10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _____________________________________________ FORM 10-Q                   x                                          Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended September 30, 2007 or                                                    o                                            Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ________ to ________ Commission File Number 1-11533 Parkway Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland	74-2123597
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
One Jackson Place Suite 1000 188 East Capitol Street P. O. Box 24647 Jackson, Mississippi 39225-4647
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code		(601) 948-4091
Registrant's web site www.pky.com
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer  o Accelerated filer  x      Non-accelerated filer  o         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  x           15,455,292 shares of Common Stock, $.001 par value, were outstanding as of November 1, 2007.

 

Page 1 of 37

PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2007


Part I. Financial Information

Item 1.	Financial Statements	Page
	Consolidated Balance Sheets, September 30, 2007 and December 31, 2006	3
	Consolidated Statements of Income for the Three Months and Nine Months Ended
	September 30, 2007 and 2006	4
	Consolidated Statements of Stockholders' Equity for the Nine Months Ended
	September 30, 2007 and 2006	6
	Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2007 and 2006	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
Part II. Other Information
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	36
Signatures
Authorized signatures		37

 

Page 2 of 37

PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
	September 30		December 31
	2007		2006
	(Unaudited)
Assets
Real estate related investments:
Office and parking properties	$	1,551,823	$	1,517,468
Office property development	7,662		-
Accumulated depreciation	(240,245)		(211,187)
	1,319,240		1,306,281
Land available for sale	1,467		1,467
Investment in unconsolidated joint ventures	11,068		11,179
	1,331,775		1,318,927
Rents receivable and other assets	110,732		107,145
Intangible assets, net	73,962		81,800
Cash and cash equivalents	11,424		4,474
	$	1,527,893	$	1,512,346
Liabilities
Notes payable to banks	$	186,799	$	152,312
Mortgage notes payable	718,311		696,012
Accounts payable and other liabilities	85,688		72,659
Subsidiary redeemable preferred membership interests	-		10,741
	990,798		931,724
Minority Interest
Minority Interest - unit holders	35		36
Minority Interest - real estate partnerships	77,751		90,280
	77,786		90,316
Stockholders' Equity
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, 67,600,000 shares authorized,
15,453,636 and 15,764,799 shares issued and outstanding
in 2007 and 2006, respectively	15		16
Common stock held in trust, at cost, 104,500 and 115,000
shares in 2007 and 2006, respectively	(3,540)		(3,894)
Additional paid-in capital	433,972		449,141
Accumulated other comprehensive income	137		828
Accumulated deficit	(29,251)		(13,761)
	459,309		490,306
	$	1,527,893	$	1,512,346

See notes to consolidated financial statements.

Page 3 of 37

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
	Three Months Ended
	September 30
	2007		2006
	(Unaudited)
Revenues
Income from office and parking properties	$	60,785	$	54,923
Management company income	432		284
Total revenues	61,217		55,207
Expenses
Property operating expense	28,338		26,590
Depreciation and amortization	19,694		17,257
Operating expense for other real estate properties	2		1
Management company expenses	343		223
General and administrative	1,860		1,282
Total expenses	50,237		45,353
Operating income	10,980		9,854
Other income and expenses
Interest and other income	90		8
Equity in earnings of unconsolidated joint ventures	234		198
Loss on sale of real estate and other assets	(3)		-
Interest expense	(13,374)		(12,565)
Loss before minority interest and discontinued operations	(2,073)		(2,505)
Minority interest - unit holders	(2)		(1)
Minority interest - real estate partnerships	1,088		225
Loss from continuing operations	(987)		(2,281)
Discontinued operations:
Income from discontinued operations	93		130
Gain on sale of real estate from discontinued operations	-		211
Net loss	(894)		(1,940)
Change in market value of interest rate swaps	(658)		(799)
Change in unrealized loss on equity securities	11		-
Comprehensive loss	$	(1,541)	$	(2,739)
Net loss available to common stockholders:
Net loss	$	(894)	$	(1,940)
Dividends on preferred stock	(1,200)		(1,200)
Dividends on convertible preferred stock	-		(481)
Net loss available to common stockholders	$	(2,094)	$	(3,621)
Net loss per common share:
Basic:
Loss from continuing operations	$	(0.14)	$	(0.28)
Discontinued operations		-		0.03
Net loss	$	(0.14)	$	(0.25)
Diluted:
Loss from continuing operations	$	(0.14)	$	(0.28)
Discontinued operations		-		0.03
Net loss	$	(0.14)	$	(0.25)
Dividends per common share	$	0.65	$	0.65
Weighted average shares outstanding:
Basic		15,507		14,236
Diluted		15,507		14,236

See notes to consolidated financial statements.

Page 4 of 37

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
	Nine Months Ended
	September 30
	2007		2006
	(Unaudited)
Revenues
Income from office and parking properties	$	183,408	$	152,460
Management company income	1,196		5,082
Total revenues	184,604		157,542
Expenses
Property operating expense	85,391		73,011
Depreciation and amortization	58,073		44,864
Operating expense for other real estate properties	4		4
Management company expenses	887		898
General and administrative	5,105		3,405
Total expenses	149,460		122,182
Operating income	35,144		35,360
Other income and expenses
Interest and other income	308		34
Equity in earnings of unconsolidated joint ventures	782		524
Gain on sale of real estate and other assets	20,307		13,465
Interest expense	(40,510)		(31,787)
Income before minority interest and discontinued operations	16,031		17,596
Minority interest - unit holders	(2)		(1)
Minority interest - real estate partnerships	2,575		369
Income from continuing operations	18,604		17,964
Discontinued operations:
Income from discontinued operations	170		785
Gain on sale of real estate from discontinued operations	-		211
Net income	18,774		18,960
Change in market value of interest rate swaps	(695)		(73)
Change in unrealized loss on equity securities	4		79
Comprehensive income	$	18,083	$	18,966
Net income available to common stockholders:
Net income	$	18,774	$	18,960
Dividends on preferred stock	(3,600)		(3,600)
Dividends on convertible preferred stock	-		(1,654)
Net income available to common stockholders	$	15,174	$	13,706
Net income per common share:
Basic:
Income from continuing operations	$	0.96	$	0.90
Discontinued operations	0.01		0.07
Net income	$	0.97	$	0.97
Diluted:
Income from continuing operations	$	0.95	$	0.89
Discontinued operations	0.01		0.07
Net income	$	0.96	$	0.96
Dividends per common share	$	1.95	$	1.95
Weighted average shares outstanding:
Basic	15,598		14,108
Diluted	15,773		14,284

See notes to consolidated financial statements.

Page 5 of 37

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
	Nine Months Ended
	September 30
	2007		2006
	(Unaudited)
8.34% Series B Cumulative Convertible
Preferred stock, $.001 par value
Balance at beginning of period	$	-	$	28,122
Conversion of preferred stock to common stock	-		(18,672)
Balance at end of period	-		9,450
8.00% Series D Preferred stock, $.001 par value
Balance at beginning of period	57,976		57,976
Balance at end of period	57,976		57,976
Common stock, $.001 par value
Balance at beginning of period	16		14
Purchase of Company stock	(1)		-
Share issued - stock offering	-		1
Balance at end of period	15		15
Common stock held in trust
Balance at beginning of period	(3,894)		(4,198)
Shares distributed from deferred compensation plan	354		304
Balance at end of period	(3,540)		(3,894)
Additional paid-in capital
Balance at beginning of period	449,141		389,971
Stock options exercised	3,029		5,659
Conversion of preferred stock to common stock	-		18,671
Share issued in lieu of Directors' fees	251		170
Shares issued - DRIP plan	363		149
Issuance costs - stock offering	(28)		-
Employee Stock Purchase Plan	37		(10)
Purchase of Company stock	(19,935)		(2,814)
Share based compensation expense	1,114		584
Reclassification upon the adoption of SFAS No. 123R	-		(3,101)
Balance at end of period	433,972		409,279
Unearned compensation
Balance at beginning of period	-		(3,101)
Reclassification upon the adoption of SFAS No. 123R	-		3,101
Balance at end of period	-		-
Accumulated other comprehensive income
Balance at beginning of period	828		826
Change in unrealized gain on equity securities	4		79
Change in market value of interest rate swaps	(695)		(73)
Balance at end of period	137		832
Accumulated deficit
Balance at beginning of period	(13,761)		4,906
Net income	18,774		18,960
Preferred stock dividends declared	(3,600)		(3,600)
Convertible preferred stock dividends declared	-		(1,654)
Common stock dividends declared	(30,664)		(27,942)
Balance at end of period	(29,251)		(9,330)
Total stockholders' equity	$	459,309	$	464,328

 

See notes to consolidated financial statements.

Page 6 of 37

PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	Nine Months Ended
	September 30
	2007		2006
	(Unaudited)
Operating activities
Net income	$	18,774	$	18,960
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization	58,073		44,864
Depreciation and amortization - discontinued operations	1		535
Amortization of above market leases	754		1,171
Amortization of loan costs	898		824
Share based compensation expense	1,114		584
Operating distributions from unconsolidated joint ventures	902		1,150
Loss allocated to minority interests	(2,573)		(368)
Gain on sale of real estate	(20,307)		(13,676)
Equity in earnings of unconsolidated joint ventures	(782)		(524)
Changes in operating assets and liabilities:
Increase in receivables and other assets	(7,360)		(18,428)
Increase in accounts payable and other liabilities	8,749		10,550
Cash provided by operating activities	58,243		45,642
Investing activities
Distributions from unconsolidated joint ventures	89		15,395
Investments in unconsolidated joint ventures	-		(113)
Purchases of real estate related investments	(49,773)		(221,394)
Proceeds from sale of real estate	56,795		14,550
Real estate development	(6,417)		-
Improvements to real estate related investments	(35,943)		(24,387)
Cash used in investing activities	(35,249)		(215,949)
Financing activities
Principal payments on mortgage notes payable	(37,201)		(25,727)
Proceeds from long-term financing	59,500		196,600
Proceeds from bank borrowings	181,712		112,759
Payments on bank borrowings	(148,057)		(87,036)
Redemption of subsidiary redeemable preferred membership interests	(10,741)		-
Debt financing costs	(738)		(1,417)
Stock options exercised	3,029		5,659
Purchase of Company stock	(19,936)		(2,814)
Dividends paid on common stock	(30,428)		(27,725)
Dividends paid on preferred stock	(3,600)		(5,360)
Contributions from minority interest partners	38,056		7,977
Distributions to minority interest partners	(48,012)		(943)
Employee stock purchase plan	37		(10)
Proceeds from DRIP plan	363		149
Issuance costs from stock offering	(28)		-
Cash (used in) provided by financing activities	(16,044)		172,112
Change in cash and cash equivalents	6,950		1,805
Cash and cash equivalents at beginning of period	4,474		3,363
Cash and cash equivalents at end of period	$	11,424	$	5,168

See notes to consolidated financial statements.

Page 7 of 37

Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2007

(1)           Basis of Presentation

                The consolidated financial statements include the accounts of Parkway Properties, Inc. ("Parkway" or "the Company"), its wholly-owned subsidiaries and joint ventures in which the Company has a controlling interest.  The other partners' equity interests in the consolidated joint ventures are reflected as minority interests in the consolidated financial statements.  Parkway also consolidates subsidiaries where the entity is a variable interest entity and Parkway is the primary beneficiary, as defined in FASB Interpretation 46R, Consolidation of Variable Interest Entities ("FIN 46R").  All significant intercompany transactions and accounts have been eliminated in the accompanying financial statements.

