| ** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

_____________________________________________

** **

** **

**FORM 10-Q**

 

**  Quarterly  Report Pursuant to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934  For Quarterly Period Ended March 31, 2007  or  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   

        15,888,182 shares of Common Stock, $.001 par value, were outstanding as  of  May 1, 2007. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |

 
| Page  1 of 32 |
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**PARKWAY PROPERTIES, INC.****FORM****10-QTABLE OF CONTENTSFOR THE QUARTER ENDED MARCH 31, 2007****Part I.****Financial Information**

| Item  1.                       | Financial  Statements                                                                  | **Page** |
|--------------------------------|----------------------------------------------------------------------------------------|----------|
|                                |                                                                                        |          |
|                                | Consolidated  Balance Sheets, March 31, 2007 and December 31, 2006                     | 3        |
|                                |                                                                                        |          |
|                                | Consolidated  Statements of Income for the Three Months Ended                          |          |
|                                |        March  31, 2007 and 2006                     | 4        |
|                                |                                                                                        |          |
|                                | Consolidated  Statements of Stockholders' Equity for the Three Months Ended            |          |
|                                |        March  31, 2007 and 2006                     | 5        |
|                                |                                                                                        |          |
|                                | Consolidated  Statements of Cash Flows for the Three Months Ended                      |          |
|                                |        March  31, 2007 and 2006                     | 6        |
|                                |                                                                                        |          |
|                                | Notes  to Consolidated Financial Statements                                            | 7        |
|                                |                                                                                        |          |
| Item  2.                       | Management's  Discussion and Analysis of Financial Condition and Results of Operations | 17       |
|                                |                                                                                        |          |
| Item  3.                  | Quantitative  and Qualitative Disclosures about Market Risk                            | 30       |
|                                |                                                                                        |          |
| Item  4.                       | Controls  and Procedures                                                               | 30       |
|                                |                                                                                        |          |
| **Part II. Other Information** |
| Item  1A.                      | Risk  Factors                                                                          | 31       |
|                                |                                                                                        |          |
| Item  6.                  | Exhibits                                                                               | 31       |
|                                |                                                                                        |          |
|                                |                                                                                        |          |
| **Signatures**                 |
|                                |                                                                                        | 32       |
| Authorized  signatures         |                                                                                        |

 
| Page  2 of 32 |
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| **                                                 PARKWAY PROPERTIES, INC.** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **                                              CONSOLIDATED BALANCE SHEETS**                |
|                                              (In thousands, except share data)                    |
| ** **                                                                                                                                                                                                                                                                                                                    | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                    |  |   |  |
|                                                                                                                                                                                                                                                                                                                          | **March 31** |   | **December 31** |
|                                                                                                                                                                                                                                                                                                                          | **2007** |   | **2006** |
|                                                                                                                                                                                                                                                                                                                          | (Unaudited) |   | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                    | ** ** |   | ** ** |
| Real estate related  investments:                                                                                                                                                                                                                                                                                             |  |   |  |
|         Office and parking  properties                                                                                                                                                                                                                                                     |  $ | 1,526,346  |   |  $ | 1,517,468  |
|         Accumulated  depreciation                                                                                                                                                                                                                                                          | (225,172) |   | (211,187) |
|                                                                                                                                                                                                                                                                                                                               | 1,301,174  |   | 1,306,281  |
|                                                                                                                                                                                                                                                                                                                               |  |   |  |
|         Land available for  sale                                                                                                                                                                                                                                                           | 1,467  |   | 1,467  |
|         Investment in  unconsolidated joint ventures                                                                                                                                                                                                                                       | 11,087  |   | 11,179  |
|                                                                                                                                                                                                                                                                                                                               | 1,313,728  |   | 1,318,927  |
|                                                                                                                                                                                                                                                                                                                               |  |   |  |
| Rents receivable and other  assets                                                                                                                                                                                                                                                                                            | 103,187  |   | 107,145  |
| Intangible assets, net                                                                                                                                                                                                                                                                                                        | 77,727  |   | 81,800  |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                     | 8,304  |   | 4,474  |
| ** **                                                                                                                                                                                                                                                                                                                    |  $ | 1,502,946  |   |  $ | 1,512,346  |
| **Liabilities**                                                                                                                                                                                                                                                                                                               |  |   |  |
| Notes payable to banks                                                                                                                                                                                                                                                                                                        |  $ | 172,034  |   |  $ | 152,312  |
| Mortgage notes payable                                                                                                                                                                                                                                                                                                        | 705,443  |   | 696,012  |
| Accounts payable and other  liabilities                                                                                                                                                                                                                                                                                       | 65,357  |   | 72,659  |
| Subsidiary redeemable  preferred membership interests                                                                                                                                                                                                                                                                         | 10,741  |   | 10,741  |
| ** **                                                                                                                                                                                                                                                                                                                    | 953,575 |  | 931,724 |
| **Minority Interest**                                                                                                                                                                                                                                                                                                         |  |  |  |
| Minority Interest - unit  holders                                                                                                                                                                                                                                                                                             | 36  |  | 36  |
| Minority Interest - real  estate partnerships                                                                                                                                                                                                                                                                                 | 66,958  |  | 90,280  |
|                                                                                                                                                                                                                                                                                                                               | 66,994  |  | 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,                                                                                                                                                                                                                                                                 |  |   |  |
|         15,886,801 and  15,764,799 shares issued and outstanding                                                                                                                                                                                                                           |  |   |  |
|         in 2007 and 2006,  respectively                                                                                                                                                                                                                                                    | 16  |   | 16  |
| Excess stock, $.001 par  value, 30,000,000 shares                                                                                                                                                                                                                                                                             |  |   |  |
|         authorized, no  shares issued                                                                                                                                                                                                                                                      | - |   | - |
| Common stock held in trust,  at cost, 111,000 and 115,000                                                                                                                                                                                                                                                                     |  |   |  |
|         shares in 2007 and  2006, respectively                                                                                                                                                                                                                                             | (3,759) |   | (3,894) |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                    | 452,382  |   | 449,141  |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                                       | 591  |   | 828  |
| Accumulated deficit                                                                                                                                                                                                                                                                                                           | (24,829) |   | (13,761) |
| ** **                                                                                                                                                                                                                                                                                                                    | 482,377  |   | 490,306  |
| ** **                                                                                                                                                                                                                                                                                                                    |  $ | 1,502,946  |  |  $ | 1,512,346  |

See notes to consolidated financial statements.

| Page  3 of 32 |
|---------------|

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| **                                                            PARKWAY PROPERTIES, INC.**                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **                                                              CONSOLIDATED STATEMENTS OF INCOME** |
|                                                             (In thousands, except per share data)             |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           | **Three Months Ended** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           | **March 31** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           | **2007** |  | **2006** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           | (Unaudited) |
| **Revenues**                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |
| Income from office and  parking properties                                                                                                                                                                                                                                                                                                                                                                           |  $ | 61,538  |  |  $ | 48,661  |
| Management company income                                                                                                                                                                                                                                                                                                                                                                                            | 333  |  | 362  |
|         Total revenues                                                                                                                                                                                                                                                                                                                                                            | 61,871  |  | 49,023  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Expenses**                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |
| Property operating expense                                                                                                                                                                                                                                                                                                                                                                                           | 28,234  |  | 23,629  |
| Depreciation and  amortization                                                                                                                                                                                                                                                                                                                                                                                       | 19,211  |  | 13,526  |
| Operating expense for other  real estate properties                                                                                                                                                                                                                                                                                                                                                                  | 1  |  | 1  |
| Management company expenses                                                                                                                                                                                                                                                                                                                                                                                          | 268  |  | 375  |
| General and administrative                                                                                                                                                                                                                                                                                                                                                                                           | 1,645  |  | 1,146  |
|         Total expenses                                                                                                                                                                                                                                                                                                                                                            | 49,359  |  | 38,677  |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  |
| **Operating income**                                                                                                                                                                                                                                                                                                                                                                                                 | 12,512  |  | 10,346  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Other income and expenses**                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  |
|         Interest and other  income                                                                                                                                                                                                                                                                                                                                                | 146  |  | 19  |
|         Equity in earnings  of unconsolidated joint ventures                                                                                                                                                                                                                                                                                                                      | 305  |  | 410  |
|         Gain on sale of real  estate                                                                                                                                                                                                                                                                                                                                              | 50  |  | -  |
|         Interest expense                                                                                                                                                                                                                                                                                                                                                          | (13,084) |  | (9,426) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Income (loss) before  minority interest and discontinued operations**                                                                                                                                                                                                                                                                                                                                              | (71) |  | 1,349  |
| Minority interest - real  estate partnerships                                                                                                                                                                                                                                                                                                                                                                        | 471  |  | 80  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Income from continuing  operations**                                                                                                                                                                                                                                                                                                                                                                               | 400  |  | 1,429  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| Discontinued operations:                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Income from  discontinued operations                                                                                                                                                                                                                                                                                                                                      | 28  |  | 312  |
| **Net income**                                                                                                                                                                                                                                                                                                                                                                                                       | 428  |  | 1,741  |
| Change in unrealized loss on  equity securities                                                                                                                                                                                                                                                                                                                                                                      | (4) |  | (30) |
| Change in market value of  interest rate swaps                                                                                                                                                                                                                                                                                                                                                                       | (234) |  | 466  |
| **Comprehensive income**                                                                                                                                                                                                                                                                                                                                                                                             |  $ | 190  |  |  $ | 2,177  |
| **Net income available to  common stockholders:**                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** ** | ** ** |
| Net income                                                                                                                                                                                                                                                                                                                                                                                                           |  $ | 428  |  |  $ | 1,741  |
| Dividends on preferred stock                                                                                                                                                                                                                                                                                                                                                                                         | (1,200) |  | (1,200) |
| Dividends on convertible  preferred stock                                                                                                                                                                                                                                                                                                                                                                            | -  |  | (587) |
| **Net loss available to  common stockholders**                                                                                                                                                                                                                                                                                                                                                                       |  $ | (772) |  |  $ | (46) |
| **Net income (loss) per  common share:**                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
| Basic:                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  |
|         Loss from continuing  operations                                                                                                                                                                                                                                                                                                                                          |  $ | (0.05) |  |  $ | (0.02) |
|         Discontinued  operations                                                                                                                                                                                                                                                                                                                                                  | -  |  | 0.02  |
|         Net loss                                                                                                                                                                                                                                                                                                                                                                  |  $ | (0.05) |  |  $ | -  |
| Diluted:                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Loss from continuing  operations                                                                                                                                                                                                                                                                                                                                          |  $ | (0.05) |  |  $ | (0.02) |
|         Discontinued  operations                                                                                                                                                                                                                                                                                                                                                  | -  |  | 0.02  |
|         Net loss                                                                                                                                                                                                                                                                                                                                                                  |  $ | (0.05) |  |  $ | -  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Dividends per common share**                                                                                                                                                                                                                                                                                                                                                                                       |  $ | 0.65  |  |  $ | 0.65  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  |
| **Weighted average shares  outstanding:**                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| Basic                                                                                                                                                                                                                                                                                                                                                                                                                | 15,616  |  | 14,049  |
| Diluted                                                                                                                                                                                                                                                                                                                                                                                                              | 15,616  |  | 14,049  |

See notes to consolidated financial statements.

