UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
  WASHINGTON, DC20549
  
  _____________________________________________
  
  
  FORM 10-Q

  x                                  
   Quarterly Report Pursuant to Section 13 or 15(d)
  of the Securities Exchange Act of 1934
  For Quarterly Period Ended June 30, 2007
  or
  o                          
    Transition Report Pursuant to Section 13 or 15(d)
  of the Securities Exchange Act of 1934
  For the Transition Period from ________ to ________
  Commission File Number 1-11533
  Parkway Properties, Inc.(Exact name of registrant as specified in its
  charter)Maryland
  
  74-2123597(State or other jurisdiction of
  
  (IRS Employer Identification No.)incorporation or organization)OneJackson Place Suite 1000
    188 East Capitol Street
    P. O. Box 24647
   Jackson, Mississippi39225-4647(Address of principal executive offices) (Zip Code)Registrant's telephone number, including area code
  (601) 948-4091Registrant'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   Noo

  

  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 fileroAccelerated filer  x      
  Non-accelerated filero

  

  Indicate
  by check mark whether the registrant is a shell company (as defined in Rule
  12b-2 of the Exchange Act).
  YesoNo 
  x
  15,907,658 shares of Common Stock, $.001 par value, were outstanding as
  of August 1, 2007.


Page
  1 of 36









PARKWAY PROPERTIES, INC.FORM10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2007

Part I.Financial Information

Item
  1.
  Financial
  Statements
  PageConsolidated
  Balance Sheets, June 30, 2007 and December 31, 2006
  3Consolidated
  Statements of Income for the Three Months and Six Months EndedJune
  30, 2007 and 2006
  4Consolidated
  Statements of Stockholders' Equity for the Six Months EndedJune
  30, 2007 and 2006
  6Consolidated
  Statements of Cash Flows for the Six Months EndedJune
  30, 2007 and 2006
  7Notes
  to Consolidated Financial Statements
  8Item
  2.
  Management's
  Discussion and Analysis of Financial Condition and Results of Operations
  21Item
  3.
  Quantitative
  and Qualitative Disclosures about Market Risk
  34Item
  4.
  Controls
  and Procedures
  34Part II. Other InformationItem
  1A.
  Risk
  Factors
  35Item
  4.
  Submission
  of Matters to a Vote of Security Holders
  35Item
  6.
  Exhibits
  35Signatures36Authorized
  signatures


Page
  2 of 36









PARKWAY PROPERTIES, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share data)June 30
  
  December 312007
  
  2006(Unaudited)AssetsReal estate related
  investments:Office and parking
  properties
  $
  1,538,263
  
  $
  1,517,468Office property
  development
  3,768
  
  -Accumulated
  depreciation
  (225,821)
  
  (211,187)1,316,210
  
  1,306,281Land available for
  sale
  1,467
  
  1,467Investment in
  unconsolidated joint ventures
  11,066
  
  11,1791,328,743
  
  1,318,927Rents receivable and other
  assets
  107,204
  
  107,145Intangible assets, net
  77,663
  
  81,800Cash and cash equivalents
  8,159
  
  4,474$
  1,521,769
  
  $
  1,512,346LiabilitiesNotes payable to banks
  $
  144,139
  
  $
  152,312Mortgage notes payable
  722,022
  
  696,012Accounts payable and other
  liabilities
  75,098
  
  72,659Subsidiary redeemable
  preferred membership interests
  10,741
  
  10,741952,000
  
  931,724Minority InterestMinority Interest - unit
  holders
  35
  
  36Minority Interest - real
  estate partnerships
  78,331
  
  90,28078,366
  
  90,316Stockholders' Equity8.00% Series D Preferred
  stock, $.001 par value,2,400,000 shares
  authorized, issued and outstanding
  57,976
  
  57,976Common stock, $.001 par
  value, 67,600,000 shares authorized,15,899,907 and
  15,764,799 shares issued and outstandingin 2007 and 2006,
  respectively
  16
  
  16Common stock held in trust,
  at cost, 104,500 and 115,000shares in 2007 and
  2006, respectively
  (3,540)
  
  (3,894)Additional paid-in capital
  453,276
  
  449,141Accumulated other
  comprehensive income
  784
  
  828Accumulated deficit
  (17,109)
  
  (13,761)491,403
  
  490,306$
  1,521,769
  
  $
  1,512,346




See notes to consolidated financial statements.

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  3 of 36









PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)Three Months EndedJune 302007
  
  2006(Unaudited)RevenuesIncome from office and
  parking properties
  $
  61,085
  
  $
  48,876Management company income
  431
  
  4,436Total revenues
  61,516
  
  53,312ExpensesProperty operating expense
  28,819
  
  22,792Depreciation and
  amortization
  19,168
  
  14,082Operating expense for other
  real estate properties
  1
  
  2Management company expenses
  276
  
  300General and administrative
  1,600
  
  977Total expenses
  49,864
  
  38,153Operating income
  11,652
  
  15,159Other income and expensesInterest and other
  income
  72
  
  7Equity in earnings
  of unconsolidated joint ventures
  243
  
  (84)Gain on sale of real
  estate and other assets
  20,260
  
  13,465Interest expense
  (14,052)
  