                The Company determines consolidation for joint ventures based on standards set forth in EITF 96-16, Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights; EITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights; Statement of Position 78-9, Accounting for Investments in Real Estate Ventures; and FIN 46R.  Based on the guidance set forth in these pronouncements, the Company consolidates certain joint ventures where it controls major operating and management decisions, or where the Company is the sole general partner and the limited partners do not possess kick-out rights or other substantive participating rights or where the entity is a variable interest entity and Parkway is the primary beneficiary.  The equity method of accounting is used for those joint ventures that do not meet the criteria for consolidation and where Parkway exercises significant influence but does not control these joint ventures.

                The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

                The accompanying financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  Operating results for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.  The financial statements should be read in conjunction with the annual report and the notes thereto.

                The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

                On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN 48").  FIN 48 clarifies the accounting for uncertain income tax positions recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company has evaluated its tax positions and found that the adoption of FIN 48 did not have a material impact on income from continuing operations, net income, cash flow from operations, cash flow from financing activities or basic and diluted earnings per share.

Page 8 of 37

 

(2)           Net Income (Loss) Per Common Share

                Basic earnings per share ("EPS") are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.  In arriving at income available to common stockholders, preferred stock dividends are deducted.  Diluted EPS reflects the potential dilution that could occur if share equivalents such as employee stock options, restricted shares, deferred incentive share units, warrants and 8.34% Series B cumulative convertible preferred stock were exercised or converted into common stock that then shared in the earnings of Parkway.

The computation of diluted EPS is as follows (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2007		2006		2007		2006
Numerator:
Basic and diluted net (loss) income
available to common stockholders	$	(2,094)	$	(3,621)	$	15,174	$	13,706
Denominator:
Basic weighted average shares	15,507		14,236		15,598		14,108
Dilutive effect of share equivalents	-		-		175		176
Dilutive weighted average shares	15,507		14,236		15,773		14,284
Diluted earnings (loss) income per share	$	(0.14)	$	(0.25)	$	0.96	$	0.96

                The computation of diluted EPS for the three months and nine months ended September 30, 2006 did not assume the conversion of the 8.34% Series B cumulative preferred stock because their inclusion would have been anti-dilutive.  The computation of diluted EPS for the three months ended September 30, 2007 and 2006 did not include the effect of share equivalents because their inclusion would have been anti-dilutive.

(3)           Supplemental Cash Flow Information and Schedule of Non-Cash Investing and Financing Activity

                The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

	Nine Months Ended
	September 30
	2007		2006
	(in thousands)
Supplemental cash flow information:
Cash paid for interest	$	39,362	$	30,113
Income taxes refunded	(19)		(13)
Supplemental schedule of non-cash investing and financing activity:
Shares issued in lieu of Directors' fees	251		170
Capital lease obligation	3,989		-

 (4)           Acquisitions and Dispositions

                On June 14, 2007, the discretionary fund ("the Fund") with Ohio Public Employee Retirement System ("Ohio PERS"), of which Parkway owns 25%, purchased for $46.5 million 1401 Enclave Parkway, a 209,000 square foot six-story office building in Houston, Texas.  The Fund expects to spend $346,000 for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership.  The purchase was funded with a $28 million first mortgage placement by the Fund and with equity contributions from the partners.  Since Parkway is the sole general partner and has the authority to make major decisions on behalf of the Fund, thereby giving Parkway a controlling interest, Parkway has included the Fund in its consolidated financial statements.

Page 9 of 37

                On June 29, 2007, the Company sold two office properties, First Tennessee Plaza and Cedar Ridge, totaling 549,000 square feet located in Knoxville, Tennessee for a gross sales price of $59 million.  The Company received net cash proceeds from the sale of $56.8 million and the proceeds were used to prepay the $7.4 million first mortgage secured by First Tennessee Plaza and to reduce amounts outstanding under the Company's bank lines of credit.  Parkway recorded a gain on the sale for financial reporting purposes of $20.3 million and expenses related to the prepayment of the mortgage of $494,000 in the second quarter of 2007.  Parkway Realty Services LLC, a subsidiary of the Company, was retained to provide management services for the properties under a five-year agreement.  Therefore, all revenue and expense for these properties are included as a component of continuing operations.

(5)           Office Property Development

                On February 28, 2007, the Company purchased 2.5 acres of land in Jackson, Mississippi for $1.8 million.  This land was purchased as part of the Company's plan to develop the 194,000 square foot Class A+ office building known as The Pinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company's headquarters building.  The estimated cost of the development is $48.5 million with expected completion in the fall of 2008.  The Company has received commitments to lease approximately 70% of the new office space from four major customers.  Parkway will be seeking partners for an 80% ownership interest in the development.  The development is designed to utilize benefits available under the Gulf Opportunity Zone Act for new developments in areas affected by Hurricane Katrina.  During the nine months ending September 30, 2007, the Company incurred $7.7 million in development costs for The Pinnacle.

                On September 1, 2007, Parkway entered into a lease for the parking garage known as Parking at Jackson Place, which is adjacent to the Company's headquarters and The Pinnacle in Jackson, Mississippi.  The term of the lease is 60 years with a renewal option for an additional 30 years.  The company expects to spend $4.5 million in improvements to the garage and will have complete operational control over the asset.  Since the fair value of the land is greater than 25% of the total value of the property, the Company is accounting for the component of the lease attributable to the land as an operating lease and the component attributable to the building as a capital lease.

(6)           Discontinued Operations

                All current and prior period income from the following office property dispositions are included in discontinued operations for the nine months ended September 30, 2007 and 2006 (in thousands).

		Square	Date of	Gross Sales	Net Book Value	Gain (Loss)
Office Property	Location	Feet	Sale	Price	of Real Estate	on Sale
The Park on Camelback	Phoenix, Arizona	102	09/09/05	$  17,500	$  12,526	$  4,419
250 Commonwealth	Greenville, South Carolina	46	09/14/05	4,020	4,104	(238)
2005 Dispositions		148		$  21,520	$  16,630	$  4,181
Central Station Building	St. Petersburg, Florida	133	08/02/06	$  15,000	$  14,338	$     211
Richmond Centre	Houston, Texas	92	11/29/06	6,906	4,551	2,018
Ashford II	Houston, Texas	59	12/07/06	5,250	2,185	2,854
2006 Dispositions		284		$  27,156	$  21,074	$  5,083

 

Page 10 of 37

The amount of revenue and expense for these five office properties reported in discontinued operations for the three months and nine months ended September 30, 2007 and 2006 is as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30					September 30
	2007		2006			2007		2006
Income Statement:
Revenues
Income from office and parking properties	$	17	$		636	$	67	$	2,694
	17		636			67		2,694
Expenses
Property operating expense	(76)		385			(104)		1,374
Depreciation and amortization	-		121			1		535
	(76)		506			(103)		1,909
Income from discontinued operations	93		130			170		785
Gain on sale of real estate from discontinued operations	-		211			-		211
Total discontinued operations	$	93	$	341		$	170	$	996

 (7)           Investment in Unconsolidated Joint Ventures

                As of September 30, 2007, the Company was invested in four unconsolidated joint ventures with unrelated investors. These joint ventures are accounted for using the equity method of accounting, as Parkway does not control, but has the ability to significantly influence the operations of the joint ventures and is not the primary beneficiary, as that term is defined in FIN 46R.  As a result, the assets and liabilities of the joint ventures are not included in Parkway's consolidated balance sheet.  Information relating to the unconsolidated joint ventures at September 30, 2007 is detailed below (in thousands).

			Parkway's
			Ownership	Square	Percentage
Joint Ventures	Property Name	Location	Interest	Feet	Leased
Wink-Parkway Partnership	Wink Building	New Orleans, LA	50.0%	32	100.0%
Parkway Joint Venture, LLC ("Jackson JV")	UBS Building/River Oaks	Jackson, MS	20.0%	167	80.3%
RubiconPark I, LLC ("Rubicon JV")	Lakewood/Falls Pointe	Atlanta, GA	20.0%	551	98.6%
	Carmel Crossing	Charlotte, NC
RubiconPark II, LLC ("Maitland JV")	Maitland 200	Orlando, FL	20.0%	204	100.0%
				954	95.7%

                Cash distributions from unconsolidated joint ventures are made to each partner based on their percentage of ownership in each entity.  Cash distributions made to partners in joint ventures where the percentage of debt assumed is disproportionate to the ownership percentage in the venture is distributed based on each partner's share of cash available for distribution before debt service, based on their ownership percentage, less the partner's share of debt service based on the percentage of debt assumed by each partner.

                Parkway provides management, construction and leasing services for all of the unconsolidated joint ventures except for the Wink-Parkway Partnership, and receives market based fees for these services.  The portion of fees earned on unconsolidated joint ventures attributable to Parkway's ownership interest is eliminated in consolidation.

Page 11 of 37

                Balance sheet information for the unconsolidated joint ventures is summarized below as of September 30, 2007 and December 31, 2006 (in thousands):

Balance Sheet Information
	September 30, 2007
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (at 100%):
Real Estate, Net	$	-	$	1,197	$	15,933	$	66,850	$	29,416	$	113,396
Other Assets	-		282		1,224		7,002		688		9,196
Total Assets	$	-	$	1,479	$	17,157	$	73,852	$	30,104	$	122,592
Mortgage Debt (a)	$	-	$	201	$	12,600	$	52,000	$	18,730	$	83,531
Other Liabilities	-		12		479		1,670		641		2,802
Partners' and Shareholders' Equity	-		1,266		4,078		20,182		10,733		36,259
Total Liabilities & Partners'/Shareholders' Equity	$	-	$	1,479	$	17,157	$	73,852	$	30,104	$	122,592
Parkway's Share of Unconsolidated
Joint Ventures
Real Estate, Net	$	-	$	598	$	3,187	$	13,370	$	5,883	$	23,038
Mortgage Debt	$	-	$	101	$	2,520	$	7,200	$	-	$	9,821
Investment in Joint Ventures	$	-	$	633	$	(218)	$	5,406	$	5,247	$	11,068
	December 31, 2006
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (at 100%):
Real Estate, Net	$	-	$	1,214	$	16,431	$	68,053	$	28,980	$	114,678
Other Assets	190		256		1,083		6,355		663		8,547
Total Assets	$	190	$	1,470	$	17,514	$	74,408	$	29,643	$	123,225
Mortgage Debt (a)	$	-	$	275	$	12,600	$	52,000	$	19,061	$	83,936
Other Liabilities	26		113		493		1,333		489		2,454
Partners' and Shareholders' Equity	164		1,082		4,421		21,075		10,093		36,835
Total Liabilities & Partners'/Shareholders' Equity	$	190	$	1,470	$	17,514	$	74,408	$	29,643	$	123,225
Parkway's Share of Unconsolidated
Joint Ventures
Real Estate, Net	$	-	$	607	$	3,286	$	13,611	$	5,796	$	23,300
Mortgage Debt	$	-	$	137	$	2,520	$	7,200	$	-	$	9,857
Investment in Joint Ventures	$	-	$	541	$	(150)	$	5,676	$	5,112	$	11,179

        (a)   The mortgage debt, all of which is non-recourse, is collateralized by the individual real estate properties within each venture.