| Page  4 of 32 |
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| **                                                  PARKWAY PROPERTIES, INC.**                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**                                    |
|                                                        (In thousands) |
|                                                                                                                                                                                                                                                                                                                                                     | ** ** |
|                                                                                                                                                                                                                                                                                                                                                     | **Three Months Ended** |
|                                                                                                                                                                                                                                                                                                                                                     | **March 31** |
|                                                                                                                                                                                                                                                                                                                                                     | **2007** |  | **2006** |
|                                                                                                                                                                                                                                                                                                                                                     | (Unaudited) |
|                                                                                                                                                                                                                                                                                                                                                     | ** ** |  | ** ** |
| **8.34% Series B Cumulative  Convertible**                                                                                                                                                                                                                                                                                                          |  |  |  |
|         **Preferred stock,  $.001 par value**                                                                                                                                                                                                                                                                    |  |  |  |
|         Balance at beginning  of period                                                                                                                                                                                                                                                                          |  $ | -  |  |  $ | 28,122  |
|         Balance at end of  period                                                                                                                                                                                                                                                                                | -  |  | 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                                                                                                                                                                                                                                                                          | 16  |  | 14  |
|         Balance at end of  period                                                                                                                                                                                                                                                                                | 16  |  | 14  |
| ** **                                                                                                                                                                                                                                                                                                                                          |  |  |  |
| **Common stock held in  trust**                                                                                                                                                                                                                                                                                                                     |  |  |  |
|         Balance at beginning  of period                                                                                                                                                                                                                                                                          | (3,894) |  | (4,198) |
|                 Shares  distributed from deferred compensation plan                                                                                                                                                                                                      | 135  |  | 203  |
|         Balance at end of  period                                                                                                                                                                                                                                                                                | (3,759) |  | (3,995) |
| ** **                                                                                                                                                                                                                                                                                                                                          |  |  |  |
| **Additional paid-in  capital**                                                                                                                                                                                                                                                                                                                     |  |  |  |
|         Balance at beginning  of period                                                                                                                                                                                                                                                                          | 449,141  |  | 389,971  |
|                 Stock  options exercised                                                                                                                                                                                                                                 | 2,610  |  | 590  |
|                 Shares  issued - DRIP plan                                                                                                                                                                                                                               | 289  |  | -  |
|                 Issuance  costs - stock offering                                                                                                                                                                                                                         | (11) |  | -  |
|                 Share based  compensation expense                                                                                                                                                                                                                        | 353  |  | 147  |
|                 Reclassification  upon the adoption of SFAS No. 123R                                                                                                                                                                                                     | -  |  | (3,101) |
|         Balance  at end of period                                                                                                                                                                                                                                                                                | 452,382  |  | 387,607  |
| ** **                                                                                                                                                                                                                                                                                                                                          |  |  |  |
| **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 loss on equity securities                                                                                                                                                                                                          | (4) |  | (30) |
|                 Change in  market value of interest rate swaps                                                                                                                                                                                                           | (233) |  | 466  |
|         Balance at end of  period                                                                                                                                                                                                                                                                                | 591  |  | 1,262  |
| ** **                                                                                                                                                                                                                                                                                                                                          |  |  |  |
| **Accumulated deficit**                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Balance at beginning  of period                                                                                                                                                                                                                                                                          | (13,761) |  | 4,906  |
|                 Net income                                                                                                                                                                                                                                               | 428  |  | 1,741  |
|                 Preferred  stock dividends declared                                                                                                                                                                                                                      | (1,200) |  | (1,200) |
|                 Convertible  preferred stock dividends declared                                                                                                                                                                                                          | -  |  | (587) |
|                 Common stock  dividends declared                                                                                                                                                                                                                         | (10,296) |  | (9,200) |
|         Balance at end of  period                                                                                                                                                                                                                                                                                | (24,829) |  | (4,340) |
| ** **                                                                                                                                                                                                                                                                                                                                          |  |  |  |
| **Total stockholders'  equity**                                                                                                                                                                                                                                                                                                                     |  $ | 482,377  |  |  $ | 466,646  |

| See notes to consolidated financial statements. 

 

Page 5 of 32 |
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| **                                                             PARKWAY PROPERTIES, INC.** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS**                  |
|                                                             (In thousands)                     |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            | **Three Months Ended** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            | **March 31** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            | **2007** |  | **2006** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            | (Unaudited) |
| **Operating  activities**                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Net  income                                                                                                                                                                                                                                                                                                                                                |  $ | 428  |  |  $ | 1,741  |
|         Adjustments  to reconcile net income to cash provided by                                                                                                                                                                                                                                                                                                   |  |  |  |
|                  operating  activities:                                                                                                                                                                                                                                                                               |  |  |  |
|                          Depreciation  and amortization                                                                                                                                                                                                                            | 19,211  |  | 13,526  |
|                          Depreciation  and amortization - discontinued operations                                                                                                                                                                                                  | -  |  | 200  |
|                          Amortization  of above market leases                                                                                                                                                                                                                      | 352  |  | 409  |
|                          Amortization  of loan costs                                                                                                                                                                                                                               | 293  |  | 282  |
|                          Share  based compensation expense                                                                                                                                                                                                                         | 353  |  | 147  |
|                          Operating  distributions from unconsolidated joint ventures                                                                                                                                                                                               | 405  |  | 357  |
|                          Loss  allocated to minority interests                                                                                                                                                                                                                     | (471) |  | (80) |
|                          Net  gain on sale of real estate                                                                                                                                                                                                                          | (50) |  | -  |
|                          Equity  in earnings of unconsolidated joint ventures                                                                                                                                                                                                      | (305) |  | (410) |
|                          Changes  in operating assets and liabilities:                                                                                                                                                                                                                  |  |  |  |
|                                 Decrease  in receivables and other assets                                                                                                                                                                       | 2,226  |  | 2,907  |
|                                 Decrease  in accounts payable and other liabilities                                                                                                                                                             | (7,374) |  | (6,153) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| **        Cash  provided by operating activities**                                                                                                                                                                                                                                                                                                                 | 15,068  |  | 12,926  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| **Investing  activities**                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Purchases  of real estate related investments                                                                                                                                                                                                                                                                                                              | (2,119) |  | (1,456) |
|         Improvements  to real estate related investments                                                                                                                                                                                                                                                                                                           | (6,364) |  | (7,310) |
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **        Cash  used in investing activities**                                                                                                                                                                                                                                                                                                                     | (8,483) |  | (8,766) |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| **Financing  activities**                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |
|         Principal  payments on mortgage notes payable                                                                                                                                                                                                                                                                                                              | (22,069) |  | (3,594) |
|         Proceeds  from long-term financing                                                                                                                                                                                                                                                                                                                         | 31,500  |  | -  |
|         Net  proceeds from bank borrowings                                                                                                                                                                                                                                                                                                                         | 19,489  |  | 14,389  |
|         Debt  financing costs                                                                                                                                                                                                                                                                                                                                      | (293) |  | (54) |
|         Stock  options exercised                                                                                                                                                                                                                                                                                                                                   | 2,610  |  | 590  |
|         Dividends  paid on common stock                                                                                                                                                                                                                                                                                                                            | (10,219) |  | (9,138) |
|         Dividends  paid on preferred stock                                                                                                                                                                                                                                                                                                                         | (1,200) |  | (1,787) |
|         Contributions  from minority interest partners                                                                                                                                                                                                                                                                                                             | 1,313  |  | 375  |
|         Distributions  to minority interest partners                                                                                                                                                                                                                                                                                                               | (24,164) |  | (303) |
|         Proceeds  from DRIP Plan                                                                                                                                                                                                                                                                                                                                   | 289  |  | -  |
|         Issuance  costs from stock offerings                                                                                                                                                                                                                                                                                                                       | (11) |  | -  |
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **        Cash  (used in) provided by financing activities**                                                                                                                                                                                                                                                                                                       | (2,755) |  | 478  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| **        Change  in cash and cash equivalents**                                                                                                                                                                                                                                                                                                                   | 3,830  |  | 4,638  |
|                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  |
| **        Cash  and cash equivalents at beginning of period**                                                                                                                                                                                                                                                                                                      | 4,474  |  | 3,363  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |
| **        Cash  and cash equivalents at end of period**                                                                                                                                                                                                                                                                                                            |  $ | 8,304  |  |  $ | 8,001  |

 

See notes to consolidated financial statements.

| Page  6 of 32 |
|---------------|

----

**Parkway Properties, Inc.Notes to Consolidated Financial Statements (Unaudited)March 31, 2007(1)           Basis of Presentation**

                Theconsolidated financial statements include the accounts of Parkway Properties,Inc. ("Parkway" or "the Company"), its wholly-ownedsubsidiaries and joint ventures in which the Company has a controllinginterest.  Third party equity interests in the consolidated joint ventures arereflected as minority interests in the consolidated financial statements. Parkway also consolidates subsidiaries where the entity is a variable interestentity and Parkway is the primary beneficiary, as defined in FASBInterpretation 46R, *Consolidation of Variable Interest Entities* ("FIN46R").  All significant intercompany transactions and accounts have beeneliminated.

                The Company determines consolidation for joint ventures basedon standards set forth in EITF 96-16, *Investor's Accounting for an InvesteeWhen the Investor Has a Majority of the Voting Interest but the MinorityShareholder or Shareholders Have Certain Approval or Veto Rights;*EITF04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights;*Statement of Position 78-9*, Accounting forInvestments in Real Estate Ventures;* and FIN 46R.  Based on the guidanceset forth in these pronouncements, the Company consolidates certain jointventures where it exercises significant control over major operating andmanagement decisions, or where the Company is the sole general partner and thelimited partners do not possess kick-out rights or other substantiveparticipating rights or where the entity is a variable interest entity andParkway is the primary beneficiary.  The equity method of accounting is usedfor those joint ventures that do not meet the criteria for consolidation underthese pronouncements. 

                Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

                Theaccompanying financial statements reflect all adjustments which are, in theopinion of management, necessary for a fair statement of the results for theinterim periods presented.  All such adjustments are of a normal recurringnature.  Operating results for the three months ended March 31, 2007 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2007.  The financial statements should be read in conjunction withthe annual report and the notes thereto.

                Thebalance sheet at December 31, 2006 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the United Statesfor complete financial statements.

                OnJanuary 1, 2007, the Company adopted FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109*("FIN 48").  FIN 48 clarifies the accounting for uncertain income tax positionsrecognized in a company's financial statements and prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement 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 FIN48 has not had a material impact on income from continuing operations, netincome, cash flow from operations, cash flow from financing activities or basicand diluted earnings per share.

 

| Page  7 of 32 |
|---------------|

----

**(2)           NetIncome Per Common Share**

                Basic earnings per share ("EPS")are computed by dividing income (loss) available to common stockholders by theweighted-average number of common shares outstanding for the period.  Inarriving at income available to common stockholders, preferred stock dividendsare deducted.  Diluted EPS reflects the potential dilution that could occur ifshare equivalents such as employee stock options, restricted shares, deferredincentive share units, warrants and 8.34% Series B cumulative convertiblepreferred stock were exercised or converted into common stock that then sharedin the earnings of Parkway.

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

| ** **                                                                                                | **Three Months Ended**                                 |
|-----------------------------------------------------------------------------------------------------------|--------------------------------------------------------|
| ** **                                                                                                | **March 31**                                           |
| ** **                                                                                                | **2007**                                               | ** ** | **2006** |
| Numerator:                                                                                                | ** **                                             | ** ** | ** ** |
|       Basic  and diluted net loss                                           |                                                        |  |  |
|             available  to common stockholders | $        (772) |  | $      (46) |
| Denominator:                                                                                              |                                                        |  |  |
|       Basic  weighted average shares                                        | 15,616                                            |  | 14,049  |
|                                                                                                           |                                                        |  |  |
|       Diluted  weighted average shares                                      | 15,616                                            |  | 14,049  |
| Diluted earnings per share                                                                                | $       (0.05)      |  | $     0.00  |

                Thecomputation of diluted EPS for the three months ended March 31, 2007 and 2006 didnot include the effect of share equivalents because their inclusion would havebeen anti-dilutive.