  (9,796)Income before minority
  interest and discontinued operations
  18,175
  
  18,751Minority interest - real
  estate partnerships
  1,016
  
  64Income from continuing
  operations
  19,191
  
  18,815Discontinued operations:Income from
  discontinued operations
  49
  
  344Net income
  19,240
  
  19,159Change in market value of
  interest rate swaps
  197
  
  260Change in unrealized gain
  (loss) on equity securities
  (3)
  
  109Comprehensive income
  $
  19,434
  
  $
  19,528Net income available to
  common stockholders:Net income
  $
  19,240
  
  $
  19,159Dividends on preferred stock
  (1,200)
  
  (1,200)Dividends on convertible
  preferred stock
  -
  
  (586)Net income available to
  common stockholders
  $
  18,040
  
  $
  17,373Net income per common
  share:Basic:Income from
  continuing operations
  $
  1.15
  
  $
  1.21Discontinued
  operations
  
  -
  
  
  0.03Net income
  $
  1.15
  
  $
  1.24Diluted:Income from
  continuing operations
  $
  1.14
  
  $
  1.18Discontinued
  operations
  
  -
  
  
  0.02Net income
  $
  1.14
  
  $
  1.20Dividends per common
  share
  $
  0.65
  
  $
  0.65Weighted average shares
  outstanding:Basic
  
  15,672
  
  
  14,036Diluted
  
  15,847
  
  
  15,000




See notes to consolidated financial statements.

Page
  4 of 36









PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)Six Months EndedJune 302007
  
  2006(Unaudited)RevenuesIncome from office and
  parking properties
  $
  122,623
  
  $
  97,537Management company income
  764
  
  4,798Total revenues
  123,387
  
  102,335ExpensesProperty operating expense
  57,053
  
  46,421Depreciation and
  amortization
  38,379
  
  27,608Operating expense for other
  real estate properties
  2
  
  3Management company expenses
  544
  
  675General and administrative
  3,245
  
  2,123Total expenses
  99,223
  
  76,830Operating income
  24,164
  
  25,505Other income and expensesInterest and other
  income
  218
  
  26Equity in earnings
  of unconsolidated joint ventures
  548
  
  326Gain on sale of real
  estate and other assets
  20,310
  
  13,465Interest expense
  (27,136)
  
  (19,222)Income before minority
  interest and discontinued operations
  18,104
  
  20,100Minority interest - real
  estate partnerships
  1,487
  
  144Income from continuing
  operations
  19,591
  
  20,244Discontinued operations:Income from
  discontinued operations
  77
  
  656Net income
  
  19,668
  
  
  20,900Change in market value of
  interest rate swaps
  (37)
  
  726Change in unrealized gain
  (loss) on equity securities
  (7)
  
  79Comprehensive income
  $
  19,624
  
  $
  21,705Net income available to
  common stockholders:Net income
  $
  19,668
  
  $
  20,900Dividends on preferred stock
  (2,400)
  
  (2,400)Dividends on convertible
  preferred stock
  -
  
  (1,173)Net income available to
  common stockholders
  $
  17,268
  
  $
  17,327Net income per common
  share:Basic:Income from
  continuing operations
  $
  1.10
  
  $
  1.19Discontinued
  operations
  -
  
  0.04Net income
  $
  1.10
  
  $
  1.23Diluted:Income from
  continuing operations
  $
  1.09
  
  $
  1.17Discontinued
  operations
  -
  
  0.05Net income
  $
  1.09
  
  $
  1.22Dividends per common
  share
  $
  1.30
  
  $
  1.30Weighted average shares
  outstanding:Basic
  15,644
  
  14,042Diluted
  15,831
  
  14,214




See notes to consolidated financial statements.

Page
  5 of 36









PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(In thousands)Six Months EndedJune2007
  
  2006(Unaudited)8.34% Series B
  Cumulative ConvertiblePreferred stock,
  $.001 par valueBalance at
  beginning of period
  $
  -
  
  $
  28,122Balance at end of
  period
  -
  
  28,1228.00% Series D Preferred
  stock, $.001 par valueBalance at
  beginning of period
  57,976
  
  57,976Balance at end of
  period
  57,976
  
  57,976Common stock, $.001 par
  valueBalance at
  beginning of period
  16
  
  14Balance at end of
  period
  16
  
  14Common stock held in
  trustBalance at
  beginning of period
  (3,894)
  
  (4,198)Shares
  distributed from deferred compensation plan
  354
  
  304Balance at end of
  period
  (3,540)
  
  (3,894)Additional paid-in
  capitalBalance at
  beginning of period
  449,141
  
  389,971Stock options exercised
  2,788
  
  1,364Share
  issued in lieu of Directors' fees
  251
  
  170Shares
  issued - DRIP plan
  363
  
  -Issuance
  costs - stock offering
  (30)
  
  -Employee
  Stock Purchase Plan
  36
  
  -Purchase of
  Company stock
  -
  
  (2,814)Share based
  compensation expense
  727
  
  308Reclassification
  upon the adoption of SFAS No. 123R
  -
  
  (3,101)Balance
  at end of period
  453,276
  
  385,898Unearned compensationBalance at
  beginning of period
  -
  
  (3,101)Reclassification
  upon the adoption of SFAS No. 123R
  -
  
  3,101Balance at end of
  period
  -
  
  -Accumulated other
  comprehensive incomeBalance at
  beginning of period
  828
  
  826Change in
  unrealized loss on equity securities
  (7)
  