Page 12 of 37

In most cases the Company's share of debt related to its unconsolidated joint ventures is the same as its ownership percentage in the venture.  However, in the case of the Rubicon Joint Venture and the Maitland Joint Venture, the Company's share of debt is disproportionate to its ownership percentage.  The disproportionate debt structure was created to meet the Company's partner's financing criteria.  In the Rubicon Joint Venture, Parkway owns a 20% interest in the venture but assumed 13.85% of the debt.  In the Maitland Joint Venture, the Company owns a 20% interest in the venture and assumed none of the debt. The terms related to Parkway's share of unconsolidated joint venture mortgage debt are summarized below (in thousands):

				Parkway's	Monthly	Loan	Loan
	Type of	Interest		Share of	Debt	Balance	Balance
Joint Venture	Debt Service	Rate	Maturity	Debt	Service	09/30/07	12/31/06
Wink-Parkway Partnership	Amortizing	8.625%	07/01/09	50.00%	$           5	$       101	$       137
Maitland JV	Amortizing	4.390%	06/01/11	0.00%	-	-	-
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	2,520
					$         47	$    9,821	$    9,857
Weighted average interest rate at end of period						5.154%	5.167%

                The following table presents Parkway's proportionate share of principal payments due for mortgage debt in unconsolidated joint ventures as of September 30, 2007 (in thousands):

	Wink		Jackson		Rubicon		Maitland
	Partnership		JV		JV		JV		Total
2007 (Remaining three months)	$	13	$	-	$	-	$	-	$	13
2008	54		-		-		-		54
2009	34		13		100		-		147
2010	-		33		114		-		147
2011	-		35		119		-		154
Thereafter	-		2,439		6,867		-		9,306
	$	101	$	2,520	$	7,200	$	-	$	9,821

 

Page 13 of 37

                Income statement information for the unconsolidated joint ventures is summarized below for the three months and nine months ending September 30, 2007 and 2006 (in thousands):

Results of Operations
	Three Months Ended September 30, 2007
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (100%):
Revenues	$	-	$	89	$	603	$	2,564	$	1,098	$	4,354
Operating Expenses	-		(22)		(319)		(1,009)		(439)		(1,789)
Net Operating Income	-		67		284		1,555		659		2,565
Interest Expense	-		(3)		(184)		(647)		(206)		(1,040)
Loan Cost Amortization	-		(1)		(1)		(16)		(3)		(21)
Depreciation and Amortization	-		(6)		(134)		(503)		(192)		(835)
Net Income (Loss)	$	-	$	57	$	(35)	$	389	$	258	$	669
Parkway's Share of Unconsolidated
Joint Ventures:
Net Income (Loss)	$	-	$	29	$	(7)	$	119	$	93	$	234
Depreciation and Amortization	$	-	$	3	$	27	$	101	$	38	$	169
Property Management Fees	$	-	$	-	$	19	$	81	$	50	$	150
Interest Expense	$	-	$	2	$	36	$	90	$	-	$	128
Loan Cost Amortization	$	-	$	-	$	-	$	2	$	-	$	2
Other Supplemental Information:
Distributions from Unconsolidated JVs	$	-	$	-	$	23	$	209	$	-	$	232

Results of Operations
	Three Months Ended September 30, 2006
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (100%):
Revenues	$	14	$	110	$	671	$	2,489	$	1,106	$	4,390
Operating Expenses	(53)		(95)		(329)		(1,020)		(460)		(1,957)
Net Operating Income (Loss)	(39)		15		342		1,469		646		2,433
Interest Expense	-		(7)		(184)		(647)		(211)		(1,049)
Loan Cost Amortization	-		(1)		(1)		(16)		(3)		(21)
Depreciation and Amortization	-		(6)		(137)		(474)		(153)		(770)
Net Income (Loss)	$	(39)	$	1	$	20	$	332	$	279	$	593
Parkway's Share of Unconsolidated
Joint Ventures:
Net Income (Loss)	$	(12)	$	-	$	4	$	107	$	99	$	198
Depreciation and Amortization	$	-	$	3	$	27	$	95	$	31	$	156
Property Management Fees	$	-	$	-	$	25	$	197	$	30	$	252
Interest Expense	$	-	$	3	$	36	$	90	$	-	$	129
Loan Cost Amortization	$	-	$	-	$	-	$	2	$	-	$	2
Other Supplemental Information:
Distributions from Unconsolidated JVs	$	26	$	40	$	47	$	201	$	77	$	391

Page 14 of 37

Results of Operations
	Nine Months Ended September 30, 2007
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (100%):
Revenues	$	1	$	290	$	1,933	$	7,714	$	3,303	$	13,241
Operating Expenses	(35)		(72)		(963)		(2,915)		(1,249)		(5,234)
Net Operating Income (Loss)	(34)		218		970		4,799		2,054		8,007
Interest Expense	-		(14)		(552)		(1,918)		(621)		(3,105)
Loan Cost Amortization	-		(3)		(2)		(47)		(11)		(63)
Depreciation and Amortization	-		(17)		(409)		(1,488)		(514)		(2,428)
Income (Loss) Before Gain on Sale of Real Estate	(34)		184		7		1,346		908		2,411
Gain on Sale of Real Estate	166		-		-		-		-		166
Net Income	$	132	$	184	$	7	$	1,346	$	908	$	2,577
Parkway's Share of Unconsolidated
Joint Ventures:
Income (Loss) Before Gain of Sale of Real Estate	$	(11)	$	93	$	2	$	390	$	308	$	782
Gain on Sale of Real Estate	50		-		-		-		-		50
Net Income	$	39	$	93	$	2	$	390	$	308	$	832
Depreciation and Amortization	$	-	$	9	$	82	$	297	$	103	$	491
Property Management Fees	$	-	$	-	$	103	$	259	$	124	$	486
Promote Fee	$	27	$	-	$	-	$	-	$	-	$	27
Interest Expense	$	-	$	8	$	110	$	265	$	-	$	383
Loan Cost Amortization	$	-	$	2	$	-	$	6	$	-	$	8
Other Supplemental Information:
Distributions from Unconsolidated JVs	$	89	$	-	$	69	$	660	$	173	$	991

Results of Operations
	Nine Months Ended September 30, 2006
	Viad		Wink		Jackson		Rubicon		Maitland		Combined
	JV		Building		JV		JV		JV		Total
Unconsolidated Joint Ventures (100%):
Revenues	$	5,833	$	253	$	2,014	$	7,438	$	3,276	$	18,814
Operating Expenses	(2,931)		(134)		(1,014)		(2,848)		(1,320)		(8,247)
Net Operating Income	2,902		119		1,000		4,590		1,956		10,567
Interest Expense	(2,415)		(22)		(552)		(1,918)		(634)		(5,541)
Loan Cost Amortization	(457)		(2)		(2)		(47)		(10)		(518)
Depreciation and Amortization	(717)		(17)		(398)		(1,318)		(459)		(2,909)
Income (Loss) Before Gain on Sale of Real Estate	(687)		78		48		1,307		853		1,599
Gain on Sale of Real Estate	42,693		-		-		-		-		42,693
Net Income	$	42,006	$	78	$	48	$	1,307	$	853	$	44,292
Parkway's Share of Unconsolidated
Joint Ventures:
Income (Loss) Before Gain on Sale of Real Estate	$	(206)	$	39	$	10	$	382	$	299	$	524
Gain on Sale of Real Estate	13,584		-		-		-		-		13,584
Net Income	$	13,378	$	39	$	10	$	382	$	299	$	14,108
Depreciation and Amortization	$	215	$	8	$	80	$	264	$	92	$	659
Property Management Fees	$	718	$	-	$	129	$	389	$	101	$	1,337
Promote Fee	$	3,861	$	-	$	-	$	-	$	-	$	3,861
Interest Expense	$	499	$	11	$	110	$	266	$	-	$	886
Interest Expense - Prepayment	225		-		-		-		-		225
Total Interest Expense	$	724	$	11	$	110	$	266	$	-	$	1,111
Loan Cost Amortization	$	136	$	1	$	-	$	7	$	-	$	144
Other Supplemental Information:
Distributions from Unconsolidated JVs	$	15,701	$	40	$	93	$	411	$	300	$	16,545

Page 15 of 37

 

(8)           Minority Interest - Real Estate Partnerships

The Company has an interest in two joint ventures that are included in its consolidated financial statements. Information relating to these consolidated joint ventures is detailed below.

			Parkway's
Joint Venture Entity	Property Name	Location	Ownership %
Parkway Moore, LLC	Moore Building Associates, LP/
	Toyota Center	Memphis, TN	75.025%
Parkway Properties Office Fund, LP	BellSouth Building/Centurion Centre	Jacksonville, FL	25.000%
	Maitland 100/555 Winderley	Orlando, FL
	Chatham Centre	Schaumburg, IL
	Renaissance Center	Memphis, TN
	100 Ashford Center/Peachtree Ridge	Atlanta, GA
	Overlook II	Atlanta, GA
	1401 Enclave Parkway	Houston, TX

Moore Building Associates, LP ("MBALP") was established for the purpose of owning a commercial office building (the Toyota Center in Memphis, Tennessee).  In acting as the general partner, Parkway is committed to providing additional funding to meet partnership operating deficits up to an aggregate amount of $1 million.  Parkway receives income from MBALP in the form of interest from a construction note receivable, incentive management fees and property management fees.  Parkway also receives interest income on a note receivable from Parkway Moore, LLC ("PMLLC").  Any intercompany asset, liability, revenue and expense accounts between Parkway and MBALP and PMLLC have been eliminated.

Parkway serves as the general partner of Parkway Properties Office Fund, LP (the "Fund") and provides asset management, property management, leasing and construction management services to the Fund, for which it is paid market-based fees.  Cash distributions from the Fund are made to each joint venture partner based on their percentage of ownership in the Fund.  Since Parkway is the sole general partner and has the authority to make major decisions on behalf of the Fund, Parkway is considered to have a controlling interest.  Accordingly, Parkway is required to include the Fund in its consolidated financial statements.

Minority interest in real estate partnerships represents the other partners' proportionate share of equity in the partnerships discussed above at September 30, 2007.  Income is allocated to minority interest based on the weighted average percentage ownership during the year.

(9)           Share Based Compensation

                Effective January 1, 2003, the stockholders 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 to employees of the Company.  At present, it is Parkway's intention to grant restricted shares and/or deferred incentive share units instead of stock options.  Restricted shares and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway common shares (NYSE ticker symbol, PKY) as of the date of grant.

                Compensation expense, including estimated forfeitures, is recognized over the expected vesting period, which is four to seven years from grant date for restricted shares subject to service conditions and four years from grant date for deferred incentive share units.  Certain restricted shares have been granted to officers of the Company where vesting is contingent upon achieving the cumulative goals of the GEAR UP Plan, which began January 1, 2006 and ends December 31, 2008.  Compensation expense will not be recorded on the shares that vest based on performance conditions until the Company determines that it is probable that the goal will be achieved.  Therefore, no expense has been recorded in 2006 and 2007 for these shares. 

Compensation expense related to restricted shares and deferred incentive share units of $1.1 million and $584,000 was recognized for the nine months ending September 30, 2007 and 2006, respectively.  Total compensation expense related to nonvested awards subject to service conditions not yet recognized was $4.3 million as of September 30, 2007.  The weighted average period over which this expense is expected to be recognized is approximately 2.8 years.  Total potential compensation expense associated with shares that vest based on performance conditions is $1.5 million as of September 30, 2007.

Page 16 of 37

                Restricted shares and deferred incentive share units are forfeited if an employee leaves the Company before the vesting date.  Shares and/or units that are forfeited become available for future grant under the 2003 Plan.