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

** **

                TheCompany considers all highly liquid investments with a maturity of three monthsor less when purchased to be cash equivalents.

|                                                                      | **Three Months Ended**                 |
|----------------------------------------------------------------------|----------------------------------------|
|                                                                      | **March 31**                           |
|                                                                      | **2007**                               |  | **2006** |
|                                                                      | (in thousands)                         |
|                                                                      |                                        |  |  |
| Supplemental  cash flow information:                                 |                                        |  |  |
|         Cash  paid for interest   | $     12,419  |  | $      8,518  |
|         Income  taxes paid        | 29                                |  | 2  |
| Supplemental  schedule of non-cash investing and financing activity: |                                        |  |  |
|         None                      | -                                 |  | -  |

** **

(4)           Discontinued Operations

                Allcurrent and prior period income from the following office property dispositionsare included in discontinued operations for the three months ended March 31,2007 and 2006 (in thousands).

| Page  8 of 32 |
|---------------|

----

| ** **               | ** **                       | **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                       |

Theamount of revenue and expense for these five office properties reported indiscontinued operations for the three months ended March 31, 2007 and 2006 isas follows (in thousands):

** **

| ** **                                | **Three Months Ended** |
|-------------------------------------------|------------------------|
| ** **                                | **March 31**           |
| ** **                                | **2007**               |  | **2006** |
| **Income Statement:**                     | ** **             |  | ** ** |
| **Revenues**                              |                        |  |  |
| Income from office and parking properties |  $                | 1  |  |  $ | 1,036  |
| ** **                                | 1                 |  | 1,036  |
| ** **                                |                        |  |  |
| **Expenses**                              |                        |  |  |
| Property operating expense                | (27)                   |  | 524  |
| Depreciation and amortization             | -                 |  | 200  |
|                                           | (27)                   |  | 724  |
|                                           |                        |  |  |
| **Income from discontinued operations**   |  $                | 28  |  |  $ | 312  |

**(5)           Investmentin Unconsolidated Joint Ventures**

                Asof March 31, 2007, the Company was invested in four unconsolidated jointventures with unrelated investors. These joint ventures are accounted for usingthe equity method of accounting, as Parkway does not control  but has theability to significantly influence the operations of these joint ventures andis not the primary beneficiary, as that term is defined in FIN 46R.  As aresult, the assets and liabilities of the joint ventures are not included inParkway's consolidated balance sheet.  Information relating to theunconsolidated joint ventures at March 31, 2007 is detailed below (inthousands).

| ** **                                           | ** **              | ** **      | **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        | 81.8%          |
| RubiconPark I, LLC ("Rubicon  JV")         | Lakewood/Falls Pointe   | Atlanta, GA     | 20.0%         | 551        | 99.3%          |
|                                                      | Carmel Crossing         | Charlotte, NC   |               |            |                |
| RubiconPark II, LLC  ("Maitland JV")       | Maitland 200            | Orlando, FL     | 20.0%         | 203        | 93.2%          |
|                                                      |                         |                 |               | 953        | 95.0%          |

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

                Parkwayprovides management, construction and leasing services for all of theunconsolidated joint ventures except for the Wink-Parkway Partnership, andreceives market based fees for these services.  The portion of fees earned onunconsolidated joint ventures attributable to Parkway's ownership interest iseliminated in consolidation.

| Page  9 of 32 |
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----

                Balancesheet information for the unconsolidated joint ventures is summarized below asof March 31, 2007 and December 31, 2006 (in thousands):

| **Balance Sheet Information**                                                                      |
|----------------------------------------------------------------------------------------------------|
|                                                                                                    | **March 31, 2007** |
|                                                                                                    | **Viad** | **Wink** | **Jackson** | **Rubicon** | **Maitland** | **Combined** |
|                                                                                                    | **JV** | **Building** | **JV** | **JV** | **JV** | **Total** |
| **Unconsolidated  Joint Ventures (at 100%):**                                                      |  |  |  |  |  |  |
| Real  Estate, Net                                                                                  | $               - | $     1,208 | $    16,345  | $   67,658 | $    28,936 | $    114,147 |
| Other  Assets                                                                                      | 318 | 240 | 1,243  | 6,352 | 765 | 8,918 |
|         Total  Assets                                           | $           318 | $     1,448 | $    17,588  | $   74,010 | $    29,701 | $    123,065 |
|                                                                                                    |  |  |  |  |  |  |
| Mortgage  Debt (a)                                                                                 | $               - | $        251 | $    12,600  | $   52,000 | $    18,951 | $      83,802 |
| Other  Liabilities                                                                                 | 12 | 30 | 670  | 1,157 | 507 | 2,376 |
| Partners'  and Shareholders' Equity                                                                | 306 | 1,167 | 4,318  | 20,853 | 10,243 | 36,887 |
|         Total  Liabilities & Partners'/Shareholders' Equity | $          318 | $     1,448 | $    17,588  | $   74,010 | $    29,701 | $    123,065 |
|                                                                                                    |  |  |  |  |  |  |
| **Parkway's  Share of Unconsolidated**                                                             |  |  |  |  |  |  |
| **        Joint  Ventures**                                     |  |  |  |  |  |  |
| Real  Estate, Net                                                                                  | $               - | $        604 | $      3,269  | $   13,532 | $      5,787 | $      23,192 |
| Mortgage  Debt                                                                                     | $               - | $        125 | $      2,520  | $     7,200 | $              - | $        9,845 |
| Investment  in Joint Ventures                                                                      | $               - | $        584 | $       (171) | $     5,551 | $      5,123 | $      11,087 |
|                                                                                                    |  |  |  |  |  |  |
|                                                                                               |   |
|                                                                                                    | **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)   Themortgage debt, all of which is non-recourse, is collateralized by theindividual real estate properties within each venture.

| Page  10 of 32 |
|----------------|

----

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

| ** **                                           | ** **       | ** **   | ** **   | **Parkway's** | **Monthly**                                                           | **Loan**                                  | **Loan**                                  |
|------------------------------------------------------|------------------|--------------|--------------|---------------|-----------------------------------------------------------------------|-------------------------------------------|-------------------------------------------|
| ** **                                           | **Type of**      | **Interest** | ** **   | **Share of**  | **Debt**                                                              | **Balance**                               | **Balance**                               |
| **Joint Venture**                                    | **Debt Service** | **Rate**     | **Maturity** | **Debt**      | **Service**                                                           | **03/31/07**                              | **12/31/06**                              |
|                                                      |                  |              |              |               |                                                                       |                                           |                                           |
| Wink-Parkway Partnership                             | Amortizing       | 8.625%       | 07/01/09     | 50.00%        | $           5  | $       125 | $       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             | $    9,845                 | $    9,857                 |
|                                                      |                  |              |              |               |                                                                       |                                           |                                           |
| **Weighted average interest  rate at end of period** |                  |              |              | 5.162%        | 5.167%                                                                |

                Thefollowing table presents Parkway's proportionate share of principal paymentsdue for mortgage debt in unconsolidated joint ventures as of March 31, 2007 (inthousands):

|                                | **Wink**        | **Jackson** | **Rubicon** | **Maitland** | ** **  |
|--------------------------------|-----------------|-------------|-------------|--------------|-------------|
|                                | **Partnership** | **JV**      | **JV**      | **JV**       | **Total**   |
| 2007  (Remaining nine months ) |  $         | 38     |  $     | -       |  $     | -  |  $ | -  |  $ | 38  |
| 2008                           | 54         | -      | -      | -       | 54     |
| 2009                           | 33         | 13     | 100    | -       | 146    |
| 2010                           | -          | 33     | 114    | -       | 147    |
| 2011                           | -          | 35     | 119    | -       | 154    |
| Thereafter                     | -          | 2,439  | 6,867  | -       | 9,306  |
|                                |  $         | 125    |  $     | 2,520   |  $     | 7,200  |  $ | -  |  $ | 9,845  |

| Page  11 of 32 |
|----------------|

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                Incomestatement information for the unconsolidated joint ventures is summarized belowfor the three months ending March 31, 2007 and 2006 (in thousands):

| **                                                                   Results of Operations** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                        | **Three Months Ended March 31, 2007** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        | **Viad** | **Wink** | **Jackson** | **Rubicon** | **Maitland** | **Combined** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        | **JV** | **Building** | **JV** | **JV** | **JV** | **Total** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
| **Unconsolidated Joint  Ventures (100%):**                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
| Revenues                                                                                                                                                                                                                                                                                                                                                                                                                               |  $ | -  |  $ | 114  |  $ | 680  |  $ | 2,584  |  $ | 1,112  |  $ | 4,490  |
| Operating Expenses                                                                                                                                                                                                                                                                                                                                                                                                                     | (25) | (16) | (342) | (881) | (381) | (1,645) |
|         Net Operating Income                                                                                                                                                                                                                                                                                                                                                                        | (25) | 98  | 338  | 1,703  | 731  | 2,845  |
| Interest Expense                                                                                                                                                                                                                                                                                                                                                                                                                       | -  | (6) | (184) | (632) | (208) | (1,030) |
| Loan Cost Amortization                                                                                                                                                                                                                                                                                                                                                                                                                 | -  | (1) | (1) | (16) | (3) | (21) |
| Depreciation and  Amortization                                                                                                                                                                                                                                                                                                                                                                                                         | -  | (6) | (140) | (491) | (157) | (794) |
| Income (Loss) Before Gain on  Sale  of Real Estate                                                                                                                                                                                                                                                                                                                                                                                     | (25) | 85  | 13  | 564  | 363  | 1,000  |
| Gain on Sale of Real  Estate                                                                                                                                                                                                                                                                                                                                                                                                           | 166  | -  | -  | -  | -  | 166  |
|         Net Income                                                                                                                                                                                                                                                                                                                                                                                  |  $ | 141  |  $ | 85  |  $ | 13  |  $ | 564  |  $ | 363  |  $ | 1,166  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
| **Parkway's Share of  Unconsolidated**                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |
| **        Joint Ventures:**                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |  |  |  |
| Income (Loss) Before Gain on  Sale  of Real Estate                                                                                                                                                                                                                                                                                                                                                                                     |  $ | (8) |  $ | 43  |  $ | 3  |  $ | 152  |  $ | 115  |  $ | 305  |
| Gain on Sale of Real  Estate                                                                                                                                                                                                                                                                                                                                                                                                           | 50  | -  | -  | -  | -  | 50  |
| Net Income                                                                                                                                                                                                                                                                                                                                                                                                                             |  $ | 42  |  $ | 43  |  $ | 3  |  $ | 152  |  $ | 115  |  $ | 355  |
| Depreciation and  Amortization                                                                                                                                                                                                                                                                                                                                                                                                         |  $ | -  |  $ | 3  |  $ | 28  |  $ | 98  |  $ | 32  |  $ | 161  |
| Property Management Fees                                                                                                                                                                                                                                                                                                                                                                                                               |  $ | -  |  $ | -  |  $ | 58  |  $ | 70  |  $ | 34  |  $ | 162  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |
| Interest Expense                                                                                                                                                                                                                                                                                                                                                                                                                       |  $ | -  |  $ | 3  |  $ | 37  |  $ | 87  |  $ | -  |  $ | 127  |
| Loan Cost Amortization                                                                                                                                                                                                                                                                                                                                                                                                                 |  $ | -  |  $ | 1  |  $ | -  |  $ | 2  |  $ | -  |  $ | 3  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
| **Other Supplemental  Information:**                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |  |  |  |
| Distributions from  Unconsolidated JVs                                                                                                                                                                                                                                                                                                                                                                                                 |  $ | -  |  $ | -  |  $ | 23  |  $ | 278  |  $ | 104  |  $ | 405  |