  79Change in
  market value of interest rate swaps
  (37)
  
  726Balance at end of
  period
  784
  
  1,631Retained earnings (deficit)Balance at
  beginning of period
  (13,761)
  
  4,906Net income
  19,668
  
  20,900Preferred
  stock dividends declared
  (2,400)
  
  (2,400)Convertible
  preferred stock dividends declared
  -
  
  (1,173)Common
  stock dividends declared
  (20,616)
  
  (18,383)Balance at end of
  period
  (17,109)
  
  3,850Total stockholders'
  equity
  $
  491,403
  
  $
  473,597


See notes to consolidated
  financial statements. Page 6 of 36









PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)Six Months EndedJune 302007
  
  2006(Unaudited)Operating
  activitiesNet
  income
  $
  19,668
  
  $
  20,900Adjustments
  to reconcile net income to cash provided byoperating
  activities:Depreciation
  and amortization
  38,379
  
  27,608Depreciation
  and amortization - discontinued operations
  1
  
  413Amortization
  of above market leases
  698
  
  678Amortization
  of loan costs
  583
  
  557Share
  based compensation expense
  727
  
  308Operating
  distributions from unconsolidated joint ventures
  670
  
  785Loss
  allocated to minority interests
  (1,487)
  
  (144)Gain
  on sale of real estate
  (20,310)
  
  (13,465)Equity
  in earnings of unconsolidated joint ventures
  (548)
  
  (326)Changes
  in operating assets and liabilities:Increase
  in receivables and other assets
  (2,434)
  
  (2,526)Increase
  (decrease) in accounts payable and other liabilities
  1,171
  
  (812)Cash
  provided by operating activities
  37,118
  
  33,976Investing
  activitiesDistributions
  from unconsolidated joint ventures
  89
  
  15,369Investments
  in unconsolidated joint ventures
  -
  
  (113)Purchases
  of real estate related investments
  (49,600)
  
  (40,702)Proceeds
  from sale of real estate
  56,787
  
  -Real
  estate development
  (1,909)
  
  -Improvements
  to real estate related investments
  (24,992)
  
  (15,344)Cash
  used in investing activities
  (19,625)
  
  (40,790)Financing
  activitiesPrincipal
  payments on mortgage notes payable
  (33,490)
  
  (7,375)Proceeds
  from long-term financing
  59,500
  
  14,400Net
  proceeds from (payments on) bank borrowings
  (9,005)
  
  17,724Debt
  financing costs
  (648)
  
  (1,230)Stock
  options exercised
  2,788
  
  1,364Purchase
  of Company stock
  -
  
  (2,814)Dividends
  paid on common stock
  (20,459)
  
  (18,244)Dividends
  paid on preferred stock
  (2,400)
  
  (3,573)Contributions
  from minority interest partners
  36,915
  
  7,482Distributions
  to minority interest partners
  (47,378)
  
  (521)Employee
  stock purchase plan
  36
  
  -Proceeds
  from DRIP plan
  363
  
  -Issuance
  costs from stock offering
  (30)
  
  -Cash
  (used in) provided by financing activities
  (13,808)
  
  7,213Change
  in cash and cash equivalents
  3,685
  
  399Cash
  and cash equivalents at beginning of period
  4,474
  
  3,363Cash
  and cash equivalents at end of period
  $
  8,159
  
  $
  3,762




See notes to consolidated financial statements.

Page
  7 of 36







Parkway Properties, Inc.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2007
(1)           Basis of Presentation



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

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



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



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



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



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

Page
  8 of 36









(2)           Net
Income Per Common Share

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

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



Three Months Ended
  
  Six Months EndedJune 30
  
  June 302007
  
  2006
  
  2007
  
  2006Numerator:Basic
  and diluted net incomeavailable
  to common stockholders
  $
  18,040
  
  $
  17,373
  
  $
  17,268
  
  $
  17,327Dividends
  on convertible preferred stock
  -
  
  586
  
  -
  
  -$
  18,040
  
  $
  17,959
  
  $
  17,268
  
  $
  17,327Denominator:Basic
  weighted average shares
  15,672
  
  14,036
  
  15,644
  
  14,042Dilutive
  effect of share equivalents
  175
  
  161
  
  187
  
  172Dilutive
  effect of convertible preferred stock
  -
  
  803
  
  -
  
  -Dilutive
  weighted average shares
  15,847
  
  15,000
  
  15,831
  
  14,214Diluted earnings per share
  $
  1.14
  
  $
  1.20
  
  $
  1.09
  
  $
  1.22




The
computation of diluted EPS for the six months ended June 30, 2006 did not assume
the conversion of the 8.34% Series B cumulative preferred stock because their
inclusion would have been anti-dilutive.



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



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



Six Months EndedJune 302007
  
  2006(in thousands)Supplemental
  cash flow information:Cash
  paid for interest
  $      26,260
  
  $     17,874Income
  taxes paid (refunded)
  30
  
  (8)Supplemental
  schedule of non-cash investing and financing activity:Shares
  issued in lieu of Directors' fees
  251
  
  170




(4)      Acquisitions and Dispositions



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

Page
  9 of 36









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



(5)           Office Property Development



On
February 28, 2007, the Company purchased 2.5 acres of land in Jackson,
Mississippi for $1.8 million.  This land was purchased as part of the Company's
plan to develop the 194,000 square foot Class A+ office building known as The
Pinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company's
headquarters building.  The estimated cost of the development is $48.5 million with
expected completion in the fall of 2008.  The Company has received commitments
to lease approximately 72% of the new office space from four major customers. 
Parkway will be seeking partners for an 80% ownership interest in the
development.  The development is designed to utilize benefits available under
the Gulf Opportunity Zone Act for new developments in areas affected by
Hurricane Katrina.  During the six months ending June 30, 2007, the Company
incurred $3.8 million in development costs for The Pinnacle.