On January 12, 2007, the Board of Directors approved the grant of 35,874 restricted shares to officers of the Company.  The shares were valued at $1.9 million and 34,875 shares will vest four years from grant date and 999 shares will vest subject to achievement of the cumulative goals of the GEAR UP Plan, which will end on December 31, 2008.

A summary of the Company's restricted shares and deferred incentive share unit activity for the nine months ended September 30, 2007 is as follows:

		Weighted		Weighted
		Average	Deferred	Average
	Restricted	Grant-Date	Incentive	Grant-Date
	Shares	Fair Value	Share Units	Fair Value
Outstanding at December 31, 2006	188,500	$  38.60	18,806	$    46.33
Granted	35,874	52.36	30	52.36
Forfeited	(3,375)	46.14	(3,471)	46.20
Outstanding at September 30, 2007	220,999	$  40.72	15,365	$    46.37

(10)         Capital and Financing Transactions

                On March 1, 2007, the Company paid off the $18 million first mortgage secured by Citrus Center in Orlando, Florida which was previously scheduled to mature on August 1, 2007. 

                In connection with the 2006 first mortgage placed on One Illinois Center, located at 111 East Wacker Drive in Chicago, Illinois, the Company delivered $11.3 million in letters of credit to satisfy the various escrow requirements made by the lender.  On April 2, 2007, the Company renewed these letters of credit through June 30, 2008 and reduced the carrying amount from $11.3 million to $3 million.  The reduction in the letters of credit is due to the Company funding the lender escrow requirements with cash contributions to the escrow accounts.

                In connection with the purchase of office properties, the Fund placed the following non-recourse first mortgages during the nine months ending September 30, 2007:

•        On February 9, 2007, the Fund placed a $31.5 million ten-year non-recourse first mortgage with an interest rate of 5.61% in connection with the 2006 purchase of Overlook II in Atlanta, Georgia.  Payments during the mortgage term will be on an interest only basis and the loan matures on March 1, 2017.

•        On June 14, 2007, the Fund placed a $28 million eight-year non-recourse first mortgage with a fixed interest rate of 5.76% in connection with the purchase of 1401 Enclave Parkway in Houston, Texas.  Payments during the mortgage term will be on an interest only basis for five years.  Principle and interest payments of $5.8 million will be made over remaining term of loan with a balloon payment due at maturity.

                In connection with the sale of the two Knoxville office properties on June 29, 2007, the Company paid off the $7.4 million first mortgage secured by First Tennessee Plaza and recorded expenses related to the prepayment of the mortgage of $494,000 in the second quarter.  The mortgage had an interest rate of 7.17% and was previously scheduled to mature on December 15, 2012. 

                On August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7 million shares of Parkway's outstanding common stock through July 30, 2008.  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.   Through September 2007, the Company purchased 454,038 shares for $19.9 million, which equates to an average price of $43.91 per share.

Page 17 of 37

                In connection with the purchase of the Capital City Plaza in Atlanta, Georgia on April 2, 2004, Parkway, through a subsidiary company, issued $15.5 million in preferred membership interests to the seller. The preferred membership interests paid the seller a 7% coupon rate and were issued to accommodate their tax planning needs.  The seller previously redeemed $4.75 million of the preferred membership interest. On August 7, 2007, the seller redeemed the remaining $10.7 million of preferred membership interests.

                On August 24, 2007, the Company entered into an interest rate swap agreement with US Bank.  The interest rate swap is for a $30 million notional amount and fixes the 30-day LIBOR interest rate at 4.924%, which equates to a total interest rate of 6.224%, for the period September 4, 2007 through August 31, 2008. The swap agreement serves as a hedge of the variable interest rates on a portion of the borrowings under the Company's $200 million line of credit.

(11)         Segment Information

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

                The Company believes that the individual operating segments exhibit similar economic characteristics such as being leased by the square foot, sharing the same primary operating expenses and ancillary revenue opportunities and being cyclical in the economic performance based on current supply and demand conditions.  The individual operating segments are also similar in that revenues are derived from the leasing of office space to customers and each office property is managed and operated consistently in accordance with Parkway's standard operating procedures.  The range and type of customer uses of our properties is similar throughout our portfolio regardless of location or class of building and the needs and priorities of our customers do not vary from building to building. Therefore, Parkway's management responsibilities do not vary from location to location based on the size of the building, geographic location or class.

Page 18 of 37

The management of the Company evaluates the performance of the reportable office segment based on funds from operations applicable to common shareholders ("FFO").  Management believes that FFO is an appropriate measure of performance for equity REITs and computes this measure in accordance with the National Association of Real Estate Investment Trusts' ("NAREIT") definition of FFO.  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 and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive the Company's pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, the Company does not adjust FFO to eliminate the effects of non-recurring charges.  The Company believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses.  However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient.  Thus, NAREIT created FFO as a supplemental measure of operating performance for real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP.  The Company believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful.  FFO as reported by Parkway may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  Funds from operations do not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds from operations should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.

The following is a reconciliation of FFO and net income available to common stockholders for office properties and total consolidated entities for the three months ending September 30, 2007 and 2006.

	As of or for the three months ended September 30, 2007						As of or for the three months ended September 30, 2006
	Office		Unallocated				Office		Unallocated
	Properties		and Other		Consolidated		Properties		and Other		Consolidated
	(in thousands)						(in thousands)
Property operating revenues (a)	$	60,785	$	-	$	60,785	$	54,923	$	-	$	54,923
Property operating expenses (b)	(28,338)		-		(28,338)		(26,590)		-		(26,590)
Property net operating income from         continuing operations	32,447		-		32,447		28,333		-		28,333
Management company income	-		432		432		-		284		284
Interest and other income	-		90		90		-		8		8
Interest expense (c)	(10,731)		(2,643)		(13,374)		(9,742)		(2,823)		(12,565)
Management company expenses	‑		(343)		(343)		-		(223)		(223)
General and administrative expenses	-		(1,860)		(1,860)		-		(1,282)		(1,282)
Other expense	-		(2)		(2)		-		(1)		(1)
Equity in earnings of unconsolidated joint ventures	234		-		234		198		-		198
Adjustment for depreciation and amortization -        unconsolidated joint ventures	169		-		169		156		-		156
Adjustment for depreciation and amortization -         discontinued operations	-		-		-		121		-		121
Adjustment for minority interest -          real estate partnerships	(1,711)		-		(1,711)		(423)		-		(423)
Income from discontinued operations	93		-		93		130		-		130
Loss on non depreciable assets	-		(3)		(3)		-		-		-
Dividends on preferred stock	-		(1,200)		(1,200)		-		(1,200)		(1,200)
Dividends on convertible preferred stock	-		-		-		-		(481)		(481)
Funds from operations available         to common stockholders	20,501		(5,529)		14,972		18,773		(5,718)		13,055
Depreciation and amortization	(19,694)		-		(19,694)		(17,257)		-		(17,257)
Depreciation and amortization -         unconsolidated joint ventures	(169)		-		(169)		(156)		-		(156)
Depreciation and amortization -         discontinued operations	-		-		-		(121)		-		(121)
Depreciation and amortization - minority         interest - real estate partnerships	2,799		-		2,799		648		-		648
Gain on sale of real estate
from discontinued operations	-		-		-		211		-		211
Minority interest - unit holders	-		(2)		(2)		-		(1)		(1)
Net income (loss) available to common         stockholders	$	3,437	$	(5,531)	$	(2,094)	$	2,098	$	(5,719)	$	(3,621)
Capital expenditures	$	10,951	$	-	$	10,951	$	9,043	$	-	$	9,043
(a)    Included in property operating revenues are rental revenues, customer reimbursements, parking income and other income.
(b)    Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.
(c)    Interest expense for office properties represents interest expense on property secured mortgage debt and interest on subsidiary redeemable preferred membership interests.  It does not include interest expense on the unsecured lines of credit.

 

Page 19 of 37

 

The following is a reconciliation of FFO and net income available to common stockholders for office properties and total consolidated entities for the nine months ending September 30, 2007 and 2006.

	As of or for the nine months ended September 30, 2007						As of or for the nine months ended September 30, 2006
	Office		Unallocated				Office		Unallocated
	Properties		and Other		Consolidated		Properties		and Other		Consolidated
	(in thousands)						(in thousands)
Property operating revenues (a)	$	183,408	$	-	$	183,408	$	152,460	$	-	$	152,460
Property operating expenses (b)	(85,391)		-		(85,391)		(73,011)		-		(73,011)
Property net operating income from         continuing operations	98,017		-		98,017		79,449		-		79,449
Management company income	-		1,196		1,196		-		5,082		5,082
Interest and other income	-		308		308		-		34		34
Interest expense (c)	(32,506)		(8,004)		(40,510)		(24,116)		(7,671)		(31,787)
Management company expenses	-		(887)		(887)		-		(898)		(898)
General and administrative expenses	-		(5,105)		(5,105)		-		(3,405)		(3,405)
Other expense	-		(4)		(4)		-		(4)		(4)
Equity in earnings of unconsolidated         joint ventures	782		-		782		524		-		524
Adjustment for depreciation and amortization -         unconsolidated joint ventures	491		-		491		659		-		659
Adjustment for depreciation and amortization -         discontinued operations	1		-		1		535		-		535
Adjustment for minority interest -         real estate partnerships	(4,899)		-		(4,899)		(1,104)		-		(1,104)
Income from discontinued operations	170		-		170		785		-		785
Gain (loss) on non depreciable assets	47		-		47		(119)		-		(119)
Dividends on preferred stock	-		(3,600)		(3,600)		-		(3,600)		(3,600)
Dividends on convertible preferred stock	-		-		-		-		(1,654)		(1,654)
Funds from operations available         to common stockholders	62,103		(16,096)		46,007		56,613		(12,116)		44,497
Depreciation and amortization	(58,073)		-		(58,073)		(44,864)		-		(44,864)
Depreciation and amortization -         unconsolidated joint ventures	(491)		-		(491)		(659)		-		(659)
Depreciation and amortization -         discontinued operations	(1)		-		(1)		(535)		-		(535)
Depreciation and amortization - minority         interest - real estate partnerships	7,474		-		7,474		1,473		-		1,473
Gain on sale of and real estate and other assets	20,260		-		20,260		13,584		-		13,584
Gain on sale of real estate          from discontinued operations	-		-		-		211		-		211
Minority interest - unit holders	-		(2)		(2)		-		(1)		(1)
Net income (loss) available to common         stockholders	$	31,272	$	(16,098)	$	15,174	$	25,823	$	(12,117)	$	13,706
Total assets	$	1,519,751	$	8,142	$	1,527,893	$	1,385,545	$	7,285	$	1,392,830
Office and parking properties	$	1,319,240	$	-	$	1,319,240	$	1,205,123	$	-	$	1,205,123
Investment in unconsolidated joint ventures	$	11,068	$	-	$	11,068	$	11,126	$	-	$	11,126
Capital expenditures	$	35,943	$	-	$	35,943	$	24,387	$	-	$	24,387
(a)   Included in property operating revenues are rental revenues, customer reimbursements, parking income and other income.
(b)   Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.
(c)   Interest expense for office properties represents interest expense on property secured mortgage debt and interest on subsidiary redeemable preferred membership       interests.  It does not include interest expense on the unsecured lines of credit.