 

|                                                                 | **Three Months Ended March 31, 2006** |
|-----------------------------------------------------------------|---------------------------------------|
|                                                                 | **Viad**                              | **Wink** | **Jackson** | **Rubicon** | **Maitland** | **Combined** |
|                                                                 | **JV**                                | **Building** | **JV** | **JV** | **JV** | **Total** |
| ** **                                                      |                                       |  |  |  |  |  |
| **Unconsolidated Joint Ventures  (100%):**                      |                                       |  |  |  |  |  |
| Revenues                                                        |  $                               | 3,264  |  $ | 76  |  $ | 660  |  $ | 2,421  |  $ | 1,048  |  $ | 7,469  |
| Operating Expenses                                              | (1,262)                               | (26) | (358) | (954) | (410) | (3,010) |
|         Net Operating Income | 2,002                            | 50  | 302  | 1,467  | 638  | 4,459  |
| Interest Expense                                                | (838)                                 | (8) | (184) | (632) | (212) | (1,874) |
| Loan Cost Amortization                                          | (86)                                  | -  | (1) | (16) | (3) | (106) |
| Depreciation and  Amortization                                  | (495)                                 | (6) | (125) | (412) | (153) | (1,191) |
|         Net Income (Loss)    |  $                               | 583  |  $ | 36  |  $ | (8) |  $ | 407  |  $ | 270  |  $ | 1,288  |
| ** **                                                      |                                       |  |  |  |  |  |
| **Parkway's Share of  Unconsolidated**                          |                                       |  |  |  |  |  |
| **        Joint Ventures:**  |                                       |  |  |  |  |  |
| Net Income (Loss)                                               |  $                               | 175  |  $ | 18  |  $ | (1) |  $ | 121  |  $ | 97  |  $ | 410  |
| Depreciation and  Amortization                                  |  $                               | 148  |  $ | 3  |  $ | 25  |  $ | 82  |  $ | 31  |  $ | 289  |
| Property Management Fees                                        |  $                               | 237  |  $ | -  |  $ | 28  |  $ | 96  |  $ | 32  |  $ | 393  |
|                                                                 |                                       |  |  |  |  |  |  |  |  |  |  |  |
| Interest Expense                                                |  $                               | 251  |  $ | 4  |  $ | 37  |  $ | 88  |  $ | -  |  $ | 380  |
| Loan Cost Amortization                                          |  $                               | 26  |  $ | -  |  $ | -  |  $ | 2  |  $ | -  |  $ | 28  |
| ** **                                                      |                                       |  |  |  |  |  |
| **Other Supplemental  Information:**                            |                                       |  |  |  |  |  |
| Distributions from  Unconsolidated JVs                          |  $                               | 162  |  $ | -  |  $ | 23  |  $ | 70  |  $ | 102  |  $ | 357  |

** **

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**(6)           MinorityInterest - Real Estate Partnerships**

** **             The Company has an interest in two joint ventures thatare included in its consolidated financial statements. Information relating tothese 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      |                 |

Moore Building Associates, LP ("MBALP") wasestablished 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 additionalfunding to meet partnership operating deficits up to an aggregate amount of $1million.  Parkway receives income from MBALP in the form of interest from aconstruction note receivable, incentive management fees and property managementfees.  Parkway also receives interest income on a note receivable from ParkwayMoore, LLC ("PMLLC").  Any intercompany asset, liability, revenue and expenseaccounts between Parkway and MBALP and PMLLC have been eliminated.

Parkway serves as the general partner of ParkwayProperties Office Fund, LP (the "Fund") and provides asset management, propertymanagement, leasing and construction management services to the Fund, for whichit is paid market-based fees.  Cash distributions from the Fund are made toeach 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 majordecisions on behalf of the Fund, Parkway is considered to have a controllinginterest under GAAP.  Accordingly, Parkway is required to include the Fund inits consolidated financial statements.

Minority interest in real estate partnershipsrepresents the other partners' proportionate share of equity in thepartnerships discussed above at March 31, 2007.  Income is allocated tominority interest based on the weighted average percentage ownership during theyear.

**(7)           ShareBased Compensation**

                EffectiveJanuary 1, 2003, the stockholders of the Company approved Parkway's 2003 EquityIncentive Plan (the "2003 Plan") that authorized the grant of up to 200,000equity based awards to employees of the Company.  At present, it is Parkway'sintention to grant restricted shares and/or deferred incentive share unitsinstead of stock options.  Restricted shares and deferred incentive share unitsare valued based on the New York Stock Exchange closing market price of Parkwaycommon shares (NYSE ticker symbol, PKY) as of the date of grant.

                Compensationexpense, including estimated forfeitures, is recognized over the expectedvesting period, which is four to seven years from grant date for restrictedshares subject to service conditions and four years from grant date for deferredincentive share units.  Certain restricted shares have been granted to officersof the Company where vesting is contingent upon achieving the cumulative goalsof 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 onperformance conditions until the Company determines that it is probable thatthe goal will be achieved.  Therefore, no expense has been recorded in 2006 and2007 for these shares.  

Compensation expense related to restricted shares anddeferred incentive share units of $353,000 and $147,000 was recognized for the threemonths ending March 31, 2007 and 2006, respectively.  Total compensationexpense related to nonvested awards subject to service conditions not yetrecognized was $5.1 million as of March 31, 2007.  The weighted average periodover which this expense is expected to be recognized is approximately 3.3years.  Total potential compensation expense associated with shares that vestbased on performance conditions is $1.5 million as of March 31, 2007.

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                Restrictedshares and deferred incentive share units are forfeited if an employee leavesthe Company before the vesting date.  Shares and/or units that are forfeitedbecome available for future grant under the 2003 Plan.

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

**               **A summary of the Company's restricted shares anddeferred incentive share unit activity for the three months ended March 31,2007 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          | (1,868)         | 46.31                      |
| Outstanding at March 31, 2007    | 220,999   | $  40.72  | 16,968     | $    46.34  |

**(8)           Capitaland Financing Transactions**

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

                OnMarch 1, 2007, the Company paid off the $18 million first mortgage secured byCitrus Center in Orlando, Florida which was previously scheduled to mature onAugust 1, 2007.  

                Inconnection with the 2006 first mortgage placed on One Illinois Center, locatedat 111 East Wacker Drive in Chicago, Illinois, the Company delivered $11.3million in letters of credit to satisfy the various escrow requirements made bythe lender.  The letters of credit expire June 30, 2007.  On April 2, 2007, theCompany renewed these letters of credit through June 30, 2008 and reduced thecarrying amount from $11.3 million to $3 million.  The reduction in the lettersof credit is due to the Company funding the lender escrow requirements withcash contributions to the escrow accounts.

**(9)           SubsequentEvents**

                OnApril 30, 2007, the Company reached agreement with an unrelated purchaser andreceived $2 million in non refundable earnest money for the sale of twowholly-owned buildings located in Knoxville, Tennessee.  These propertiesrepresent approximately 549,000 rentable square feet. The estimated gross salesproceeds are expected to be approximately $59 million and the sale is scheduledto be completed in the second quarter of 2007.  

**(10)         SegmentInformation**

                Parkway'sprimary business is the ownership and operation of office properties. TheCompany accounts for each office property or groups of related officeproperties as an individual operating segment.  Parkway has aggregated itsindividual operating segments into a single reporting segment due to the factthat the individual operating segments have similar operating and economiccharacteristics.   

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                TheCompany believes that the individual operating segments exhibit similareconomic characteristics such as being leased by the square foot, sharing thesame primary operating expenses and ancillary revenue opportunities and beingcyclical in the economic performance based on current supply and demandconditions.  The individual operating segments are also similar in thatrevenues are derived from the leasing of office space to customers and eachoffice property is managed and operated consistently in accordance withParkway's standard operating procedures.  The range and type of customer usesof our properties is similar throughout our portfolio regardless of location orclass of building and the needs and priorities of our customers do not varyfrom building to building. Therefore, Parkway's management responsibilities donot vary from location to location based on the size of the building,geographic location or class.

The management of the Company evaluates theperformance of the reportable office segment based on funds from operationsapplicable to common shareholders ("FFO").  Management believes that funds fromoperations available to common shareholders ("FFO") is an appropriate measureof performance for equity REITs and computes this measure in accordance withthe 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 andextraordinary items under GAAP, plus depreciation and amortization, and afteradjustments to derive the Company's pro rata share of FFO of consolidated andunconsolidated joint ventures.  Further, the Company does not adjust FFO toeliminate the effects of non-recurring charges.  The Company believes that FFOis a meaningful supplemental measure of its operating performance becausehistorical cost accounting for real estate assets in accordance with GAAPimplicitly assumes that the value of real estate assets diminishes predictablyover time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cash available to fundcash needs.  Funds from operations should not be considered an alternative tonet income as an indicator of the Company's operating performance or as an alternativeto cash flow as a measure of liquidity.