(6)           Discontinued Operations



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



Square
  Date of
  Gross Sales
  Net Book Value
  Gain (Loss)Office Property
  Location
  Feet
  Sale
  Price
  of Real Estate
  on SaleThe Park on Camelback
  Phoenix, Arizona
  102
  09/09/05
  $  17,500
  $  12,526
  $  4,419250 Commonwealth
  Greenville, South Carolina
  46
  09/14/05
  4,020
  4,104
  (238)2005 Dispositions
  
  148
  
  $  21,520
  $  16,630
  $  4,181Central Station Building
  St. Petersburg,
   Florida
  133
  08/02/06
  $  15,000
  $  14,338
  $     211Richmond Centre
  Houston, Texas
  92
  11/29/06
  6,906
  4,551
  2,018Ashford II
  Houston, Texas
  59
  12/07/06
  5,250
  2,185
  2,8542006 Dispositions
  
  284
  
  $  27,156
  $  21,074
  $  5,083




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



Three Months Ended
  
  Six Months EndedJune 30
  
  June 302007
  
  2006
  
  2007
  
  2006Income
  Statement:RevenuesIncome from office and
  parking properties
  $
  50
  
  $
  1,022
  
  $
  51
  
  $
  2,05850
  
  1,022
  
  51
  
  2,058ExpensesProperty operating expense
  -
  
  465
  
  (27)
  
  989Depreciation and
  amortization
  1
  
  213
  
  1
  
  4131
  
  678
  
  (26)
  
  1,402Income from discontinued
  operations
  $
  49
  
  $
  344
  
  $
  77
  
  $
  656




Page
  10 of 36









(7)           Investment
in Unconsolidated Joint Ventures



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



Parkway'sOwnership
  Square
  PercentageJoint Ventures
  Property Name
  Location
  Interest
  Feet
  LeasedWink-Parkway Partnership
  Wink Building
  New Orleans, LA
  50.0%
  32
  100.0%Parkway Joint Venture, LLC
  ("Jackson JV")
  UBSBuilding/River Oaks
  Jackson, MS
  20.0%
  167
  81.1%RubiconParkI, LLC ("Rubicon
  JV")
  Lakewood/Falls Pointe
  Atlanta, GA
  20.0%
  551
  98.5%Carmel Crossing
  Charlotte, NCRubiconParkII, LLC
  ("Maitland JV")
  Maitland 200
  Orlando, FL
  20.0%
  203
  95.7%953
  94.9%




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



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

Page
  11 of 36









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



Balance Sheet InformationJune 30, 2007Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated
  Joint Ventures (at 100%):Real
  Estate, Net
  $
  -
  $
  1,202
  $
  16,001
  $
  67,277
  $
  29,321
  $
  113,801Other
  Assets
  20
  259
  1,193
  6,695
  578
  8,745Total
  Assets
  $
  20
  $
  1,461
  $
  17,194
  $
  73,972
  $
  29,899
  $
  122,546Mortgage
  Debt (a)
  $
  -
  $
  226
  $
  12,600
  $
  52,000
  $
  18,841
  $
  83,667Other
  Liabilities
  24
  26
  365
  1,352
  582
  2,349Partners'
  and Shareholders' Equity
  (4)
  1,209
  4,229
  20,620
  10,476
  36,530Total
  Liabilities & Partners'/Shareholders' Equity
  $
  20
  $
  1,461
  $
  17,194
  $
  73,972
  $
  29,899
  $
  122,546Parkway's
  Share of UnconsolidatedJoint
  VenturesReal
  Estate, Net
  $
  -
  $
  601
  $
  3,200
  $
  13,455
  $
  5,864
  $
  23,120Mortgage
  Debt
  $
  -
  $
  113
  $
  2,520
  $
  7,200
  $
  -
  $
  9,833Investment
  in Joint Ventures
  $
  -
  $
  604
  $
  (189)
  $
  5,497
  $
  5,154
  $
  11,066December 31, 2006Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated
  Joint Ventures (at 100%):Real
  Estate, Net
  $
  -
  $
  1,214
  $
  16,431
  $
  68,053
  $
  28,980
  $
  114,678Other
  Assets
  190
  256
  1,083
  6,355
  663
  8,547Total
  Assets
  $
  190
  $
  1,470
  $
  17,514
  $
  74,408
  $
  29,643
  $
  123,225Mortgage
  Debt (a)
  $
  -
  $
  275
  $
  12,600
  $
  52,000
  $
  19,061
  $
  83,936Other
  Liabilities
  26
  113
  493
  1,333
  489
  2,454Partners'
  and Shareholders' Equity
  164
  1,082
  4,421
  21,075
  10,093
  36,835Total
  Liabilities & Partners'/Shareholders' Equity
  $
  190
  $
  1,470
  $
  17,514
  $
  74,408
  $
  29,643
  $
  123,225Parkway's
  Share of UnconsolidatedJoint
  VenturesReal
  Estate, Net
  $
  -
  $
  607
  $
  3,286
  $
  13,611
  $
  5,796
  $
  23,300Mortgage
  Debt
  $
  -
  $
  137
  $
  2,520
  $
  7,200
  $
  -
  $
  9,857Investment
  in Joint Ventures
  $
  -
  $
  541
  $
  (150)
  $
  5,676
  $
  5,112
  $
  11,179