 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Parkway is a self-administered and self-managed REIT specializing in the acquisition, operations, leasing and ownership of office properties.  The Company is geographically focused on the Southeastern and Southwestern United States and Chicago.  As of October 1, 2007 Parkway owned or had an interest in 66 office properties located in 11 states with an aggregate of approximately 13.0 million square feet of leasable space.  Included in the portfolio are 18 properties totaling 2.7 million square feet that are owned jointly with other investors, representing 21% of the portfolio.  Under the Company's GEAR UP Plan, which started January 1, 2006 and ends December 31, 2008, it is the Company's goal to transform its strategy from being an owner-operator to being an operator-owner. The strategy highlights the Company's strength in providing excellent service in the operation of office properties in addition to its direct ownership of real estate assets. Fee-based real estate services are offered through the Company's wholly owned subsidiary, Parkway Realty Services LLC, which also manages and/or leases approximately 1.8 million square feet for third party owners as of July 1, 2007.  The Company generates revenue primarily by leasing office space to its customers and providing management and leasing services to third party office property owners (including joint venture interests).  The primary drivers behind Parkway's revenues are occupancy, rental rates and customer retention. 

Occupancy.  Parkway's revenues are dependent on the occupancy of its office buildings.  As a result of job losses and over supply of office properties during 2001 through 2003, vacancy rates increased nationally and in Parkway's markets.  In 2004, the office sector began to recover from high vacancy rates due to improving job creation.  As of October 1, 2007, occupancy of Parkway's office portfolio was 92.3% compared to 91.6% as of July 1, 2007 and 91.0% as of October 1, 2006.  Not included in the October 1, 2007 occupancy rate are 18 signed leases totaling 88,000 square feet, which commence during the fourth quarter of 2007 through the first quarter of 2008 and will raise Parkway's percentage leased to 93.0%.  To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases.  These include the Broker Bill of Rights, a short-form service agreement and customer advocacy programs which are models in the industry and have helped the Company maintain occupancy around 92% during a time when the national occupancy rate is approximately 87%.  Parkway projects occupancy ranging from 91% to 92% during 2007 for its office properties with projected annual average occupancy of 92%.

Rental Rates.  An increase in vacancy rates has the effect of reducing market rental rates and vice versa.  Parkway's leases typically have three to seven year terms.  As leases expire, the Company replaces the existing leases with new leases at the current market rental rate.

Customer Retention.  Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs.  Parkway estimates that it costs five to six times more 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 lost during downtime on the space plus leasing costs, which rise as market vacancies increase.  Therefore, Parkway focuses a great deal of energy on customer retention.  Parkway's operating philosophy is based on the premise that it is in the customer retention business.  Parkway seeks to retain its customers by continually focusing on operations at its office properties.  The Company believes in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders.  Over the past ten years, Parkway maintained an average 73.7% customer retention rate.  Parkway's customer retention for the three months and nine months ended September 30, 2007 was 69.8% and 69.3%, respectively, compared to 73.8% and 71.6% for the three months and nine months ended September 30, 2006, respectively. 

Strategic Planning.  Management continues to see Parkway defined as a focused office REIT with a hands-on, service-oriented approach, a disciplined asset allocation program and a willingness to recycle assets.  However, management sees the future transformation taking Parkway from being an owner-operator to being an operator-owner.  On January 1, 2006, the Company initiated a new three-year operating plan referred to as the "GEAR UP" Plan that will serve as the spring board to transform Parkway from being first an owner of real estate and secondarily an operator of real estate for others to being first an operator of real estate for others that also owns an interest in the real estate.  The goals of the GEAR UP Plan are as follows:

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

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•        Equity Opportunities.  Over the last several years management has created a broad array of equity opportunities for Parkway.  On the private equity side this includes the use of discretionary funds, such as the Fund with Ohio PERS, and partnerships.  The judicious use of private equity provides a greater return on equity to the public shareholders. Parkway intends to contribute assets from its balance sheet to form new joint ventures and expects these subsequent ventures to be similar to discretionary funds in their duration and economics. On the public equity side, this includes the judicious use of common equity and preferred equity to manage the balance sheet and growth. 

•         Asset Recycling. The Company has demonstrated its willingness in the past to sell assets when management believed the time was right.  At the start of the GEAR UP Plan, Parkway identified 25 buildings in twelve markets, totaling approximately 5 million rentable square feet to be part of the asset recycling program.  Most of these properties are smaller assets or located in smaller markets that do not fit with the Company strategy of owning larger assets in institutional markets.  The dispositions that are planned will help align the Company's portfolio with its current acquisition criteria, which focuses on larger properties in institutional markets.  In most cases, Parkway will seek to keep a 10% to 30% joint venture interest in the properties being recycled and retain management and leasing agreements.  This is a fluid list of assets based on the Company's evaluation of specific market conditions and review of the portfolio.  The other side of Asset Recycling is the reinvestment of proceeds from dispositions into other assets, either owned in the fee-simple format or owned jointly with a partner.

These two goals, Equity Opportunities and Asset Recycling, are what combine to transform Parkway from being an owner-operator to being an operator-owner.  Management strongly believes that these actions will result in Parkway better leveraging its core strength of operating office properties and will be advantageous for the Company's shareholders over the long term.

•        Retain Customers.  Customer retention remains the cornerstone of the Company's business and is why partners choose to partner with Parkway.  The goal is a customer retention rate of 70% to 75%.  The average customer retention rate since the inception of the GEAR UP Plan on January 1, 2006 is 70%, and we anticipate that the annual customer retention rate for 2007 will be in the range of 70% to 75%.

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

•        Performance.  In the planning process, management first decided what actions to take strategically over the three years of the GEAR UP Plan and secondly, modeled the economic impact of these actions.  Given the large component of Asset Recycling in the Plan, management selected a financial metric that would be most appropriate to measure the success of the Plan.   This led to the adoption of Cumulative Adjusted Funds Available for Distribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP Plan, with a target of $7.18 per share cumulative over three years.  Actual Adjusted FAD for 2006 exceeded the amount projected by the Company by $.29 per diluted share.  Additionally, Parkway established a self-imposed limit for the modified fixed charge coverage ratio of 2.5 times as a pledge not to use leverage to achieve Company goals. 

For the GEAR UP Plan Parkway is not abandoning Funds from Operations, but rather carrying it a step further to include accountability for capital items and removing the accounting adjustments which are not directly influenced by the operations of its properties.   Management believes an Adjusted FAD goal provides an effective alignment with the shareholders by focusing the team on maximizing income from operations while being mindful of capital expenses and ultimately the funds available to cover the dividend.   Cumulative Adjusted FAD is calculated as the sum of Adjusted FAD for each of the three years of the plan.    The adjustments that will be made to FAD reported each quarter principally include charges for impairment of value and expenses related to the early extinguishment of debt. 

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Parkway has made progress on its Asset Recycling and Equity Opportunities goals in 2006 and 2007 as follows:

•        Dispositions.   Parkway sold ten office properties for a gross sales price totaling $153.8 million and recorded a total gain on the sales for financial reporting purposes in the amount of $43.1 million.

•        Fund Acquisitions.  The Fund with Ohio PERS purchased eight office properties at an aggregate contract purchase price of $230.2 million. 

•        Fee Simple Purchases.  Parkway purchased One Illinois Center in Chicago, Illinois at a contract purchase price of $198 million.

•       Other Purchases.  Parkway purchased an additional interest in Moore Building Associates, LP, which owns the Toyota Center in Memphis, Tennessee, for $1.4 million raising Parkway's total ownership interest to 75.025%.

•        Equity Offering.  On December 18, 2006, the Company sold 600,000 shares of common stock to Banc of America Securities LLC at a gross offering price of $50.25 per share and a net price of $49.37 per share. The Company used the net proceeds of approximately $29.6 million to repay indebtedness outstanding under a $19.3 million mezzanine loan incurred in connection with the purchase of One Illinois Center and to purchase additional investments in office properties.

•        Stock Buyback.  On August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7 million shares of Parkway's outstanding common stock through July 30, 2008.  During the quarter ending September 30, 2007, the Company purchased 454,038 shares of Parkway common stock for $19.9 million, which equates to an average price of $43.91 per share.

Discretionary Fund.  On July 6, 2005, Parkway, through affiliated entities, entered into a limited partnership agreement forming a $500 million discretionary fund with Ohio PERS (the "Fund") for the purpose of acquiring high-quality multi-tenant office properties.  Ohio PERS is a 75% investor and Parkway is a 25% investor in the Fund, which will be capitalized with approximately $200 million of equity capital and $300 million of non-recourse, fixed-rate first mortgage debt.  The Fund targets acquisitions in the existing core Parkway markets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville.  There is approximately $228 million remaining capacity for Fund office investments.  The remaining office investments are expected to be funded by approximately $137 million in mortgage debt and $91 million in equity contributions from partners.

       The Fund targets properties with an anticipated cash on cash return greater than 7% and an anticipated leveraged internal rate of return of greater than 11%.  Parkway serves as the general partner of the Fund and provides asset management, property management, leasing and construction management services to the Fund, for which it 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 the excess cash flow will be paid to the general partner and 80% will be paid to the limited partners.    Through its general partner and limited partner ownership interests, Parkway may receive a distribution of the cash flow equivalent to 40%.  Parkway will have three years from the inception date of the Fund to identify and acquire properties (the "Commitment Period"), with funds contributed as needed to close acquisitions.  Parkway will exclusively represent the Fund in making acquisitions within the target markets and within certain predefined criteria.  Parkway will not be prohibited from making fee-simple or joint venture acquisitions in markets outside of the target markets, acquiring properties within the target markets that do not meet the Fund's specific criteria or selling or joint venturing any currently owned properties.  The term of the Fund will be seven years from the expiration of the Commitment Period, with provisions to extend the term for two additional one-year periods.

Page 23 of 37

Financial Condition

Comments are for the balance sheet dated September 30, 2007 compared to the balance sheet dated December 31, 2006.

                Office and Parking Properties.  In 2007, Parkway continued the application of its strategy of operating and acquiring office properties, joint venturing interests in office assets, as well as liquidating non-core assets and office assets that no longer meet the Company's investment criteria and/or the Company has determined value will be maximized by selling.  During the nine months ending September, 2007, total assets increased $15.5 million or 1.0% and office and parking properties (before depreciation) increased $34.4 million or 2.3%.

                Purchases, Improvements and Development. Parkway's investment in office and parking properties increased $13.0 million net of depreciation to a carrying amount of $1.3 billion at September 30, 2007, and consisted of 60 office and parking properties.  The primary reason for the increase in office and parking properties relates to the net effect of the purchase of land and an office property, building improvements, development costs, the sale of two office properties, a capital lease for a garage and depreciation recorded during the year.

                On February 28, 2007, the Company purchased 2.5 acres of land in Jackson, Mississippi for $1.8 million.  This land was purchased as part of the Company's plan to develop the 194,000 square foot Class A+ office building known as The Pinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company's headquarters building.  The estimated cost of the development is $48.5 million with expected completion in the fall of 2008.  The Company has received commitments to lease approximately 70% of the new office space from four major customers.  Parkway will be seeking partners for an 80% ownership interest in the development.  The development is designed to utilize benefits available under the Gulf Opportunity Zone Act for new developments in areas affected by Hurricane Katrina.  During the nine months ending September 30, 2007, the Company incurred $7.7 million in development costs for The Pinnacle.

                On June 14, 2007 the Fund with Ohio PERS purchased 1401 Enclave Parkway, a 209,000 square foot, six-story office property in Houston, Texas for a purchase price of $46.5 million.  The Fund expects to spend an additional $346,000 for closing costs, building improvements, leasing costs and tenant improvements during the first two years of ownership. 