** **

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The following is a reconciliation of FFO and netincome available to common stockholders for office properties and totalconsolidated entities for the three months ending March 31, 2007 and 2006.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **As of or for the three months ended** | ** **      | **As of or for the three months ended** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|-----------------|-----------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **March 31, 2007**                      | ** **      | **March 31, 2006**                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **Office & Parking**                | **Unallocated** | ** **                              |  | **Office & Parking** | **Unallocated** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **Properties**                          | **and Other**   | **Consolidated**                        |  | **Properties** | **and Other** | **Consolidated** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** **                              | (In thousands)  | ** **                              |  | ** ** | (In thousands) | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Property  operating revenues (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  $                                 | 61,538     |  $                                 | -  |  $ | 61,538  |  |  $ | 48,661  |  $ | -  |  $ | 48,661  |
| Property  operating expenses (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (28,234)                                | -          | (28,234)                                |  | (23,629) | -  | (23,629) |
| Property  net operating income from                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                         |                 |                                         |  |  |  |  |
|         continuing  operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 33,304                             | -          | 33,304                             |  | 25,032  | -  | 25,032  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Management  company income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | -                                  | 333        | 333                                |  | -  | 362  | 362  |
| Interest  and other income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | -                                  | 146        | 146                                |  | -  | 19  | 19  |
| Interest  expense (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | (10,508)                                | (2,576)         | (13,084)                                |  | (7,157) | (2,269) | (9,426) |
| Management  company expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | -                                  | (268)           | (268)                                   |  | -  | (375) | (375) |
| General  and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | -                                  | (1,645)         | (1,645)                                 |  | -  | (1,146) | (1,146) |
| Other  expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | -                                  | (1)             | (1)                                     |  | -  | (1) | (1) |
| Equity  in earnings of unconsolidated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                         |                 |                                         |  |  |  |  |
|         joint  ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 305                                | -          | 305                                |  | 410  | -  | 410  |
| Adjustment  for depreciation and amortization -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
|         unconsolidated  joint ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 161                                | -          | 161                                |  | 289  | -  | 289  |
| Adjustment  for depreciation and amortization -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
|         discontinued  operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | -                                  | -          | -                                  |  | 200  | -  | 200  |
| Adjustment  for minority interest -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                         |                 |                                         |  |  |  |  |
|         real  estate partnerships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (1,920)                                 | -          | (1,920)                                 |  | (330) | -  | (330) |
| Income  from discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 28                                 | -          | 28                                 |  | 312  | -  | 312  |
| Gain  on non depreciable assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 50                                 | -          | 50                                 |  | -  | -  | -  |
| Dividends  on preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | -                                  | (1,200)         | (1,200)                                 |  | -  | (1,200) | (1,200) |
| Dividends  on convertible preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | -                                  | -          | -                                  |  | -  | (587) | (587) |
| Funds  from operations available                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                         |                 |                                         |  |  |  |  |
|         to  common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 21,420                             | (5,211)         | 16,209                             |  | 18,756  | (5,197) | 13,559  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Depreciation  and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (19,211)                                | -          | (19,211)                                |  | (13,526) | -  | (13,526) |
| Depreciation  and amortization -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                         |                 |                                         |  |  |  |  |
|         unconsolidated  joint ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (161)                                   | -          | (161)                                   |  | (289) | -  | (289) |
| Depreciation  and amortization -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                         |                 |                                         |  |  |  |  |
|         discontinued  operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | -                                  | -          | -                                  |  | (200) | -  | (200) |
| Depreciation  and amortization - minority                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                         |                 |                                         |  |  |  |  |
|         interest  - real estate partnerships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 2,391                              | -          | 2,391                              |  | 410  | -  | 410  |
| Net  income (loss) available to common                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                         |                 |                                         |  |  |  |  |
|         stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  $                                 | 4,439      |  $                                 | (5,211) |  $ | (772) |  |  $ | 5,151 |  $ | (5,197) |  $ | (46) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  $                                 | 1,494,761  |  $                                 | 8,185  |  $ | 1,502,946  |  |  $ | 1,174,327  |  $ | 6,183  |  $ | 1,180,510 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Office  and parking properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  $                                 | 1,301,174  |  $                                 | -  |  $ | 1,301,174  |  |  $ | 1,033,958  |  $ | -  |  $ | 1,033,958  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Investment  in unconsolidated joint ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  $                                 | 11,087     |  $                                 | -  |  $ | 11,087  |  |  $ | 12,995  |  $ | -  |  $ | 12,995  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| Capital  expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  $                                 | 6,364      |  $                                 | -  |  $ | 6,364  |  |  $ | 7,310  |  $ | -  |  $ | 7,310  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                         |                 |                                         |  |  |  |  |
| (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, which is  included in "Unallocated and Other". |

 
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**Overview**

Parkway is a self-administered and self-managed REITspecializing in the acquisition, operations, leasing and ownership of officeproperties.  The Company is geographically focused on the Southeastern andSouthwestern United States and Chicago.  As of April 1, 2007 Parkway owned or had aninterest in 66 office properties located in 11 states with an aggregate ofapproximately 13.3 million square feet of leasable space.  Included in theportfolio are 17 properties totaling 2.5 million square feet that are ownedjointly with other investors, representing 19% of the portfolio.  Under theCompany'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 anowner-operator to being an operator-owner. The strategy highlights theCompany's strength in providing excellent service in the operation of officeproperties in addition to its direct ownership of real estate assets. Fee-basedreal estate services are offered through the Company's wholly owned subsidiary,Parkway Realty Services LLC, which also manages and/or leases approximately 1.2million square feet for third party owners as of April 1, 2007.  The Companygenerates revenue primarily by leasing office space to its customers andproviding management and leasing services to third party office property owners(including joint venture interests).  The primary drivers behind Parkway'srevenues are occupancy, rental rates and customer retention.  

*Occupancy*.  Parkway's revenues are dependent on the occupancy of itsoffice buildings.  As a result of job losses and over supply of officeproperties during 2001 through 2003, vacancy rates increased nationally and inParkway's markets.  In 2004, the office sector began to recover from highvacancy rates due to improving job creation.  As of April 1, 2007, occupancy ofParkway's office portfolio was 90.9% compared to 90.8% as of January 1, 2007and 89.4% as of April 1, 2006.  Not included in the April 1, 2007 occupancyrate are 24 signed leases totaling 147,000 square feet, which commence duringthe second through third quarters of 2007 and will raise Parkway's percentageleased to 92%.  To combat rising vacancy, Parkway utilizes innovativeapproaches to produce new leases.  These include the Broker Bill of Rights, ashort-form service agreement and customer advocacy programs which are models inthe industry and have helped the Company maintain occupancy around 91% during atime when the national occupancy rate is approximately 87%.  Parkway projectsoccupancy ranging from 91% to 94% during 2007 for its office properties.

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

*Customer Retention*.  Keeping existing customers is important as highcustomer retention leads to increased occupancy, less downtime between leases,and reduced leasing costs.  Parkway estimates that it costs five to six timesmore to replace an existing customer with a new one than to retain thecustomer.  In making this estimate, Parkway takes into account the sum ofrevenue lost during downtime on the space plus leasing costs, which rise asmarket vacancies increase.  Therefore, Parkway focuses a great deal of energyon customer retention.  Parkway's operating philosophy is based on the premisethat it is in the customer retention business.  Parkway seeks to retain its customersby continually focusing on operations at its office properties.  The Companybelieves in providing superior customer service; hiring, training, retainingand empowering each employee; and creating an environment of open communicationboth internally and externally with customers and stockholders.  Over the pastten years, Parkway maintained an average 73.7% customer retention rate. Parkway's customer retention for the quarter ending March 31, 2007 was 52.4%compared to 76% for the quarter ending December 31, 2006 and 77.4% for thequarter ending March 31, 2006.  The primary driver of the decrease in customerretention for the quarter ending March 31, 2007 is the loss of a 100,000 squarefoot customer in Richmond, Virginia, and we anticipate that the annual customerretention rate for 2007 will be in the range of 70% to 75%.  

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

| Page  17 of 32 |
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•        ***Great People***.  Great customer service starts with hiring greatpeople, training them well and retaining them.  It will take great people toaccomplish the ambitious goals of the Plan.

•        ***Equity Opportunities***.  Over the last several years management has createda broad array of equity opportunities for Parkway.  On the private equity sidethis includes the use of discretionary funds, such as the Fund with Ohio PERS,and partnerships.  The judicious use of private equity provides a greaterreturn on equity to the public shareholders. Parkway intends to contributeassets from its balance sheet to form new joint ventures and expects thesesubsequent ventures to be similar to discretionary funds in their duration andeconomics. On the public equity side, this includes the judicious use of commonequity and preferred equity to manage the balance sheet and growth.  

•        ***Asset Recycling***. The Company has demonstrated its willingness in thepast to sell assets when management believed the time was right.  At the startof the GEAR UP Plan, Parkway identified 25 buildings in twelve markets,totaling approximately 5 million rentable square feet to be part of the assetrecycling program.  Most of these properties are smaller assets or located insmaller markets that do not fit with the Company strategy of owning largerassets in institutional markets.  The dispositions that are planned will helpalign the Company's portfolio with its current acquisition criteria, whichfocuses on larger properties in institutional markets.  In most cases, Parkwaywill seek to keep a 10% to 30% joint venture interest in the properties beingrecycled and retain management and leasing agreements.  This is a fluid list ofassets based on the Company's evaluation of specific market conditions andreview of the portfolio.  The other side of Asset Recycling is the reinvestmentof proceeds from dispositions into other assets, either owned in the fee-simpleformat or owned jointly with a partner.

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

•        ***Retain Customers***.  Customer retention remains the cornerstone of theCompany's business and is why partners choose to partner with Parkway.  Thegoal is a customer retention rate of 70% to 75%.  The average customerretention rate since the inception of the GEAR UP Plan on January 1, 2006 is68%, and we anticipate that the annual customer retention rate for 2007 will bein the range of 70% to 75%.

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

•        ***Performance***.  In the planning process, management first decidedwhat actions to take strategically over the three years of the GEAR UP Plan andsecondly, modeled the economic impact of these actions.  Given the largecomponent of Asset Recycling in the Plan, management selected a financialmetric that would be most appropriate to measure the success of the Plan.  This led to the adoption of Cumulative Adjusted Funds Available forDistribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP Plan,with a target of $7.18 per share cumulative over three years.  Actual AdjustedFAD for 2006 exceeded the amount projected by the Company by $.29 per dilutedshare.  Additionally, Parkway established a self-imposed limit for the modifiedfixed charge coverage ratio of 2.5 times as a pledge not to use leverage toachieve Company goals.  

For the GEAR UP Plan Parkway is not abandoning Fundsfrom Operations, but rather carrying it a step further to includeaccountability for capital items and removing the accounting adjustments whichare not directly influenced by the operations of its properties.  Management believes an Adjusted FAD goal provides an effective alignment withthe shareholders by focusing the team on maximizing income from operationswhile being mindful of capital expenses and ultimately the funds available tocover the dividend.   Cumulative Adjusted FAD is calculated as thesum of Adjusted FAD for each of the three years of the plan.   The adjustments that will be made to FAD reported each quarterprincipally include charges for impairment of value and expenses related to theearly extinguishment of debt.  

 

| Page  18 of 32 |
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Parkway has made progress on its ***Asset Recycling***and ***Equity Opportunities*** goals in 2006 as follows:

•        *Dispositions*.   Parkway sold eight office properties for a grosssales price totaling $94.8 million and recorded a total gain on the sales forfinancial reporting purposes in the amount of $22.8 million.

•        *Fund Acquisitions*.  The Fund with Ohio PERS purchased seven officeproperties at an aggregate contract purchase price of $183.7 million. 

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

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

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

                Inaccordance with the GEAR UP Plan, the Company projects the followingacquisitions and dispositions in 2007.  

•        Fee simple office propertypurchases totaling approximately $150 million;

•        Fund office property purchasestotaling approximately $170 million;

•        Contributions of assets to fundsor similar ventures where the Company will retain a 25% ownership interest areprojected to be made as shown below:

o       Assets in Knoxville, Tennesseetotaling 549,000 square feet with an estimated value of $59 million in thesecond quarter of 2007; 

o       Assets in Virginia totaling883,000 square feet with an estimated value of $97 million in the third quarterof 2007;

o       Three assets in Columbia, SouthCarolina totaling 867,000 square feet with an estimated value of $106 million inthe fourth quarter of 2007; and

o       In connection with the proposedventures, Parkway may incur debt prepayment penalties and expense of approximately$2.8 million.  

*DiscretionaryFund*.  On July 6, 2005, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $500 million discretionary fund with Ohio PERS for the purpose ofacquiring high-quality multi-tenant office properties.  Ohio PERS is a 75%investor and Parkway is a 25% investor in the Fund, which will be capitalizedwith approximately $200 million of equity capital and $300 million ofnon-recourse, fixed-rate first mortgage debt.  The Fund targets acquisitions inthe existing core Parkway markets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville. There is approximately $275 million remaining capacity for Fund officeinvestments.  The remaining office investments are expected to be funded byapproximately $165 million in mortgage debt and $110 million in equitycontributions from partners.

| Page  19 of 32 |
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       TheFund 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 assetmanagement, property management, leasing and construction management servicesto the Fund, for which it will be paid market-based fees.  After each partnerhas received a 10% annual cumulative preferred return and a return of investedcapital, 20% of the excess cash flow will be paid to the general partner and80% will be paid to the limited partners.    Through its general partner andlimited partner ownership interests, Parkway may receive a distribution of thecash flow equivalent to 40%.  Parkway will have three years from the inceptiondate of the Fund to identify and acquire properties (the "Commitment Period"),with funds contributed as needed to close acquisitions.  Parkway willexclusively represent the Fund in making acquisitions within the target marketsand within certain predefined criteria.  Parkway will not be prohibited frommaking fee-simple or joint venture acquisitions in markets outside of thetarget markets, acquiring properties within the target markets that do not meetthe Fund's specific criteria or selling or joint venturing any currently ownedproperties.  The term of the Fund will be seven years from the expiration ofthe Commitment Period, with provisions to extend the term for two additional one-yearperiods. 

