| **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 June 30, 2006  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 

          14,216,515 shares of Common  Stock, $.001 par value, were outstanding as of  August 1, 2006.

 

 

Page 1 of  38

**PARKWAYPROPERTIES, INC.****FORM****10-QTABLE OF CONTENTSFOR THE QUARTER ENDED JUNE 30, 2006**

**Part I. Financial Information**

Item 1.

Financial Statements  

**Page**

Consolidated Balance Sheets, June 30, 2006 and December 31, 2005

3

Consolidated Statements of Income for the Three Months and  Six Months Ended 

       June 30, 2006 and  2005

4

Consolidated Statements of Stockholders' Equity for the Six  Months Ended

       June 30, 2006 and  2005

6

Consolidated Statements of Cash Flows for the Six Months  Ended 

       June 30, 2006  and 2005

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

35

Item 2.

Unregistered Sales of Equity Securities and Use of  Proceeds

36

Item 4.

Submission of Matters to a Vote of Security Holders.

36

Item 6. 

Exhibits

37

**Signatures**

38

Authorized signatures

Page 2 of  38

**PARKWAY  PROPERTIES, INC.**

**CONSOLIDATED  BALANCE SHEETS**

(In thousands,  except share data)

** **

** **

** **

** **
   
   
   
**June 30**
   
**December 31**
   
**2006**
   
**2005**
   
(Unaudited)
      
**Assets**
         
Real estate related investments:
      

Office and parking properties

$

1,252,980 
   
$

1,220,565 

Accumulated depreciation

(200,481)
   
(179,636)

1,052,499 
   
1,040,929 

   

Land available for sale

1,467 
   
1,467 

Investment in unconsolidated joint ventures

11,280 
   
12,942 

1,065,246 
   
1,055,338 

   

Rents receivable and other assets

88,546 
   
69,480 

Intangible assets, net

56,659 
   
60,161 

Cash and cash equivalents

3,762 
   
3,363 

** **

$

1,214,213 
   
$

1,188,342 

**Liabilities**

   

Notes payable to banks

$

167,369 
   
$

150,371 

Mortgage notes payable

490,295 
   
483,270 

Accounts payable and other liabilities

56,012 
   
56,628 

Subsidiary redeemable preferred membership interests

10,741 

10,741 

** **

724,417 

701,010 

**Minority Interest**

Minority Interest - unit holders

36 

38 

Minority Interest - real estate partnerships

16,163 

12,778 

16,199 

12,816 

**Stockholders' Equity**

8.34% Series B Cumulative Convertible Preferred stock,

   

        $.001 par value, 2,142,857 shares authorized,

   

        803,499 shares issued and outstanding  

28,122 
   
28,122 

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

   

        shares authorized, issued and outstanding

57,976 
   
57,976 

Common stock, $.001 par value, 65,457,143 shares  authorized,

   

        14,148,016 and 14,167,292 shares issued and  outstanding 

   

        in 2006 and 2005, respectively

14 
   
14 

Excess stock, $.001 par value, 30,000,000 shares  authorized,

   

        no shares issued

- 
   
- 

Common stock held in trust, at cost, 115,000 and 124,000  

   

        shares in 2006 and 2005, respectively

(3,894)
   
(4,198)

Additional paid-in capital

385,898 
   
389,971 

Unearned compensation

- 
   
(3,101)

Accumulated other comprehensive income  

1,631 
   
826 

Retained earnings

3,850 
   
4,906 

** **

473,597 
   
474,516 

** **

$

1,214,213 

$

1,188,342 

 

See notes toconsolidated financial statements.

 

Page 3 of  38

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF  INCOME**

(In thousands, except per share  data)

** **

**Three Months Ended**

** **

**June 30**

** **

**2006**

**2005**

** **

(Unaudited)

**Revenues**

Income from office and parking properties

$

49,897 

 $

47,972 

Management company income

4,436 

1,231 

        Total revenues

54,333 

49,203 

** **

**Expenses**

Property operating expense

23,252 

22,341 

Depreciation and amortization

14,295 

14,595 

Operating expense for other real estate properties

2 

1 

Management company expenses

300 

123 

General and administrative

977 

832 

        Total expenses

38,826 

37,892 

**Operating income**

15,507 

11,311 

**Other income and expenses**

        Interest and other income

7 

106 

        Equity in earnings of unconsolidated joint  ventures

(84)

250 

        Gain on sale of joint venture interests, real  estate and other assets

13,465 

991 

        Interest expense

(9,796)

(8,784)

**Income before minority interest and discontinued  operations**

19,099 

3,874 

Minority interest - real estate partnerships

64 

(16)

** **

**Income from continuing operations**

19,163 

3,858 

Discontinued operations:

        Income (loss) from discontinued operations

(4)

219 

** **

**Net income**

19,159 

4,077 

Change in unrealized loss on equity securities

109 

11 

Change in market value of interest rate swaps

260 

(45)

**Comprehensive income**

 $

19,528 

 $

4,043 

** **

**Net income available to common stockholders:**

Net income

 $

19,159 

 $

4,077 

Dividends on preferred stock

(1,200)

(1,200)

Dividends on convertible preferred stock

(586)

(586)

**Net income available to common stockholders**

$

17,373 

 $

2,291 

** **

**Net income per common share:**

Basic:

        Income from continuing operations

$

1.24 

 $

0.15 

        Discontinued operations

- 

0.01 

        Net income

$

1.24 

 $

0.16 

Diluted:

        Income from continuing operations

$

1.20 

 $

0.15 

        Discontinued operations

- 

0.01 

        Net income

$

1.20 

 $

0.16 

** **

**Dividends per common share**

$

0.65 

 $

0.65 

** **

**Weighted average shares outstanding:**

Basic

14,036 

14,080 

Diluted

15,000 

14,250 

 

See notes to consolidated financial statements.