                On June 29, 2007, the Company sold two office properties, First Tennessee Plaza and Cedar Ridge, totaling 549,000 square feet located in Knoxville, Tennessee for a gross sales price of $59 million.  The Company received net cash proceeds from the sale of $56.8 million and the proceeds were used to prepay the $7.4 million first mortgage secured by First Tennessee Plaza and to reduce amounts outstanding under the Company's bank lines of credit.  Parkway recorded a gain on the sale for financial reporting purposes of $20.3 million and expenses related to the prepayment of the mortgage of $494,000 in the second quarter of 2007.  Parkway Realty Services LLC was retained to provide management services for the properties under a five-year agreement.  Therefore, all revenue and expense for these properties are included as a component of continuing operations.

                On September 1, 2007, Parkway entered into a lease for the parking garage known as Parking at Jackson Place, which is adjacent to the Company's headquarters and The Pinnacle in Jackson, Mississippi.  The term of the lease is 60 years with a renewal option for an additional 30 years.  Since the fair value of the land is greater than 25% of the total value of the property, the Company is accounting for the component of the lease attributable to the land as an operating lease and the component attributable to the building as a capital lease.  The garage was recorded at a cost of $4.1 million.

                During the nine months ending September 30, 2007, the Company capitalized building improvements and additional purchase expenses of $34.6 million and recorded depreciation expense of $44.5 million related to its office and parking properties.

Intangible Assets, Net.  For the nine months ended September 30, 2007, intangible assets net of related amortization decreased $7.8 million and was primarily due to the amortization of the existing intangible assets for the period.

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Notes Payable to Banks.  Notes payable to banks increased $34.5 million or 22.6% during the nine months ended September 30, 2007.  At September 30, 2007, notes payable to banks totaled $186.8 million and the increase is primarily attributable to the net effect of advances under bank lines of credit to purchase and develop real estate, make improvements to office properties, purchase Parkway common stock and retire existing debt offset by proceeds from the sale of assets used to reduce bank lines of credit.

On August 24, 2007, the Company entered into an interest rate swap agreement with US Bank.  The interest rate swap is for a $30 million notional amount and fixes the 30-day LIBOR interest rate at 4.924%, which equates to a total interest rate of 6.224%, for the period September 4, 2007 through August 31, 2008.  The swap agreement serves as a hedge of the variable interest rates on a portion of the borrowings under the Company's $200 million line of credit.

                Mortgage Notes Payable.  During the nine months ended September 30, 2007, mortgage notes payable increased $22.3 million or 3.2% and is due to scheduled principal payments on mortgages of $11.8 million, the prepayment of existing mortgage debt of $25.4 million and the placement of mortgage debt of $59.5 million described below.

                In connection with the purchase of office properties, the Fund with Ohio PERS placed the following non-recourse first mortgages during the nine months ending September 30, 2007:

•        On February 9, 2007, the Fund placed a $31.5 million ten-year non-recourse first mortgage with an interest rate of 5.61% in connection with the 2006 purchase of Overlook II in Atlanta, Georgia.  Payments during the mortgage term will be on an interest only basis and the loan matures on March 1, 2017.

•        On June 14, 2007, the Fund placed a $28 million eight-year non-recourse first mortgage with a fixed interest rate of 5.76% in connection with the purchase of 1401 Enclave Parkway in Houston, Texas.  Payments during the mortgage term will be on an interest only basis for five years.  Principle and Interest payments of $5.8 million will be made over remaining term of loan with a balloon payment due at maturity.

                Subsidiary Redeemable Preferred Membership Interests.  In connection with the purchase of the Capital City Plaza in Atlanta, Georgia on April 2, 2004, Parkway, through a subsidiary company, issued $15.5 million in preferred membership interests to the seller.  The preferred membership interests paid the seller a 7% coupon rate and were issued to accommodate their tax planning needs.  The seller previously redeemed $4.75 million of the preferred membership interest. On August 7, 2007, the seller redeemed the remaining $10.7 million of preferred membership interests.

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                The computation of the interest, fixed charge and modified fixed charge coverage ratios and the reconciliation of net income to EBITDA is as follows for the nine months ended September 30, 2007 and 2006 (in thousands):

	Nine Months Ended
	September 30
	2007	2006
Net Income	$    18,774	$    18,960
Adjustments to Net Income:
Interest expense	39,242	30,963
Amortization of financing costs	898	824
Prepayment expense on early extinguishment of debt	370	-
Depreciation and amortization	58,074	45,399
Amortization of share based compensation	1,114	584
Gain on real estate	(20,307)	(13,676)
Tax expense	129	1
EBITDA adjustments - unconsolidated joint ventures	882	1,915
EBITDA adjustments - minority interest in real estate  partnerships	(12,019)	(2,546)
EBITDA (1)	$    87,157	$    82,424
Interest Coverage Ratio:
EBITDA	$    87,157	$    82,424
Interest expense:
Interest expense	$    39,242	$    30,963
Capitalized interest	115	-
Interest expense - unconsolidated joint ventures	383	886
Interest expense - minority interest in real estate partnerships	(4,428)	(1,039)
Total interest expense	$    35,312	$    30,810
Interest Coverage Ratio	2.47	2.68
Fixed Charge Coverage Ratio:
EBITDA	$    87,157	$    82,424
Fixed charges:
Interest expense	$    35,312	$    30,810
Preferred dividends	3,600	5,254
Principal payments (excluding early extinguishment of debt)	11,770	11,327
Principal payments - unconsolidated joint ventures	37	34
Principal payments - minority interest in real estate partnerships	(229)	(176)
Total fixed charges	$    50,490	$    47,249
Fixed Charge Coverage Ratio	1.73	1.74
Modified Fixed Charge Coverage Ratio:
EBITDA	$    87,157	$    82,424
Modified Fixed Charges:
Interest expense	$    35,312	$    30,810
Preferred dividends	3,600	5,254
Total Modified Fixed Charges	$    38,912	$    36,064
Modified Fixed Charge Coverage Ratio	2.24	2.29

(1)           Parkway defines EBITDA, a non-GAAP financial measure, as net income before interest, income taxes, depreciation, amortization, losses on early extinguishment of debt and other gains and losses.  EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do. 

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                The Company believes that EBITDA helps investors and Parkway's management analyze the Company's ability to service debt and pay cash distributions.  However, the material limitations associated with using EBITDA as a non-GAAP financial measure compared to cash flows provided by operating, investing and financing activities are that EBITDA does not reflect the Company's historical cash expenditures or future cash requirements for working capital, capital expenditures or the cash required to make interest and principal payments on the Company's outstanding debt.  Although EBITDA has limitations as an analytical tool, the Company compensates for the limitations by using EBITDA only to supplement GAAP financial measures.  Additionally, the Company believes that investors should consider EBITDA in conjunction with net income and the other required GAAP measures of its performance and liquidity to improve their understanding of Parkway's operating results and liquidity. 

                Parkway views EBITDA primarily as a liquidity measure and, as such, the GAAP financial measure most directly comparable to it is cash flows provided by operating activities.  Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income, cash flows provided by operating, investing and financing activities prepared in accordance with GAAP.  The following table reconciles EBITDA to cash flows provided by operating activities for the nine months ended September 30, 2007 and 2006 (in thousands):

	Nine Months Ended
	September 30
	2007	2006
EBITDA	$    87,157	$    82,424
Amortization of above market leases	754	1,171
Operating distributions from unconsolidated joint ventures	902	1,150
Interest expense	(39,242)	(30,963)
Prepayment expense on early extinguishment of debt	(370)	-
Tax expense	(129)	(1)
Increase in receivables and other assets	(7,360)	(18,428)
Increase in accounts payable and other liabilities	8,749	10,550
Adjustments for minority interests	9,446	2,178
Adjustments for unconsolidated joint ventures	(1,664)	(2,439)
Cash flows provided by operating activities	$    58,243	$    45,642

                Minority Interest - Real Estate Partnerships. During the nine months ending September 30, 2007, minority interest associated with real estate partnerships decreased $12.5 million or 13.9%.  The decrease is attributable to the distribution of the minority interest partner's share of the $59.5 million mortgage notes payable placed by the Fund offset by the minority interest partner's contribution toward the purchase of an office property.

                Stockholders' Equity. Stockholders' equity decreased $31.0 million or 6.3% during the nine months ended September 30, 2007, as a result of the following (in thousands):

	Increase
	(Decrease)
Net income	$    18,774
Change in unrealized gain on equity securities	4
Change in market value of interest rate swaps	(695)
Comprehensive income	18,083
Common stock dividends declared	(30,664)
Purchase of company stock	(19,936)
Preferred stock dividends declared	(3,600)
Exercise of stock options	3,029
Share based compensation expense	1,114
Shares distributed from deferred compensation plan	354
Shares issued through DRIP Plan	363
Shares issued in lieu of Directors' fees	251
Shares issued through Employee Stock Purchase Plan	37
Stock offering issuance costs	(28)
	$   (30,997)

 

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                On August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7 million shares of Parkway's outstanding common stock through July 30, 2008.  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.  Through September 2007, the Company purchased 454,038 shares for $19.9 million, which equates to an average price of $43.91 per share.

Results of Operations

Comments are for the three months and nine months ended September 30, 2007 compared to the three months and nine months ended September 30, 2006.

            Net loss available to common stockholders for the three months ended September 30, 2007 was $2.1 million ($0.14 per basic common share) as compared to net loss available to common stockholders of $3.6 million ($0.25 per basic common share) for the three months ended September 30, 2006.  Net income available to common stockholders for the nine months ended September 30, 2007 was $15.2 million ($0.97 per basic common share) as compared to net income available to common stockholders of $13.7 million ($0.97 per basic common share) for the nine months ended September 30, 2006.  A net gain on the sale of real estate and other assets of $20.3 million was included in net income available to common stockholders for the nine months ended September 30, 2007.  Net gains on the sale of real estate and other assets of $211,000 and $13.7 million were included in net income available to common stockholders for the three months and nine months ended September 30, 2006.

                Office and Parking Properties.  The analysis below includes changes attributable to same store properties, acquisitions and dispositions of office properties.  Same store properties are those that the Company owned for the current and prior year reporting periods, excluding properties classified as discontinued operations.  At September 30, 2007, same store properties consisted of 52 properties comprising 9.8 million square feet.  Properties acquired in 2006 and 2007 that do not meet the definition of same store properties consisted of eight properties with 2.3 million square feet.

                The following table represents revenue from office and parking properties for the three months and nine months ended September 30, 2007 and 2006 (in thousands):

	Three Months Ended September 30							Nine Months Ended September 30
					Increase		%						Increase		%
	2007		2006		(Decrease)		Change	2007			2006		(Decrease)		Change
Revenue from office and parking properties:
Same store properties	$	47,026	$	45,735	$	1,291	2.8%	$	144,222		$	140,476	$	3,746	2.7%
Properties acquired in 2006	12,087		6,061		6,026		99.4%	37,248			6,523		30,725		471.0%
Properties acquired in 2007	1,624		-		1,624		0.0%	1,898			-		1,898		0.0%
Properties disposed	48		3,127		(3,079)		-98.5%	40			5,461		(5,421)		-99.3%
Total revenue from office and
parking properties	$	60,785	$	54,923	$	5,862	10.7%	$		183,408	$	152,460	$	30,948	20.3%

                Revenue from office and parking properties for same store properties increased $1.3 million and $3.7 million for the three months and nine months ended September 30, 2007, respectively, compared to the same periods for 2006.  The primary reason for the increase is due to an increase in same store occupancy and average rental rates for same store properties for the nine months ended September 30, 2007 compared to September 30, 2006.  Average same store occupancy was 91.6% for the nine months ended September 30, 2007 compared to 89.6% for the same period of 2006.  Additionally, same store rental rates increased 2.1% for the nine months ended September 30, 2007 compared to the same period of 2006.