**FinancialCondition**

***Comments are for the balance sheet dated March 31, 2007 compared to thebalance sheet dated December 31, 2006.***

*                Officeand Parking Properties.*  In 2007,Parkway continued the application of its strategy of operating and acquiringoffice properties, joint venturing interests in office assets, as well asliquidating non-core assets and office assets that no longer meet the Company'sinvestment criteria and/or the Company has determined value will be maximizedby selling.  During the three months ending March 31, 2007, total assets decreased$9.4 million or .6% and office and parking properties (before depreciation)increased $8.9 million or .6%.

                *Purchases and Improvements*. Parkway's investment inoffice and parking properties decreased $5.1 million net of depreciation to acarrying amount of $1.3 billion at March 31, 2007, and consisted of 60 officeand parking properties.  The primary reason for the decrease in office andparking properties relates to the net effect of the purchase of land, buildingimprovements and depreciation recorded during the quarter.

** **                OnFebruary 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'splan to develop the 194,000 square foot Class A+ office building known as ThePinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company'sheadquarters building.  The estimated cost of the development is $42.5 million withexpected completion in the fall of 2008.  The Company has received commitmentsto lease approximately 72% of the new office space from four major customers. Parkway will be seeking partners for an 80% ownership interest in thedevelopment.  The development is designed to utilize benefits available underthe Gulf Opportunity Zone Act for new developments in areas affected byHurricane Katrina.  There can be no assurance that the development or jointventure of The Pinnacle will occur.

                Duringthe three months ending March 31, 2007, the Company capitalized buildingimprovements and additional purchase expenses of $5.8 million and recordeddepreciation expense of $14.5 million related to its office and parkingproperties.

*Rents Receivable and Other Assets.*  Rents receivable and other assets decreased $4million or 3.7% for the three months ended March 31, 2007.  The decrease isprimarily attributable to the decrease in escrow bank account balances of $4.4million, which was caused by the release of funds in connection withexpenditures incurred in leasing office properties and payment of propertytaxes.

*Intangible Assets, Net.* For the three months ended March 31, 2007, intangibleassets net of related amortization decreased $4.1 million and was primarily dueto the amortization of the existing intangible assets for the period.

*Notes Payable to Banks. *Notes payable to banks increased $19.7 million or 13%during the three months ended March 31, 2007.  At March 31, 2007, notes payableto banks totaled $172 million and the increase is primarily attributable toadvances under bank lines of credit to purchase land, make improvements tooffice properties and retire existing mortgage debt.

*                MortgageNotes Payable. *During the threemonths ended March 31, 2007, mortgage notes payable increased $9.4 million or 1.4%and is due to scheduled principal payments on mortgages of $4.1 million, theprepayment of existing mortgage debt of $18 million and the placement ofmortgage debt of $31.5 million described below.

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                OnFebruary 9, 2007, the Fund with Ohio PERS, of which Parkway owns 25%, placed a$31.5 million ten-year non-recourse first mortgage with an interest rate of5.61% 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 theloan matures on March 1, 2017.

                TheCompany expects to continue seeking fixed-rate, non-recourse mortgage financingwith maturities from five to ten years typically amortizing over 25 to 30 yearson select office building investments as additional capital is needed.  TheCompany targets a debt to total market capitalization rate at a percentage inthe 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 theCompany's common stock may affect the debt to total market capitalizationratio.  However, over time the Company plans to maintain a percentage in the rangeof 45% to 50%.  The Company calculates this ratio by including itsproportionate share of any debt on assets held in funds and partnerships.  Inaddition to this debt ratio, the Company monitors interest, fixed charge andmodified fixed charge coverage ratios.  The interest coverage ratio is computedby comparing the cash interest accrued to earnings before interest, taxes,depreciation and amortization ("EBITDA"). The fixed charge coverageratio is computed by comparing the cash interest accrued, principal paymentsmade on mortgage loans and preferred dividends paid to EBITDA.  The modified fixedcharge coverage ratio is computed by comparing cash interest accrued andpreferred dividends paid to EBITDA.  In accordance with the GEAR UP Plan,Parkway has established a self-imposed limit for the modified fixed chargecoverage ratio of 2.5 times as the Company's pledge not to use leverage toachieve Company goals.  Management believes the debt to market capitalization,interest coverage, fixed charge coverage and modified fixed charge coverageratios provide useful information on total debt levels as well as the Company'sability to cover interest, principal and/or preferred dividend payments withcurrent income.

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                Thecomputation of the interest, fixed charge and modified fixed charge coverageratios and the reconciliation of net income to EBITDA is as follows for the threemonths ended March 31, 2007 and 2006 (in thousands):

|                                                                                                               | **Three Months Ended**                                      |
|---------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
|                                                                                                               | **March 31**                                                |
|                                                                                                               | **2007**                                                    | ** ** | **2006** |
| **Net  Income**                                                                                               | $         428  |  | $      1,741  |
| **Adjustments  to Net Income:**                                                                               |                                                             |  |  |
|         Interest  expense                                                  | 12,915                                                 |  | 9,144  |
|         Amortization  of financing costs                                   | 293                                                    |  | 282  |
|         Write  off of debt premium assumed on mortgage note payable        | (124)                                                       |  | -  |
|         Depreciation  and amortization                                     | 19,211                                                 |  | 13,726  |
|         Amortization  of share based compensation                          | 353                                                    |  | 147  |
|         Gain  on real estate                                               | (50)                                                        |  | -  |
|         Tax  expense                                                       | 13                                                     |  | -  |
|         EBITDA  adjustments - unconsolidated joint ventures                | 291                                                    |  | 697  |
|        EBITDA  adjustments - minority interest in real estate partnerships      | (3,629)                                                     |  | (782) |
| **EBITDA  (1)**                                                                                               | $    29,701                             |  | $    24,955  |
| ** **                                                                                                    |                                                             |  |  |
| **Interest  Coverage Ratio:**                                                                                 |                                                             |  |  |
| EBITDA                                                                                                        | $    29,701                             |  | $    24,955  |
| Interest  expense:                                                                                            |                                                             |  |  |
|        Interest  expense                                                   | $    12,915                             |  | $      9,144  |
|        Interest  expense - unconsolidated joint ventures                   | 127                                                    |  | 380  |
|        Interest  expense - minority interest in real estate partnerships   | (1,203)                                                     |  | (360) |
| Total  interest expense                                                                                       | $    11,839                             |  | $      9,164  |
| **Interest  Coverage Ratio**                                                                                  | 2.51                                                   |  | 2.72  |
| ** **                                                                                                    |                                                             |  |  |
| **Fixed  Charge Coverage Ratio:**                                                                             |                                                             |  |  |
| EBITDA                                                                                                        | $    29,701                             |  | $    24,955  |
| Fixed  charges:                                                                                               |                                                             |  |  |
|        Interest  expense                                                   | $    11,839                             |  | $      9,164  |
|        Preferred  dividends                                                | 1,200                                                  |  | 1,787  |
|        Principal  payments (excluding early extinguishment of debt)        | 4,051                                                  |  | 3,594  |
|        Principal  payments - unconsolidated joint ventures                 | 12                                                     |  | 11  |
|        Principal  payments - minority interest in real estate partnerships | (65)                                                        |  | (118) |
| Total  fixed charges                                                                                          | $    17,037                             |  | $    14,438  |
| **Fixed  Charge Coverage Ratio**                                                                              | 1.74                                                   |  | 1.73  |
| ** **                                                                                                    |                                                             |  |  |
| **Modified  Fixed Charge Coverage Ratio:**                                                                    |                                                             |  |  |
| EBITDA                                                                                                        | $    29,701                             |  | $    24,955  |
| Modified  Fixed Charges:                                                                                      |                                                             |  |  |
|        Interest  expense                                                   | $    11,839                             |  | $      9,164  |
|        Preferred  dividends                                                | 1,200                                                  |  | 1,787  |
| Total  Modified Fixed Charges                                                                                 | $    13,039                             |  |  $   10,951  |
| **Modified  Fixed Charge Coverage Ratio**                                                                     | 2.28                                                   |  | 2.28  |

(1)           Parkwaydefines EBITDA, a non-GAAP financial measure, as net income before interest,income taxes, depreciation, amortization, losses on early extinguishment ofdebt and other gains and losses.  EBITDA, as calculated by us, is notcomparable to EBITDA reported by other REITs that do not define EBITDA exactlyas we do.  

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                TheCompany believes that EBITDA helps investors and Parkway's management analyzethe Company's ability to service debt and pay cash distributions.  However, thematerial limitations associated with using EBITDA as a non-GAAP financialmeasure compared to cash flows provided by operating, investing and financingactivities are that EBITDA does not reflect the Company's historical cashexpenditures or future cash requirements for working capital, capitalexpenditures or the cash required to make interest and principal payments onthe Company's outstanding debt.  Although EBITDA has limitations as ananalytical tool, the Company compensates for the limitations by only usingEBITDA to supplement GAAP financial measures.  Additionally, the Companybelieves that investors should consider EBITDA in conjunction with net incomeand the other required GAAP measures of its performance and liquidity toimprove their understanding of Parkway's operating results and liquidity. 

                Parkwayviews EBITDA primarily as a liquidity measure and, as such, the GAAP financialmeasure most directly comparable to it is cash flows provided by operatingactivities.  Because EBITDA is not a measure of financial performancecalculated in accordance with GAAP, it should not be considered in isolation oras a substitute for operating income, net income, cash flows provided byoperating, investing and financing activities prepared in accordance withGAAP.  The following table reconciles EBITDA to cash flows provided byoperating activities for the three months ended March 31, 2007 and 2006 (inthousands):

|                                                             | **Three Months Ended**           |
|-------------------------------------------------------------|----------------------------------|
|                                                             | **March 31**                     |
|                                                             | **2007**                         |  | **2006** |
|                                                             |                                  |  |  |
| EBITDA                                                      | $    29,701  |  | $    24,955  |
|                                                             |                                  |  |  |
| Amortization  of above market leases                        | 352                         |  | 409  |
| Operating  distributions from unconsolidated joint ventures | 405                         |  | 357  |
| Interest  expense                                           | (12,915)                         |  | (9,144) |
| Write  off of debt premium assumed on mortgage note payable | 124                         |  | -  |
| Tax  expense                                                | (13)                             |  | -  |
| Decrease  in receivables and other assets                   | 2,226                       |  | 2,907  |
| Decrease  in accounts payable and other liabilities         | (7,374)                          |  | (6,153) |
| Adjustments  for minority interests                         | 3,158                       |  | 702  |
| Adjustments  for unconsolidated joint ventures              | (596)                            |  | (1,107) |
|                                                             |                                  |  |  |
| Cash  flows provided by operating activities                | $    15,068  |  | $    12,926  |

* *                *AccountsPayable and Other Liabilities.*  Accounts payable and other liabilities decreased$7.3 million or 10.1% for the three months ended March 31, 2007 and wasprimarily due to the decrease in accrued property taxes for the period in theamount of $6.9 million as a result of property tax payments.