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

Page
  12 of 36









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



Parkway's
  Monthly
  Loan
  LoanType of
  Interest
  
  Share of
  Debt
  Balance
  BalanceJoint Venture
  Debt Service
  Rate
  Maturity
  Debt
  Service
  06/30/07
  12/31/06Wink-Parkway Partnership
  Amortizing
  8.625%
  07/01/09
  50.00%
  $           5
  $       113
  $       137Maitland JV
  Amortizing
  4.390%
  06/01/11
  0.00%
  -
  -
  -Rubicon JV
  Interest Only
  4.865%
  01/01/12
  13.85%
  30
  7,200
  7,200Jackson JV
  Interest Only
  5.840%
  07/01/15
  20.00%
  12
  2,520
  2,520$         47
  $    9,833
  $    9,857Weighted average interest
  rate at end of period
  
  
  
  5.158%
  5.167%




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



Wink
  Jackson
  Rubicon
  MaitlandPartnership
  JV
  JV
  JV
  Total2007
  (Remaining six months )
  $
  25
  $
  -
  $
  -
  $
  -
  $
  252008
  54
  -
  -
  -
  542009
  34
  13
  100
  -
  1472010
  -
  33
  114
  -
  1472011
  -
  35
  119
  -
  154Thereafter
  -
  2,439
  6,867
  -
  9,306$
  113
  $
  2,520
  $
  7,200
  $
  -
  $
  9,833


Page
  13 of 36









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



Results of OperationsThree Months Ended June 30, 2007Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated Joint
  Ventures (100%):Revenues
  $
  2
  $
  87
  $
  649
  $
  2,566
  $
  1,093
  $
  4,397Operating Expenses
  (12)
  (33)
  (301)
  (1,025)
  (429)
  (1,800)Net Operating Income
  (Loss)
  (10)
  54
  348
  1,541
  664
  2,597Interest Expense
  -
  (5)
  (184)
  (639)
  (207)
  (1,035)Loan Cost Amortization
  -
  (1)
  (1)
  (16)
  (3)
  (21)Depreciation and
  Amortization
  -
  (6)
  (135)
  (493)
  (165)
  (799)Net Income (Loss)
  $
  (10)
  $
  42
  $
  28
  $
  393
  $
  289
  $
  742Parkway's Share of
  UnconsolidatedJoint Ventures:Net Income (Loss)
  $
  (3)
  $
  21
  $
  6
  $
  119
  $
  100
  $
  243Depreciation and
  Amortization
  $
  -
  $
  3
  $
  27
  $
  98
  $
  33
  $
  161Property Management Fees
  $
  -
  $
  -
  $
  26
  $
  108
  $
  40
  $
  174Promote Fee
  $
  27
  $
  -
  $
  -
  $
  -
  $
  -
  $
  27Interest Expense
  $
  -
  $
  3
  $
  37
  $
  88
  $
  -
  $
  128Loan Cost Amortization
  $
  -
  $
  1
  $
  -
  $
  2
  $
  -
  $
  3Other Supplemental
  Information:Distributions from
  Unconsolidated JVs
  $
  89
  $
  -
  $
  23
  $
  173
  $
  69
  $
  354


Results of OperationsThree Months Ended June 30, 2006Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated Joint
  Ventures (100%):Revenues
  $
  2,555
  $
  67
  $
  682
  $
  2,527
  $
  1,121
  $
  6,952Operating Expenses
  (1,616)
  (12)
  (325)
  (874)
  (450)
  (3,277)Net Operating Income
  939
  55
  357
  1,653
  671
  3,675Interest Expense
  (1,577)
  (7)
  (184)
  (639)
  (212)
  (2,619)Loan Cost Amortization
  (371)
  (1)
  (1)
  (16)
  (3)
  (392)Depreciation and
  Amortization
  (222)
  (6)
  (136)
  (432)
  (152)
  (948)Income (Loss) Before Gain on
  Sale of Real Estate
  (1,231)
  41
  36
  566
  304
  (284)Gain on Sale of Real Estate
  42,693
  -
  -
  -
  -
  42,693Net Income (Loss)
  $
  41,462
  $
  41
  $
  36
  $
  566
  $
  304
  $
  42,409Parkway's Share of
  UnconsolidatedJoint Ventures:Income (Loss) Before Gain on
  Sale of Real Estate
  $
  (369)
  $
  20
  $
  7
  $
  154
  $
  104
  $
  (84)Gain on Sale of Real Estate
  
  13,584
  
  -
  
  -
  
  -
  
  -
  
  13,584Net Income
  $
  13,215
  $
  20
  $
  7
  $
  154
  $
  104
  $
  13,500Depreciation and
  Amortization
  $
  68
  $
  3
  $
  27
  $
  86
  $
  30
  $
  214Property Management Fees
  $
  480
  $
  -
  $
  76
  $
  96
  $
  41
  $
  693Promote Fee
  $
  3,861
  $
  -
  $
  -
  $
  -
  $
  -
  $
  3,861Interest Expense
  $
  247
  $
  4
  $
  36
  $
  89
  $
  -
  $
  376Interest Expense -
  Prepayment
  