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                The following table represents property operating expenses for the three months and nine months ended September 31, 2007 and 2006 (in thousands):

	Three Months Ended September 30							Nine Months Ended September 30
					Increase		%						Increase		%
	2007		2006		(Decrease)		Change	2007			2006		(Decrease)		Change
Expenses from office and parking properties:
Same store properties	$	22,114	$	22,008	$	106	0.5%	$	66,838		$	67,034	$	(196)	-0.3%
Properties acquired in 2006	5,473		2,940		2,533		86.2%	17,591			3,091		14,500		469.1%
Properties acquired in 2007	668		-		668		0.0%	778			-		778		0.0%
Office property development	25		-		25		0.0%	82			-		82		0.0%
Properties disposed	58		1,642		(1,584)		-96.5%	102			2,886		(2,784)		-96.5%
Total expenses from office and
parking properties	$	28,338	$	26,590	$	1,748	6.6%	$		85,391	$	73,011	$	12,380	17.0%

                        Property operating expenses for same store properties increased $106,000 for the three months ended September 30, 2007 compared to the same period of 2006 and decreased $196,000 for the nine months ended September 30, 2007 compared to the same period of 2006.  The primary reason for the year to date decrease is due to decreased utilities.

Depreciation and amortization expense attributable to office and parking properties increased $2.4 million and $13.2 million for the three months and nine months ended September 30, 2007, respectively, compared to the same period for 2006 and is due to the increase in the net investment in office and parking properties due to additional purchases and improvements to properties.

                Management Company Income.  Management company income decreased $3.9 million for the nine months ending September 30, 2007 compared to the same period of 2006 and is primarily due to the additional management and incentive fee recorded in 2006 as a result of the economic returns generated above an internal rate of return hurdle rate achieved over the life of the Viad joint venture.  The fees were received and recognized by Parkway in the second quarter of 2006 at closing of the sale of Viad Corporate Center. 

                Share Based Compensation Expense.  Effective January 1, 2006, Parkway adopted FASB Statement No. 123R, Share-Based Payment ("FAS 123R") using the modified-prospective transition method. In the past the Company had granted stock options for a fixed number of shares to employees and directors with an exercise price equal to or above the fair value of the shares at the date of grant.  However, no stock options have been granted to employees since 2002 or to directors since 2003.  Since 2003, Parkway has elected to grant restricted shares and deferred incentive share units instead of stock options.  Therefore, the adoption of FAS 123R has not had a material impact on income from continuing operations, net income, cash flow from operations, cash flow from financing activities or basic and diluted earnings per share. 

                On January 12, 2007, the Board of Directors approved the grant of 35,874 shares to officers of the Company.  The shares were valued at $1.9 million and 34,875 shares will vest four years from grant date and 999 shares will vest subject to achievement of the cumulative goals of the GEAR UP Plan, which will end December 31, 2008.  Compensation expense will not be recorded on the shares that vest based on performance conditions until the Company determines that it is probable that the goal will be achieved.  Therefore, no expense has been recorded to date for the shares that vest based on achievement of the cumulative goals of the GEAR UP Plan.

                Share based compensation expense of $1.1 million and $584,000 was recognized for the nine months ending September 30, 2007 and 2006, respectively.  Total compensation expense related to nonvested awards subject to service conditions not yet recognized was $4.3 million as of September 30, 2007.  The weighted average period over which this expense is expected to be recognized is approximately 2.8 years.  Total potential compensation expense associated with shares that vest based on performance conditions is $1.5 million as of September 30, 2007.

                General and Administrative Expense.  General and administrative expense increased $578,000 and $1.7 million for the three months and nine months ended September 30, 2007, respectively, compared to the same period of 2006 and is primarily attributable to increased personnel costs, share based compensation expense and professional fees.

Page 29 of 37

                Gain on Sale of Real Estate and Other Assets.  For the nine months ended September 30, 2007, Parkway recorded a gain on the sale of two office properties in Knoxville, Tennessee in the amount of $20.3 million.  For the nine months ended September 30, 2006, the Company recorded a gain on the sale of the Viad Corporate Center in the amount of $13.6 million and recognized an impairment loss on investment securities in the amount of $119,000. 

                Interest Expense.  Interest expense, including amortization, increased $809,000 and $8.7 million for the three months and nine months ended September 30, 2007, respectively, compared to the same period of 2006 and is comprised of the following (in thousands):

	Three Months Ended September 30							Nine Months Ended September 30
					Increase		%					Increase		%
	2007		2006		(Decrease)		Change	2007		2006		(Decrease)		Change
Interest expenses:
Mortgage interest expense	$	10,456	$	9,384	$	1,072	11.4%	$	31,100	$	23,062	$	8,038	34.9%
Bank line interest expense	2,527		2,724		(197)		-7.2%	7,693		7,339		354		4.8%
Subsidiary redeemable preferred
membership interest	76		190		(114)		-60.0%	449		562		(113)		-20.1%
Debt prepayment expense	-		-		-		0.0%	370		-		370		0.0%
Mortgage loan cost amortization	198		169		29		17.2%	587		492		95		19.3%
Bank loan cost amortization	117		98		19		19.4%	311		332		(21)		-6.3%
Total interest expense	$	13,374	$	12,565	$	809	6.4%	$	40,510	$	31,787	$	8,723	27.4%

                Mortgage interest expense increased $1.1 million and $8.0 million for the three months and nine months ended September 30, 2007, respectively, compared to the same period for 2006 and is due to the net effect of new loans placed or assumed in 2007 and 2006 and the early extinguishment of two mortgages in 2007.  The average interest rate on mortgage notes payable as of September 30, 2007 and 2006 was 5.8%.

                Discontinued Operations.  Discontinued operations is comprised of the following for the three months and nine months ending September 30, 2007 and 2006 (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
			Increase	%			Increase	%
	2007	2006	(Decrease)	Change	2007	2006	(Decrease)	Change
Discontinued operations:
Income from discontinued
operations	$    93	$  130	$    (37)	-28.5%	$     170	$   785	$    (615)	-78.3%
Gain on sale of real estate
from discontinued operations	-	211	(211)	-100.0%	-	211	(211)	-100.0%
Total discontinued operations	$    93	$  341	$  (248)	-72.7%	$    170	$   996	$    (826)	-82.9%

In August 2006, the Company sold Central Station, an office property in St. Petersburg, Florida to an unrelated party for a gross sales price of $15 million and recognized a gain on the sale in the amount of $211,000 in the third quarter of 2006. 

Liquidity and Capital Resources

 Statement of Cash Flows.   Cash and cash equivalents were $11.4 million and $4.5 million at September 30, 2007 and December 31, 2006, respectively.  Cash flows provided by operating activities for the nine months ended September 30, 2007 were $58.2 million compared to $45.6 million for the same period of 2006.  The increase in cash flows from operating activities of $12.6 million is primarily attributable to the effect of the timing of receipt of revenues and payment of expenses.

                Cash used in investing activities was $35.2 million for the nine months ended September 30, 2007 compared to cash used in investing activities of $215.9 million for the same period of 2006.  The decrease in cash used in investing activities of $180.7 million is primarily due to the net effect of increased proceeds on the sale of office properties and office property purchases in 2006, offset by an increase in office property improvements and development costs in 2007.

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                Cash used in financing activities was $16.0 million for the nine months ended September 30, 2007 compared to cash provided by financing activities of $172.1 million for the same period of 2006.  The decrease in cash provided by financing activities of $188.2 million is primarily due to the net effect of an early extinguishment of two mortgage notes payable in 2007, proceeds from the sale of office properties used to reduce bank lines of credit, the purchase of Parkway common stock and proceeds received on mortgage placements in 2006.

Liquidity.   The Company plans to continue pursuing the acquisition of additional investments that meet the Company's investment criteria and intends to use bank lines of credit, proceeds from the sale of non-core assets and office properties, proceeds from the sale of portions of owned assets through joint ventures, possible sales of securities and cash balances to fund those acquisitions. 

                The Company's cash flows are exposed to interest rate changes primarily as a result of its lines of credit used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations.  The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs.  To achieve its objectives, the Company borrows at fixed rates, but also utilizes a four-year unsecured revolving credit facility, a five-year unsecured term loan and two one-year unsecured lines of credit.

                At September 30, 2007, Parkway had a total of $186.8 million outstanding under a four-year $140 million unsecured revolving credit facility and a five-year $60 million unsecured term loan, both led by Wachovia Bank and syndicated to nine other banks (the "$200 million line"), a $15 million unsecured line of credit with PNC Bank (the "$15 million line") and a $9 million unsecured line of credit with Trustmark National Bank (the "$9 million line").  The weighted average interest rate on unsecured lines of credit was 6.4% and 6.2% at September 30, 2007 and 2006, respectively.

The $200 million line is comprised of a $60 million term loan maturing in April 2011 and a $140 million revolving loan maturing in April 2010. The interest rate on the $200 million line is based on LIBOR plus 80 to 130 basis points depending upon overall Company leverage, with the current rate set at LIBOR plus 130 basis points as of September 30, 2007.  The Company pays an annual administration fee of $35,000 and fees on the unused portion of the revolver ranging between 12.5 and 20 basis points based upon overall Company leverage, with the rate set at 12.5 basis points at September 30, 2007.

                The Company's $200 million line requires compliance with a number of restrictive financial covenants, including tangible net worth, fixed charge coverage ratio, unencumbered interest coverage ratio, total debt to total asset ratio, secured debt to total asset value ratio, secured recourse debt to total asset value ratio and unencumbered pool restrictions.  As of September 30, 2007 the Company was in compliance with these financial covenants.

The $15 million line matures January 29, 2008, is unsecured and is expected to fund the daily cash requirements of the Company's treasury management system.  The interest rate on the $15 million line is based on LIBOR plus 80 to 130 basis points, depending upon overall Company leverage, with the current rate set at LIBOR plus 130 basis points as of September 30, 2007.  Under the $15 million line, the Company does not pay annual administration fees or fees on the unused portion of the line.

The $9 million line with Trustmark National Bank is interest only, has a current interest rate equal to the 30-day LIBOR rate plus 132.5 basis points and matures December 7, 2007.  The proceeds of the loan were used to finance the construction of the City Centre Garage, which was completed in 2005.