* *                *MinorityInterest - Real Estate Partnerships.* During the three months ending March31, 2007, minority interest associated with real estate partnerships decreased$23.3 million or 25.8%.  The decrease is attributable to the distribution ofthe minority interest partner's share of the $31.5 million mortgage notespayable placed by the Fund.  The minority interest partner's share of mortgageproceeds was $23.6 million.

*                Stockholders'Equity.*Stockholders' equitydecreased $7.9 million or 1.6% during the three months ended March 31, 2007, asa result of the following (in thousands):

|                                                     | **Increase**                                                      |
|-----------------------------------------------------|-------------------------------------------------------------------|
|                                                     | **(Decrease)**                                                    |
| Net  income                                         | $          428  |
| Change  in unrealized loss on equity securities     | (4)                                                               |
| Change  in market value of interest rate swaps      | (233)                                                             |
| Comprehensive  income                               | 191                                                          |
| Common  stock dividends declared                    | (10,296)                                                          |
| Preferred  stock dividends declared                 | (1,200)                                                           |
| Exercise  of stock options                          | 2,610                                                        |
| Share  based compensation expense                   | 353                                                          |
| Shares  distributed from deferred compensation plan | 135                                                          |
| Shares  issued through DRIP Plan                    | 289                                                          |
| Stock  offering issuance costs                      | (11)                                                              |
|                                                     | $     (7,929)                                 |

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**Resultsof Operations**

***Comments are for the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006.***

Net loss available to common stockholders for thethree months ended March 31, 2007, was $772,000  ($0.05 per basic common share)as compared to net loss available to common stockholders of $46,000 ($0.00 perbasic common share) for the three months ended March 31, 2006.

*                Officeand Parking Properties. *The analysisbelow includes changes attributable to same store properties, acquisitions anddispositions of office properties.  Same store properties are those that theCompany owned for the current and prior year reporting periods, excludingproperties classified as discontinued operations.  At March 31, 2007, samestore properties consisted of 52 properties comprising 10.1 million squarefeet.  Properties acquired in 2006 that do not meet the definition of samestore properties consisted of eight properties with 2.2 million square feet.

                Thefollowing table represents income from office and parking properties for thethree months ended March 31, 2007 and 2006 (in thousands):

|                                                 | **Three Months Ended March 31** |
|-------------------------------------------------|---------------------------------|
|                                                 | ** **                      | ** ** | **Increase** | **%** |
|                                                 | **2007**                        | **2006** | **(Decrease)** | **Change** |
| Income from office and  parking properties:     |                                 |  |  |  |
|     Same store  properties       |  $                         | 48,904  |  $ | 47,478  |  $ | 1,426  | 3.0% |
|     Properties  acquired in 2006 | 12,634                     | -  | 12,634  | 0.0% |
|     Properties  disposed         | -                          | 1,183  | (1,183) | -100.0% |
| Total income from office  and                   |                                 |  |  |  |
|     parking  properties          |  $                         | 61,538  |  $ | 48,661  |  $ | 12,877  | 26.5% |

                Incomefrom office and parking properties for same store properties increased $1.4million for the three months ended March 31, 2007 compared to the same periodfor 2006.  The primary reason for the increase is due to an increase in samestore occupancy and average rental rates for same store properties for the threemonths ended March 31, 2007 compared to March 31, 2006.  Average same storeoccupancy was 91.7% and for the three months ended March 31, 2007 compared to88.8% for the same period of 2006.

                Thefollowing table represents property operating expenses for the three monthsended March 31, 2007 and 2006 (in thousands):

|                                                                  | **Three Months Ended March 31** |
|------------------------------------------------------------------|---------------------------------|
|                                                                  | ** **                      | ** ** | **Increase** | **%** |
|                                                                  | **2007**                        | **2006** | **(Decrease)** | **Change** |
| Property operating  expenses:                                    |                                 |  |  |  |
|       Same  store properties       |  $                         | 22,276  |  $ | 23,026  |  $ | (750) | -3.3% |
|       Properties  acquired in 2006 | 5,940                      | -  | 5,940  | 0.0% |
|       Properties  disposed         | 18                         | 603  | (585) | -97.0% |
| Total property                                                   |                                 |  |  |  |
|       operating  expenses          |  $                         | 28,234  |  $ | 23,629  |  $ | 4,605  | 19.5% |

                Propertyoperating expenses for same store properties decreased $750,000 for the threemonths ended March 31, 2007 compared to the same period for 2006.  The primaryreason for the decrease is due to decreased repair and maintenance expendituresand utilities.

                Depreciationand amortization expense attributable to office and parking propertiesincreased $5.7 million for the three months ended March 31, 2007 compared to thesame period for 2006 and is due to the increase in the net investment in officeand parking properties due to additional purchases and improvements toproperties.

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

                OnJanuary 12, 2007, the Board of Directors approved the grant of 35,874 shares toofficers of the Company.  The shares were valued at $1.9 million and 34,875shares will vest four years from grant date and 999 shares will vest subject toachievement of the cumulative goals of the GEAR UP Plan, which will endDecember 31, 2008.  Compensation expense will not be recorded on the sharesthat vest based on performance conditions until the Company determines that itis probable that the goal will be achieved.  Therefore, no expense has beenrecorded to date for the shares that vest based on achievement of thecumulative goals of the GEAR UP Plan.

                Sharebased compensation expense of $353,000 and $147,000 was recognized for thethree months ended March 31, 2007 and 2006, respectively.  Total compensationexpense related to nonvested awards subject to service conditions not yetrecognized was $5.1 million as of March 31, 2007.  The weighted average periodover which this expense is expected to be recognized is approximately 3.3years.  Total potential compensation expense associated with shares that vestbased on performance conditions is $1.5 million as of March 31, 2007. 

                *Generaland Administrative Expense*.  General and administrative expense increased$499,000 for the three months ended March 31, 2007 compared to the same periodof 2006 and is primarily attributable to increased personnel costs and sharebased compensation expense.  

*                InterestExpense. *Interest expense, includingamortization, increased $3.7 million or 38.8% for the three months ended March31, 2007 compared to the same period of 2006 and is comprised of the following(in thousands):

|                                                                                                        | **Three Months Ended March 31** |
|--------------------------------------------------------------------------------------------------------|---------------------------------|
|                                                                                                        | ** **                      | ** ** | **Increase** | **%** |
|                                                                                                        | **2007**                        | **2006** | **(Decrease)** | **Change** |
| Interest expense:                                                                                      |                                 |  |  |  |
|       Mortgage  interest expense                                         | $  10,250             | $     6,810 | $       3,440  | 50.5% |
|       Bank  line interest expense                                        | 2,480                      | 2,149 | 331  | 15.4% |
|       Subsidiary  redeemable                                             |                                 |  |  |  |
|             preferred  membership interest | 185                        | 185 | -  | 0.0% |
|       Write  off of debt premium assumed                                 |                                 |  |  |  |
|             on  mortgage note payable      | (124)                           | - | (124) | 0.0% |
|       Mortgage  loan cost amortization                                   | 197                        | 162 | 35  | 21.6% |
|       Bank  loan cost  amortization                                 | 96                         | 120 | (24) | -20.0% |
|                                                                                                        |                                 |  |  |  |
| Total interest expense                                                                                 | $   13,084       | $     9,426 | $       3,658  | 38.8% |

                Mortgageinterest expense increased $3.4 million or 50.5% for the three months ended March31, 2007 compared to the same period for 2006 and is due to the net effect ofnew loans placed or assumed in 2007 and 2006 and the early extinguishment of amortgage in 2007.  The average interest rate on mortgage notes payable as of March31, 2007 and 2006 was 5.8 and 5.7%, respectively.

**Liquidityand Capital Resources**

*Statement of Cash Flows.  *Cash and cash equivalents were $8.3 million and $4.5 millionat March 31, 2007 and December 31, 2006, respectively.  Cash flows provided byoperating activities for the three months ended March 31, 2007 were $15.1 millioncompared to $12.9 million for the same period of 2006.  The increase in cashflows from operating activities of $2.2 million is primarily attributable tothe effect of the timing of receipt of revenues and payment of expenses.

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                Cashused in investing activities was $8.5 million for the three months ended March31, 2007 compared to cash used in investing activities of $8.8 million for thesame period of 2006.  The decrease in cash used in investing activities of $283,000is primarily due to decreased office property improvements.

                Cashused in financing activities was $2.8 million for the three months ended March31, 2007 compared to cash provided by financing activities of $478,000 for thesame period of 2006.  The decrease in cash provided by financing activities of$3.2 million is primarily due to the net effect of an early extinguishment of amortgage note payable in 2007 offset by proceeds received on a mortgageplacement in 2007.

** ***               Liquidity.  *TheCompany plans to continue pursuing the acquisition of additional investmentsthat meet the Company's investment criteria and intends to use bank lines ofcredit, proceeds from the sale of non-core assets and office properties,proceeds from the sale of portions of owned assets through joint ventures, possiblesales of securities and cash balances to fund those acquisitions.  

                TheCompany's cash flows are exposed to interest rate changes primarily as a resultof its lines of credit used to maintain liquidity and fund capital expendituresand expansion of the Company's real estate investment portfolio andoperations.  The Company's interest rate risk management objective is to limitthe impact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs.  To achieve its objectives, the Company borrows atfixed 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.

                AtMarch 31, 2007, Parkway had a total of $172 million outstanding under afour-year $140 million unsecured revolving credit facility and a five-year $60million unsecured term loan, both led by Wachovia Bank and syndicated to nineother banks (the "$200 million line"), a $15 million unsecured line of creditwith PNC Bank (the "$15 million line") and a $9 million unsecured line ofcredit with Trustmark National Bank (the "$9 million line").  The weightedaverage interest rate on unsecured lines of credit was 6.3% and 5.7% at March31, 2007 and 2006, respectively.

The $200 million line is comprised of a $60 millionterm loan maturing in April 2011 and a $140 million revolving loan maturing inApril 2010. The interest rate on the $200 million line is based on LIBOR plus80 to 130 basis points depending upon overall Company leverage, with thecurrent rate set at LIBOR plus 130 basis points as of March 31, 2007.  TheCompany pays an annual administration fee of $35,000 and fees on the unusedportion of the revolver ranging between 12.5 and 20 basis points based uponoverall Company leverage, with the rate set at 12.5 basis points at March 31,2007.

                The Company's $200million line requires compliance with a number of restrictive financialcovenants, including tangible net worth, fixed charge coverage ratio,unencumbered interest coverage ratio, total debt to total asset ratio, secureddebt to total asset value ratio, secured recourse debt to total asset valueratio and unencumbered pool restrictions.  As of March 31, 2007 theCompany was in compliance with these financial covenants.

The $15 million line matures January 29, 2008, isunsecured and is expected to fund the daily cash requirements of the Company'streasury management system.  The interest rate on the $15 million line is basedon 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 March 31, 2007. Under the $15 million line, the Company does not pay annual administration feesor fees on the unused portion of the line.

The $9 million line with Trustmark National Bank isinterest only, has a current interest rate equal to the 30-day LIBOR rate plus132.5 basis points and matures December 7, 2007.  The proceeds of the loan wereused to finance the construction of the City Centre Garage, which was completedin 2005.