  225
  
  -
  
  -
  
  -
  
  -
  
  225Total Interest Expense
  $
  472
  $
  4
  $
  36
  $
  89
  $
  -
  $
  601Loan Cost Amortization
  $
  112
  $
  1
  $
  -
  $
  2
  $
  -
  $
  115Other Supplemental
  Information:Distributions from
  Unconsolidated JVs
  $
  15,514
  $
  -
  $
  22
  $
  140
  $
  121
  $
  15,797




Page
  14 of 36











Results of OperationsSix Months Ended June 30, 2007Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated Joint
  Ventures (100%):Revenues
  $
  2
  $
  200
  $
  1,329
  $
  5,150
  $
  2,206
  $
  8,887Operating Expenses
  (37)
  (49)
  (643)
  (1,907)
  (809)
  (3,445)Net Operating Income
  (Loss)
  (35)
  151
  686
  3,243
  1,397
  5,442Interest Expense
  -
  (11)
  (368)
  (1,272)
  (414)
  (2,065)Loan Cost Amortization
  -
  (1)
  (2)
  (31)
  (8)
  (42)Depreciation and
  Amortization
  -
  (12)
  (275)
  (984)
  (322)
  (1,593)Income (Loss) Before Gain on
  Sale of Real Estate
  (35)
  127
  41
  956
  653
  1,742Gain on Sale of Real Estate
  166
  -
  -
  -
  -
  166Net Income
  $
  131
  $
  127
  $
  41
  $
  956
  $
  653
  $
  1,908Parkway's Share of
  UnconsolidatedJoint Ventures:Income (Loss) Before Gain of
  Sale of Real Estate
  $
  (11)
  $
  64
  $
  9
  $
  271
  $
  215
  $
  548Gain on Sale of Real Estate
  50
  -
  -
  -
  -
  50Net Income
  $
  39
  $
  64
  $
  9
  $
  271
  $
  215
  $
  598Depreciation and
  Amortization
  $
  -
  $
  6
  $
  55
  $
  196
  $
  65
  $
  322Property Management Fees
  $
  -
  $
  -
  $
  84
  $
  178
  $
  74
  $
  336Promote Fee
  $
  27
  $
  -
  $
  -
  $
  -
  $
  -
  $
  27Interest Expense
  $
  -
  $
  6
  $
  74
  $
  175
  $
  -
  $
  255Loan Cost Amortization
  $
  -
  $
  2
  $
  -
  $
  4
  $
  -
  $
  6Other Supplemental
  Information:Distributions from
  Unconsolidated JVs
  $
  89
  $
  -
  $
  47
  $
  450
  $
  173
  $
  759




Results of OperationsSix Months Ended June 30, 2006Viad
  Wink
  Jackson
  Rubicon
  Maitland
  CombinedJV
  Building
  JV
  JV
  JV
  TotalUnconsolidated Joint
  Ventures (100%):Revenues
  $
  5,820
  $
  143
  $
  1,343
  $
  4,948
  $
  2,169
  $
  14,423Operating Expenses
  (2,878)
  (39)
  (685)
  (1,828)
  (860)
  (6,290)Net Operating Income
  2,942
  104
  658
  3,120
  1,309
  8,133Interest Expense
  (2,415)
  (15)
  (368)
  (1,272)
  (423)
  (4,493)Loan Cost Amortization
  (457)
  (1)
  (2)
  (31)
  (7)
  (498)Depreciation and
  Amortization
  (717)
  (11)
  (260)
  (844)
  (305)
  (2,137)Income (Loss) Before Gain on
  Sale of Real Estate
  
  (647)
  
  77
  
  28
  
  973
  
  574
  
  1,005Gain on Sale of Real Estate
  
  42,693
  
  -
  
  -
  
  -
  
  -
  
  42,693Net Income
  $
  42,046
  $
  77
  $
  28
  $
  973
  $
  574
  $
  43,698Parkway's Share of
  UnconsolidatedJoint Ventures:Income (Loss) Before Gain on
  Sale of Real Estate
  $
  (194)
  $
  38
  $
  6
  $
  275
  $
  201
  $
  326Gain on Sale of Real Estate
  
  13,584
  
  -
  
  ‐
  
  ‐
  
  ‐
  
  13,584Net Income
  $
  13,390
  $
  38
  $
  6
  $
  275
  $
  201
  $
  13,910Depreciation and
  Amortization
  $
  216
  $
  6
  $
  52
  $
  168
  $
  61
  $
  503Property Management Fees
  $
  711
  $
  -
  $
  104
  $
  194
  $
  73
  $
  1,082Promote Fee
  $
  3,861
  $
  -
  $
  -
  $
  -
  $
  -
  $
  3,861Interest Expense
  $
  498
  $
  8
  $
  73
  $
  177
  $
  -
  $
  756Interest Expense -
  Prepayment
  
  225
  
  -
  
  -
  
  -
  
  -
  
  225Total Interest Expense
  $
  723
  $
  8
  $
  73
  $
  177
  $
  -
  $
  981Loan Cost Amortization
  $
  138
  $
  1
  $
  -
  $
  4
  $
  -
  $
  143Other Supplemental
  Information:Distributions from
  Unconsolidated JVs
  $
  15,675
  $
  -
  $
  47
  $
  209
  $
  223
  $
  16,154