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To protect against the potential for rapidly rising interest rates, the Company entered into interest rate swap agreements in 2007, 2005 and 2004.  The Company designated the swaps as hedges of the variable interest rates on the Company's borrowings under the Wachovia unsecured revolving credit facility.  Accordingly, changes in the fair value of the swaps are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings.  The Company's interest rate hedge contracts as of September 30, 2007 and 2006 are summarized as follows (in thousands):

					Fair Market Value
Type of	Notional	Maturity		Fixed	September 30
Hedge	Amount	Date	Reference Rate	Rate	2007	2006
Swap	$30,000	08/31/08	1-Month LIBOR	4.924%	$    (54)	$        -
Swap	$40,000	12/31/08	1-Month LIBOR	4.360%	100	523
Swap	$20,000	12/31/08	1-Month LIBOR	4.245%	91	309
					$   137	$   832

At September 30, 2007, the Company had $718.3 million in mortgage notes payable with an average interest rate of 5.8% secured by office properties and $186.8 million drawn under bank lines of credit.  Parkway's pro rata share of unconsolidated joint venture debt was $9.8 million with an average interest rate of 5.2% at September 30, 2007.  Based on the Company's total market capitalization of approximately $1.5 billion at September 30, 2007 (using the September 28, 2007 closing price of $44.14 per common share), the Company's debt represented approximately 51.8% of its total market capitalization.  The Company targets a debt to total market capitalization rate at a percentage in the range of 45% to 50%.  This rate may vary at times pending acquisitions, sales and/or equity offerings.  In addition, volatility in the price of the Company's common stock may affect the debt to total market capitalization ratio.  However, over time the Company plans to maintain a percentage in the range of 45% to 50%.

                In addition to the debt to total market capitalization ratio, the Company also monitors interest, fixed charge and modified fixed charge coverage ratios.  The interest coverage ratio is computed by comparing the cash interest accrued to earnings before interest, taxes, depreciation and amortization ("EBITDA").  This ratio for the nine months ended September 30, 2007 and 2006 was 2.47 and 2.68 times, respectively.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  This ratio for the nine months ended September 30, 2007 and 2006 was 1.73 and 1.74 times, respectively.   The modified fixed charge coverage ratio is computed by comparing the cash interest accrued and preferred dividends paid to EBITDA.  This ratio for the nine months ended September 30, 2007 and 2006 was 2.24 and 2.29 times, respectively.    In accordance with the GEAR UP Plan, Parkway has established a self-imposed limit for the modified fixed charge coverage ratio of 2.5 times as the Company's pledge not to use leverage to achieve Company goals.  Management believes the debt to market capitalization, interest coverage, fixed charge coverage and modified fixed charge coverage ratios provide useful information on total debt levels as well as the Company's ability to cover interest, principal and/or preferred dividend payments with current income.

                The table below presents the principal payments due and weighted average interest rates for the mortgage notes payable as of September 30, 2007.

	Average	Mortgage Notes Payable
	Interest Rate	(In thousands)
2007*	5.8%	$      3,811
2008	5.9%	55,938
2009	5.9%	36,201
2010	5.9%	97,476
2011	6.1%	111,665
2012	6.1%	63,041
Thereafter	6.3%	350,179
Total		$  718,311
Fair value at 09/30/07		$  708,075

*Remaining three months

Page 32 of 37

The Company presently has plans to make additional capital improvements at its office properties in 2007 of approximately $10 million.  These expenses include tenant improvements, capitalized acquisition costs and capitalized building improvements.  Approximately $3.4 million of these improvements relate to upgrades on properties acquired in recent years that were anticipated at the time of purchase.  All such improvements are expected to be financed by cash flow from the properties, capital expenditure escrow accounts, advances on the bank lines of credit or contributions from partners.

                In 2006, the Company announced the proposed development of a 194,000 square foot Class A+ office building in Jackson, Mississippi known as The Pinnacle at Jackson Place, adjacent to the Company's headquarters building.  The estimated cost of the development is $48.5 million with expected completion in the fall of 2008.  In 2007, the Company expects to incur approximately $13 million in construction costs.  The Company has received commitments to lease approximately 70% of the new office space from four major customers.  Parkway will be seeking partners for an 80% ownership interest in the development.  The development is designed to utilize benefits available under the Gulf Opportunity Zone Act for new developments in areas affected by Hurricane Katrina.

               The Company anticipates that its current cash balance, operating cash flows and borrowings (including borrowings under 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 repair and maintenance expenses at its properties, both in the short and long term.  In addition, the Company may use proceeds from sales of assets, possible sales of securities and borrowings to fund property acquisitions.

Contractual Obligations

                See information appearing under the caption "Financial Condition - Note Payable to Banks and Mortgage Notes Payable" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of changes in long-term debt since December 31, 2006. 

Page 33 of 37

Funds From Operations

Management believes that funds from operations available to common shareholders ("FFO") is an appropriate measure of performance for equity REITs and computes this measure in accordance with the National Association of Real Estate Investment Trusts' ("NAREIT") definition of FFO.  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 and extraordinary items under GAAP, plus depreciation and amortization, and after adjustments to derive the Company's pro rata share of FFO of consolidated and unconsolidated joint ventures.  Further, the Company does not adjust FFO to eliminate the effects of non-recurring charges.  The Company believes that FFO is a meaningful supplemental measure of its operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expenses.  However, since real estate values have historically risen or fallen with market and other conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient.  Thus, NAREIT created FFO as a supplemental measure of operating performance for real estate investment trusts that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP.  The Company believes that the use of FFO, combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of real estate investment trusts among the investing public and making comparisons of operating results among such companies more meaningful.  FFO as reported by Parkway may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition.  Funds from operations do not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds from operations should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.

The following table presents a reconciliation of the Company's net income to FFO for the three months and nine months ended September 30, 2007 and 2006 (in thousands):

	Three Months Ended			Nine Months Ended
	September 30			September 30
	2007	2006		2007	2006
Net income (loss)	$         (894)	$	(1,940)	$      18,774	$	18,960
Adjustments to derive funds from operations:
Depreciation and amortization	19,694	17,257		58,073	44,864
Depreciation and amortization - discontinued operations	-	121		1	535
Minority interest depreciation and amortization	(2,799)	(648)		(7,474)	(1,473)
Adjustments for unconsolidated joint ventures	169	156		491	659
Preferred dividends	(1,200)	(1,200)		(3,600)	(3,600)
Convertible preferred dividends	-	(481)		-	(1,654)
Gain on sale of real estate	-	(211)		(20,260)	(13,795)
Other	2	1		2	1
Funds from operations applicable to common
shareholders	$      14,972	$	13,055	$       46,007	$	44,497

Inflation

                Except for insurance, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation.  Additionally, most of the leases require the customers to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes, utilities and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation.  The Company's leases typically have three to seven year terms, which may enable the Company to replace existing leases with new leases at market base rent, which may be higher or lower than the existing lease rate.

                Insurance.  Following the devastating hurricanes of 2004 and 2005, the insurance market for properties located in coastal and wind prone areas of the country has been extremely volatile.  Following a mild hurricane season in 2006, insurance premiums moderated and the Company renewed its property and casualty insurance policy on April 1, 2007, with an overall decrease in premium cost compared to the previous 16-month policy period.  While most individual properties experienced a decline in premium, properties located in coastal or wind prone areas did experience rate increases.  Increases or decreases in insurance costs directly related to each property are passed through to customers to the extent allowed by the lease terms.  Upon renewal, the deductible for wind damage for properties located in Florida increased from 2% of replacement cost to 5% of replacement cost and for properties located in Harris and Fort Bend County in Texas, deductibles for wind damage increased from 2% to 3% of replacement cost.  The new policy will be in effect until April 1, 2008, at which time these lines of coverage will be renewed under market conditions that exist at that time.

Page 34 of 37

 

Forward-Looking Statements

                In addition to historical information, certain sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those that are not in the present or past tense, that discuss the Company's beliefs, expectations or 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.  The following factors, among others discussed herein and in the Company's filings under the Securities Exchange Act of 1934, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:  defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, the failure to acquire or sell properties as and when anticipated, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates.  The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-Q and in the Company's filings under the Securities Exchange Act of 1934.  Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof.  The Company assumes no obligation to update forward-looking statements.

 Item 3.  Quantitative and Qualitative Disclosures About Market Risk

                See information appearing under the caption "Liquidity" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.  Controls and Procedures

                The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a‑15.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the Company's most recent fiscal quarter, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

                During the period covered by this report, the Company reviewed its internal controls, and there have been no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Page 35 of 37

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

There have been no material changes to the risk factors disclosed in Parkway's Form 10-K for the year ended December 31, 2006.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7 million shares of Parkway's outstanding common stock through July 30, 2008.  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.

The following table lists shares purchased to date under the existing authorization:

			(c) Total Number	(d) Maximum Number
			of Shares Purchased	of Shares that
	(a) Total Number	(b) Average	as Part of Publicly	May Yet Be
	of Shares	Price Paid	Announced Plans	Purchased Under
Period	Purchased	per Share	or Programs	the Plans or Programs
08/01/07 to 08/31/07	351,938	$     43.88	351,938	1,348,062
09/01/07 to 09/30/07	102,100	$     44.02	102,100	1,245,962
Total	454,038	$     43.91	454,038	1,245,962

 Item 6.  Exhibits

10.1     Compensation Program for Non-Employee Directors.

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

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

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

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

 

Page 36 of 37

SIGNATURES

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

DATE:   November 7, 2007	PARKWAY PROPERTIES, INC.
	BY:	/s/ Mandy M. Pope
		Mandy M. Pope, CPA
		Senior Vice President and
		Chief Accounting Officer

 

Page 37 of 37

EX-10.1

EXHIBIT 10.1

PARKWAY PROPERTIES, INC.

Compensation Program for Non-Employee Directors

Revised as of August 9, 2007

The compensation program for the non-employee directors, approved by the Compensation Committee of the Company's Board of Directors, consists of the following: 

Annual Stock Retainer.  Each non-employee director will receive an annual retainer of 600 shares of Common Stock on the date of the annual meeting of stockholders.  Such shares will be granted under the terms of the Company's 2001 Non-Employee Directors Equity Compensation Plan, as amended (the "2001 Directors Plan"). 

Audit Committee Chairperson Annual Cash Retainer.  The chairperson of the Audit Committee will receive an additional annual cash retainer in the amount of $15,000 payable on a quarterly basis.

Board and Committee Meeting Fees.  Each non-employee director will be paid $1,500 for each Board meeting attended.  Members of the Audit Committee will receive $1,500 for each meeting attended and the chairperson of the Audit Committee will receive $2,000 for each meeting attended.  Members of all other committees will receive $750 for each meeting of a committee established by the Board of Directors attended.  In each case, the non-employee director will be reimbursed for his or her expenses in connection with attendance at each meeting.

Stock Award upon Initial Election or Appointment.  A new director will receive, upon initial election or appointment as a non-employee director, a stock award of 600 shares of Common Stock and, if the election or appointment is on a date other than an annual meeting date, a pro-rata portion of the 600 share annual retainer award.  Such shares will be granted under the terms of the Company's 2001 Directors Plan.

EX-31.1

EXHIBIT 31.1

I, Steven G. Rogers, certify that:

   1.     I have reviewed this quarterly report on Form 10-Q of Parkway Properties, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 7, 2007

                                                                                                                            /s/ Steven G. Rogers

                                                                                                                            Steven G. Rogers

                                                                                                                            Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, William R. Flatt, certify that:

    1.    I have reviewed this quarterly report on Form 10-Q of Parkway Properties, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 7, 2007

                                                                                                                            /s/ William R. Flatt

                                                                                                                            William R. Flatt

                                                                                                                            Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18. U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Parkway Properties, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven G. Rogers, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)       The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Steven G. Rogers

Steven G. Rogers (*)

President, Chief Executive Officer and Director

November 7, 2007

*A signed original of this written statement required by Section 906 has been provided to Parkway Properties, Inc. and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18. U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Parkway Properties, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William R. Flatt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)       The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William R. Flatt

William R. Flatt (*)

Chief Financial Officer

November 7, 2007

*A signed original of this written statement required by Section 906 has been provided to Parkway Properties, Inc. and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.