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To protect against the potential for rapidly risinginterest rates, the Company entered into interest rate swap agreements in 2005and 2004.  The Company designated the swaps as hedges of the variable interestrates on the Company's borrowings under the Wachovia unsecured revolving creditfacility.  Accordingly, changes in the fair value of the swaps are recognizedin accumulated other comprehensive income until the hedged item is recognizedin earnings.  The Company's interest rate hedge contracts as of March31, 2007 and 2006 are summarized as follows (in thousands):

| ** **  | ** **   | ** **   | ** **         | ** ** | **Fair**                                                  |
|-------------|--------------|--------------|--------------------|------------|-----------------------------------------------------------|
| ** **  | ** **   | ** **   | ** **         | ** ** | **Market Value**                                          |
| **Type of** | **Notional** | **Maturity** | ** **         | **Fixed**  | **March 31**                                              |
| **Hedge**   | **Amount**   | **Date**     | **Reference Rate** | **Rate**   | **2007**                                                  | **2006** |
| Swap        | $40,000      | 06/30/06     | 1-Month LIBOR      | 3.530%     | $          - | $    146 |
| Swap        | $40,000      | 12/31/08     | 1-Month LIBOR      | 4.360%     | 371                                                       | 801 |
| Swap        | $20,000      | 12/31/08     | 1-Month LIBOR      | 4.245%     | 227                                                       | 423 |
|             |              |              |                    |            | $     598                             | $ 1,370 |

At March 31, 2007, the Company had $705.4 million in mortgagenotes payable with an average interest rate of 5.8% secured by officeproperties and $172 million drawn under bank lines of credit.  Parkway's prorata share of unconsolidated joint venture debt was $9.8 million with anaverage interest rate of 5.2% at March 31, 2007.  Based on the Company's totalmarket capitalization of approximately $1.7 billion at March 31, 2007 (usingthe March 31, 2007 closing price of $52.25 per common share), the Company'sdebt represented approximately 47.4% of its total market capitalization.  TheCompany targets a debt to total market capitalization rate at a percentage inthe 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 theCompany's common stock may affect the debt to total market capitalizationratio.  However, over time the Company plans to maintain a percentage in the rangeof 45% to 50%. 

                Inaddition to the debt to total market capitalization ratio, the Company alsomonitors interest, fixed charge and modified fixed charge coverage ratios.  Theinterest coverage ratio is computed by comparing the cash interest accrued toearnings before interest, taxes, depreciation and amortization ("EBITDA"). This ratio for the three months ended March 31, 2007 and 2006 was 2.51 and 2.72times, respectively.  The fixed charge coverage ratio is computed by comparingthe cash interest accrued, principal payments made on mortgage loans andpreferred dividends paid to EBITDA.  This ratio for the three months ended March31, 2007 and 2006 was 1.74 and 1.73 times, respectively.   The modified fixedcharge coverage ratio is computed by comparing the cash interest accrued andpreferred dividends paid to EBITDA.  This ratio for the three months ended March31, 2007 and 2006 was 2.28 times.    In accordance with the GEAR UP Plan,Parkway has established a self-imposed limit for the modified fixed chargecoverage ratio of 2.5 times as the Company's pledge not to use leverage toachieve Company goals.  Management believes the debt to market capitalization,interest coverage, fixed charge coverage and modified fixed charge coverageratios provide useful information on total debt levels as well as the Company'sability to cover interest, principal and/or preferred dividend payments withcurrent income.

                The table below presents the principal paymentsdue and weighted average interest rates for the mortgage notes payable as of March31, 2007.

|                        | **Average**       |  | **Mortgage Notes Payable**      |
|------------------------|-------------------|--|---------------------------------|
|                        | **Interest Rate** |  | **(In thousands)**              |
| 2007*                  | 5.8%              |  | $    12,090 |
| 2008                   | 5.9%              |  | 57,120                          |
| 2009                   | 5.9%              |  | 37,471                          |
| 2010                   | 5.9%              |  | 98,840                          |
| 2011                   | 6.1%              |  | 113,129                         |
| 2012                   | 6.1%              |  | 64,437                          |
| Thereafter             | 6.3%              |  | 322,356                         |
| Total                  |                   |  | $  705,443                 |
|                        |                   |  |                            |
| Fair value at 03/31/07 |                   |  | $  718,832                 |

*Remaining nine months

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The Company presently has plans to make additionalcapital improvements at its office properties in 2007 of approximately $39.4million.  These expenses include tenant improvements, capitalized acquisitioncosts and capitalized building improvements.  Approximately $21.8 million ofthese improvements relate to upgrades on properties acquired in recent yearsthat were anticipated at the time of purchase.  All such improvements areexpected to be financed by cash flow from the properties, capital expenditureescrow accounts, advances on the bank lines of credit or contributions frompartners.

                In 2006, the Company announced the proposeddevelopment 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 headquartersbuilding.  The estimated cost of the development is $42.5 million with expectedcompletion in the fall of 2008.  In 2007, the Company expects to incurapproximately $7 million in construction costs.  The Company has receivedcommitments to lease approximately 72% of the new office space from four majorcustomers.  Parkway will be seeking partners for an 80% ownership interest inthe development.  The development isdesigned to utilize benefits available under the Gulf Opportunity Zone Act fornew developments in areas affected by Hurricane Katrina.  There can be noassurance that the development or joint venture of The Pinnacle will occur.

                In accordance with Parkway's strategic plan, GEARUP, the Company projects the following acquisitions and dispositions in 2007. Item 2.  "Management's Discussion and Analysis of Financial Condition andResults of Operations - Overview - Strategic Planning," includes a fulldiscussion of the GEAR UP Plan.  

•        Fee simple officeproperty purchases totaling approximately $150 million, which will be fundedwith proceeds from sales and/or bank lines of credit.

•        Fund office propertypurchases totaling approximately $170 million.  Parkway's equity contributionwill be approximately $17 million and will be funded with proceeds from salesand/or bank lines of credit.

•        Contributions of assetto funds or similar ventures where the Company will retain a 25% ownershipinterest are projected to be made as shown below:

o       Assets in Knoxville,Tennessee totaling 549,000 square feet with an estimated value of $59 million inthe second quarter of 2007;

o       Assets in Virginiatotaling 883,000 square feet with an estimated value of $97 million in thethird quarter of 2007;

o       Three assets inColumbia, South Carolina totaling 867,000 square feet with an estimated valueof $106 million in the fourth quarter of 2007; and

o       In connection with theproposed ventures, Parkway may incur debt prepayment penalties and expense of approximately$2.8 million.  

                The Company anticipates that its current cashbalance, operating cash flows and borrowings (including borrowings under theworking capital line of credit) will be adequate to pay the Company's (i)operating and administrative expenses, (ii) debt service obligations, (iii)distributions to shareholders, (iv) capital improvements, and (v) normal repairand maintenance expenses at its properties, both in the short and long term. In addition, the Company may use proceeds from sales of assets, possible salesof securities and borrowings to fund property acquisitions.

**Contractual Obligations**

                Seeinformation appearing under the caption "Financial Condition - Note Payable toBanks and Mortgage Notes Payable" in Item 2, Management's Discussion andAnalysis of Financial Condition and Results of Operations for a discussion ofchanges in long-term debt since December 31, 2006.  

 

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Management believes that funds from operationsavailable to common shareholders ("FFO") is an appropriate measure ofperformance for equity REITs and computes this measure in accordance with theNational Association of Real Estate Investment Trusts' ("NAREIT")definition of FFO.  Funds from operations is defined by NAREIT as net income(computed in accordance with generally accepted accounting principles"GAAP"), excluding gains or losses from sales of property andextraordinary items under GAAP, plus depreciation and amortization, and afteradjustments to derive the Company's pro rata share of FFO of consolidated andunconsolidated joint ventures.  Further, the Company does not adjust FFO toeliminate the effects of non-recurring charges.  The Company believes that FFOis a meaningful supplemental measure of its operating performance becausehistorical cost accounting for real estate assets in accordance with GAAPimplicitly assumes that the value of real estate assets diminishes predictablyover time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cash available to fundcash needs.  Funds from operations should not be considered an alternative tonet income as an indicator of the Company's operating performance or as analternative to cash flow as a measure of liquidity.

                Thefollowing table presents a reconciliation of the Company's net income to FFOfor the three months ended March 31, 2007 and 2006 (in thousands):

|                                                                                                     | **Three Months Ended**                                |
|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                                                                                     | **March 31**                                          |
|                                                                                                     | **2007**                                              |  | **2006** |
| Net  income                                                                                         | $        428  |  | $    1,741  |
| Adjustments  to derive funds from operations:                                                       |                                                       |  |  |
|         Depreciation  and amortization                           | 19,211                                           |  | 13,526  |
|         Depreciation  and amortization - discontinued operations | -                                                |  | 200  |
|         Minority  interest depreciation and amortization         | (2,391)                                               |  | (410) |
|         Adjustments  for unconsolidated joint ventures           | 161                                              |  | 289  |
|         Preferred  dividends                                     | (1,200)                                               |  | (1,200) |
|         Convertible  preferred dividends                         | -                                                |  | (587) |
| Funds  from operations applicable to common                                                         |                                                       |  |  |
|         shareholders                                             | $   16,209                             |  | $  13,559  |

**Inflation**

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

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

** Forward-LookingStatements**

                Inaddition to historical information, certain sections of this Form 10-Q maycontain forward-looking statements within the meaning of Section 27A of theSecurities 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 theCompany's beliefs, expectations or intentions or those pertaining to theCompany's capital resources, profitability and portfolio performance andestimates of market rental rates.  Forward-looking statements involve numerousrisks and uncertainties.  The following factors, among others discussed hereinand in the Company's filings under the Securities Exchange Act of 1934, couldcause actual results and future events to differ materially from those set forthor contemplated in the forward-looking statements:  defaults or non-renewal ofleases, increased interest rates and operating costs, failure to obtainnecessary outside financing, difficulties in identifying properties to acquireand in effecting acquisitions, the failure to acquire or sell properties as andwhen anticipated, failure to qualify as a real estate investment trust underthe Internal Revenue Code of 1986, as amended, environmental uncertainties,risks related to natural disasters, financial market fluctuations, changes inreal estate and zoning laws and increases in real property tax rates.  Thesuccess of the Company also depends upon the trends of the economy, includinginterest rates, income tax laws, governmental regulation, legislation,population changes and those risk factors discussed elsewhere in this Form 10-Qand in the Company's filings under the Securities Exchange Act of 1934. Readers are cautioned not to place undue reliance on forward-lookingstatements, which reflect management's analysis only as the date hereof.  TheCompany assumes no obligation to update forward-looking statements.

**Item3.  Quantitative and Qualitative Disclosures About Market Risk**

                Seeinformation appearing under the caption "Liquidity" in Item 2, Management'sDiscussion and Analysis of Financial Condition and Results of Operations.

**Item 4.  Controls andProcedures**

             The Company carried out an evaluation, under the supervision and with theparticipation of the Company's management, including the Company's ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company's disclosure controls and procedurespursuant to Exchange Act Rule 13a‐15.  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that as of the endof the Company's most recent fiscal quarter, the Company's disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required to beincluded in the Company's periodic SEC filings.

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

 

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**PART II.  OTHER INFORMATION**

**Item 1A.  Risk Factors**

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

**Item6.        Exhibits**

31.1     Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2     Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1     Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

32.2     Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 
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**SIGNATURES**

** **

        Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

| **DATE**:   May 9, 2007 | **PARKWAY PROPERTIES, INC.** |
|----------------------------------------|------------------------------|
| ** **                             | ** **                   | ** ** |
| ** **                             | ** **                   | ** ** |
| ** **                             | **BY**:                      | /s/ Mandy M. Pope |
| ** **                             |                              | Mandy M. Pope, CPA |
| ** **                             |                              | Senior Vice President and |
| ** **                             |                              | Chief Accounting Officer |

 
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