Page
  15 of 36









(8)           Minority
Interest - Real Estate Partnerships



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



Parkway'sJoint 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, FLChatham Centre
  Schaumburg, ILRenaissance Center
  Memphis, TN100 Ashford
  Center/Peachtree Ridge
  Atlanta, GAOverlook II
  Atlanta, GA1401 Enclave Parkway
  Houston, TX




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



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



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



(9)           Share
Based Compensation



Effective
January 1, 2003, the stockholders of the Company approved Parkway's 2003 Equity
Incentive Plan (the "2003 Plan") that authorized the grant of up to 200,000
equity based awards to employees of the Company.  At present, it is Parkway's
intention to grant restricted shares and/or deferred incentive share units
instead of stock options.  Restricted shares and deferred incentive share units
are valued based on the New York Stock Exchange closing market price of Parkway
common shares (NYSE ticker symbol, PKY) as of the date of grant.



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



Compensation expense related to restricted shares and
deferred incentive share units of $727,000 and $308,000 was recognized for the six
months ending June 30, 2007 and 2006, respectively.  Total compensation expense
related to nonvested awards subject to service conditions not yet recognized
was $4.7 million as of June 30, 2007.  The weighted average period over which
this expense is expected to be recognized is approximately 3.0 years.  Total
potential compensation expense associated with shares that vest based on
performance conditions is $1.5 million as of June 30, 2007.

Page
  16 of 36









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



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



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



Weighted
  
  WeightedAverage
  Deferred
  AverageRestricted
  Grant-Date
  Incentive
  Grant-DateShares
  Fair Value
  Share Units
  Fair ValueOutstanding at December 31, 2006
  188,500
  $  38.60
  18,806
  $    46.33Granted
  35,874
  52.36
  30
  52.36Forfeited
  (3,375)
  46.14
  (2,716)
  46.03Outstanding at June 30, 2007
  220,999
  $  40.72
  16,120
  $    46.39




(10)         Capital
and Financing Transactions



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



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



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



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



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



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



On
August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7
million shares of Parkway's outstanding common stock through July 30, 2008. 
The shares may be purchased in the open market or in privately negotiated
transactions, and at times and in amounts that the Company deems appropriate.

Page
  17 of 36









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



(11)         Segment
Information



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



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



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



Page
  18 of 36









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



As of or for the three months ended
  June 30, 2007
  
  As of or for the three months ended
  June 30, 2006Office
  Unallocated
  
  
  Office
  UnallocatedProperties
  and Other
  Consolidated
  
  Properties
  and Other
  Consolidated(in thousands)
  
  (in thousands)Property operating revenues (a)
  $
  61,085
  $
  -
  $
  61,085
  
  $
  48,876
  $
  -
  $
  48,876Property operating expenses (b)
  (28,819)
  -
  (28,819)
  
  (22,792)
  -
  (22,792)Property net operating income from
  continuing operations
  32,266
  -
  32,266
  
  26,084
  -
  26,084Management company income
  -
  431
  431
  
  -
  4,436
  4,436Interest and other income
  -
  72
  72
  
  -
  7
  7Interest expense (c)
  (11,267)
  (2,785)
  (14,052)
  
  (7,217)
  (2,579)
  (9,796)Management company expenses
  -
  (276)
  (276)
  
  -
  (300)
  (300)General and administrative expenses
  -
  (1,600)
  (1,600)
  
  -
  (977)
  (977)Interest and other expense
  -
  (1)
  (1)
  
  -
  (2)
  (2)Equity in earnings of unconsolidated joint ventures
  243
  -
  243
  
  (84)
  -
  (84)Adjustment for depreciation and amortization -
  unconsolidated joint ventures
  161
  -
  161
  
  214
  -
  214Adjustment for depreciation and amortization -
  discontinued operations
  1
  -
  1
  
  213
  -
  213Adjustment for minority interest -
  real estate partnerships
  (1,268)
  -
  (1,268)
  
  (351)
  -
  (351)Income from discontinued operations
  49
  -
  49
  
  344
  -
  344Loss on non depreciable assets
  -
  
  -
  
  (119)
  -
  (119)Dividends on preferred stock
  -
  (1,200)
  (1,200)
  
  -
  (1,200)
  (1,200)Dividends on convertible preferred stock
  -
  -
  -
  
  -
  (586)
  (586)Funds from operations available
  to common stockholders
  20,185
  (5,359)
  14,826
  
  19,084
  (1,201)
  17,883Depreciation and amortization
  (19,168)
  -
  (19,168)
  
  (14,082)
  -
  (14,082)Depreciation and amortization -
  unconsolidated joint ventures
  (161)
  -
  (161)
  
  (214)
  -
  (214)Depreciation and amortization -
  discontinued operations
  (1)
  -
  (1)
  
  (213)
  -
  (213)Depreciation and amortization - minority
  interest - real estate partnerships
  2,284
  -
  2,284
  
  415
  -
  415Gain on sale of real estate
  20,260
  -
  20,260
  
  13,584
  -
  13,584Net income (loss) available to common
  stockholders
  $
  23,399
  $
  (5,359)
  $
  18,040
  
  $
  18,574
  $
  (1,201)
  $
  17,373Capital expenditures
  $
  18,628
  $
  -
  $
  18,628
  
  $
  8,036
  $
  -
  $
  8,036(a)    Included in property operating revenues are
  rental revenues, customer reimbursements, parking income and other income.(b)    Included in property operating expenses are
  real estate taxes, insurance, contract services, repairs and maintenance and
  property operating expenses.c)   Interest expense for office properties
  represents interest expense on property secured mortgage debt and interest on
  subsidiary redeemable preferred membership
  interests.  It does not include interest
  expense on the unsecured lines of credit.


