLP as borrower and Jack Edelbrock as trustee for the benefit of TeachersInsurance and Annuity Association of America as lender (incorporated byreference to Exhibit 10.2 to the Company's Form 8-K filed December 22, 2005).

        10.11    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 Exhibit 10.17 to the Company's Form 10-K for the year endedDecember 31, 2003).

        10.12     Second Amendment to Credit Agreement among ParkwayProperties, LP; 111 Capitol Building Limited Partnership; Parkway Jackson LLC;Parkway Lamar LLC; Parkway Properties, Inc. and Parkway Properties GeneralPartners, Inc. as Guarantors; Wachovia Bank, National Association as Agent;Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Runner andthe Lenders dated March 31, 2005 (incorporated by reference to Exhibit 10 tothe Registrant's Form 8-K filed April 4, 2005).

        10.13    Third Amendment to Credit Agreement among ParkwayProperties, LP; 111 Capitol Building Limited Partnership; Parkway Jackson LLC;Parkway Lamar LLC; Parkway Properties, Inc. and Parkway Properties GeneralPartners, Inc. as Guarantors; Wachovia Bank, National Association as Agent;Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Runner andthe Lenders dated November 10, 2005 (incorporated by reference to Exhibit 10 tothe Registrant's Form 8-K filed November 14, 2005).

        10.14    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 Exhibit 4(a) to the Company'sForm 8-K filed July 3, 2001).

        10.15    Promissory Note made as of June 22, 2001 by Parkway233 North Michigan, LLC in favor of German American Capital Corporation(incorporated by reference to Exhibit 4(a) to the Company's Form 8-K filed July3, 2001).

        10.16    Limited Partnership Agreement of Parkway PropertiesOffice Fund, L.P. by and among PKY Fund, LLC, Parkway Properties L.P. and PERSHolding Company Limited, L.L.C. (incorporated by reference to Exhibit 10 to theCompany's Form 8-K Filed July 7, 2005).

        10.17*  Performance measures for the Company's 2006 cashbonus awards for executive officers of the Company (a written descriptionthereof is set forth in Item 1.01 of the Company's Form 8-K filed December 22,2005).

        21          Subsidiaries of the Company (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.

** **

** **

** **

** **

** **

Page 78 of 79

**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  14, 2006

/s/  William R. Flatt

William  R. Flatt

Chief  Financial Officer

March  14, 2006

/s/  Mandy M. Pope

Mandy  M. Pope

Chief  Accounting Officer

March  14, 2006

     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  14, 2006

March  14, 2006

/s/ Roger P. Friou

/s/  Joe F. Lynch

Roger P. Friou, Director

Joe F. Lynch, Director

March  14, 2006

March  14, 2006

/s/ Martin L. Garcia

/s/ Steven G. Rogers

Martin L. Garcia, Director

Steven G. Rogers

March  14, 2006

President, Chief Executive  Officer and Director

March  14, 2006

/s/ Matthew W. Kaplan

/s/ Leland R. Speed

Matthew W. Kaplan, Director

Leland R. Speed

March  14, 2006

Chairman of the Board and  Director

March  14, 2006

/s/  Lenore M. Sullivan

Lenore M. Sullivan, Director

March  14, 2006

 

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