 

Page4 of  38

**PARKWAY PROPERTIES, INC.**
**CONSOLIDATED STATEMENTS OF  INCOME**

(In thousands, except per share  data)

** **

**Six Months Ended**

** **

**June 30**

** **

**2006**

**2005**

** **

(Unaudited)

**Revenues**

Income from office and parking properties

$

99,594 

 $

94,560 

Management company income

4,798 

2,282 

        Total revenues

104,392 

96,842 

** **

**Expenses**

Property operating expense

47,407 

43,275 

Depreciation and amortization

28,021 

25,739 

Operating expense for other real estate properties

3 

2 

Management company expenses

675 

358 

General and administrative

2,123 

2,550 

        Total expenses

78,229 

71,924 

**Operating income**

26,163 

24,918 

**Other income and expenses**

        Interest and other income

26 

241 

        Equity in earnings of unconsolidated joint  ventures

326 

765 

        Gain on sale of joint venture interests, real  estate and other assets

13,465 

991 

        Interest expense

(19,222)

(16,767)

  

**Income before minority interest and discontinued  operations**

20,758 

10,148 

Minority interest - unit holders

- 

(1)

Minority interest - real estate partnerships

144 

(321)

** **

**Income from continuing operations**

20,902 

9,826 

Discontinued operations:

        Income (loss) from discontinued operations

(2)

527 

** **

**Net income**

20,900 

10,353 

Change in unrealized loss on equity securities

79 

(53)

Change in market value of interest rate swaps

726 

390 

**Comprehensive income**

 $

21,705 

 $

10,690 

** **

**Net income available to common stockholders:**

Net income

 $

20,900 

 $

10,353 

Dividends on preferred stock

(2,400)

(2,400)

Dividends on convertible preferred stock

(1,173)

(1,173)

**Net income available to common stockholders**

$

17,327 

 $

6,780 

** **

 20,900 

**Net income per common share:**

Basic:

        Income from continuing operations

 $

1.23 

 $

0.44 

        Discontinued operations

- 

0.04 

        Net income

 $

1.23 

 $

0.48 

Diluted:

        Income from continuing operations

$

1.22 

 $

0.44 

        Discontinued operations

- 

0.04 

        Net income

$

1.22 

 $

0.48 

** **

**Dividends per common share**

$

1.30 

 $

1.30 

** **

**Weighted average shares outstanding:**

Basic

14,042 

13,994 

Diluted

14,214 

14,168 

 

See notes toconsolidated financial statements.

 

Page 5 of  38

**PARKWAY PROPERTIES, INC.**

**CONSOLIDATED STATEMENTS OF  STOCKHOLDERS' EQUITY**

(In thousands)

** **

** Six Months Ended**

**June 30**

**2006**

**2005**

 (Unaudited) 

** **

** **

**8.34%  Series B Cumulative Convertible**

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

        Balance  at beginning of period

 $

28,122 

 $

28,122 

        Balance  at end of period

28,122 

28,122 

**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

14 

12 

                Shares  issued - stock offering

- 

2 

        Balance  at end of period

14 

14 

**Common  stock held in trust**

        Balance  at beginning of period

(4,198)

(4,400)

                Shares  distributed from deferred compensation plan

304 

- 

        Balance  at end of period

(3,894)

(4,400)

**Additional  paid-in capital**

        Balance  at beginning of period

389,971 

310,455 

                Stock  options exercised

1,364 

1,101 

                Shares  issued in lieu of Directors' fees

170 

193 

                Nonvested  shares forfeited

- 

(679)

                 Deferred incentive share units forfeited  

- 

(34)

                Shares  issued - DRIP plan

- 

750 

                Shares  issued - stock offering

- 

75,809 

                 Share based compensation expense

308 

- 

                 Purchase of Company stock

(2,814)

- 

                Reclassification  upon the adoption of SFAS No. 123R

(3,101)

- 

        Balance at end of  period

385,898 

387,595 

**Unearned  compensation**

        Balance  at beginning of period

(3,101)

(4,122)

                Nonvested  shares forfeited

- 

679 

                Deferred  incentive share units forfeited

- 

34 

                Share  based compensation expense

- 

167 

                 Reclassification upon the adoption of SFAS No. 123R

3,101 

- 

        Balance  at end of period

- 

(3,242)

**Accumulated  other comprehensive income (loss)**

        Balance  at beginning of period

826 

(226)

                Change  in unrealized gain on equity securities

79 

(53)

                Change  in market value of interest rate swaps

726 

390 

        Balance  at end of period

1,631 

111 

**Retained  earnings**

        Balance  at beginning of period

4,906  |