Page
  19 of 36









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



As of or for the six months ended
  June 30, 2007
  
  As of or for the six months ended
  June 30, 2006Office
  Unallocated
  
  
  Office
  UnallocatedProperties
  and Other
  Consolidated
  
  Properties
  and Other
  Consolidated(in thousands)
  
  (in thousands)Property operating revenues (a)
  $
  122,623
  $
  -
  $
  122,623
  
  $
  97,537
  $
  -
  $
  97,537Property operating expenses (b)
  (57,053)
  -
  (57,053)
  
  (46,421)
  -
  (46,421)Property net operating income from
  continuing operations
  65,570
  -
  65,570
  
  51,116
  -
  51,116Management company income
  -
  764
  764
  
  -
  4,798
  4,798Interest and other income
  -
  218
  218
  
  -
  26
  26Interest expense (c)
  (21,775)
  (5,361)
  (27,136)
  
  (14,374)
  (4,848)
  (19,222)Management company expenses
  -
  (544)
  (544)
  
  -
  (675)
  (675)General and administrative expenses
  -
  (3,245)
  (3,245)
  
  -
  (2,123)
  (2,123)Other expense
  -
  (2)
  (2)
  
  -
  (3)
  (3)Equity in earnings of unconsolidated
  joint ventures
  548
  -
  548
  
  326
  -
  326Adjustment for depreciation and amortization -
  unconsolidated joint ventures
  322
  -
  322
  
  503
  -
  503Adjustment for depreciation and amortization -
  discontinued operations
  1
  -
  1
  
  413
  -
  413Adjustment for minority interest -
  real estate partnerships
  (3,188)
  -
  (3,188)
  
  (681)
  -
  (681)Income from discontinued operations
  77
  -
  77
  
  656
  -
  656Gain (loss) on non depreciable assets
  50
  
  50
  
  (119)
  -
  (119)Dividends on preferred stock
  -
  (2,400)
  (2,400)
  
  -
  (2,400)
  (2,400)Dividends on convertible preferred stock
  -
  -
  -
  
  -
  (1,173)
  (1,173)Funds from operations available
  to common stockholders
  41,605
  (10,570)
  31,035
  
  37,840
  (6,398)
  31,442Depreciation and amortization
  (38,379)
  -
  (38,379)
  
  (27,608)
  -
  (27,608)Depreciation and amortization -
  unconsolidated joint ventures
  (322)
  -
  (322)
  
  (503)
  -
  (503)Depreciation and amortization -
  discontinued operations
  (1)
  -
  (1)
  
  (413)
  -
  (413)Depreciation and amortization - minority
  interest - real estate partnerships
  4,675
  -
  4,675
  
  825
  -
  825Gain on sale of real estate
  20,260
  -
  20,260
  
  13,584
  -
  13,584Net income (loss) available to common
  stockholders
  $
  27,838
  $
  (10,570)
  $
  17,268
  
  $
  23,725
  $
  (6,398)
  $
  17,327Total assets
  $
  1,515,144
  $
  6,625
  $
  1,521,769
  
  $
  1,190,388
  $
  23,825
  $
  1,214,213Office and parking properties
  $
  1,316,210
  $
  -
  $
  1,316,210
  
  $
  1,052,499
  $
  -
  $
  1,052,499Investment in unconsolidated joint ventures
  $
  11,066
  $
  -
  $
  11,066
  
  $
  11,280
  $
  -
  $
  11,280Capital expenditures
  $
  24,992
  $
  -
  $
  24,992
  
  $
  15,344
  $
  -
  $
  15,344(a)   Included in property operating revenues are
  rental revenues, customer reimbursements, parking income and other income.(b)   Included in property operating expenses are
  real estate taxes, insurance, contract services, repairs and maintenance and
  property operating expenses.(c)   Interest expense for office properties
  represents interest expense on property secured mortgage debt and interest on
  subsidiary redeemable preferred membership
  interests.  It does not include interest
  expense on the unsecured lines of credit.


Page
  20 of 36









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

Overview



Parkway is a self-administered and self-managed REIT
specializing in the acquisition, operations, leasing and ownership of office
properties.  The Company is geographically focused on the Southeastern and
Southwestern United States and Chicago.  As of July 1, 2007 Parkway owned or had an interest
in 65 office properties located in 11 states with an aggregate of approximately
12.9 million square feet of leasable space.  Included in the portfolio are 18
properties totaling 2.7 million square feet that are owned jointly with other investors,
representing 21% of the portfolio.  Under the Company's GEAR UP Plan, which
started January 1, 2006 and ends December 31, 2008, it is the Company's goal to
transform its strategy from being an owner-operator to being an operator-owner.
The strategy highlights the Company's strength in providing excellent service
in the operation of office properties in addition to its direct ownership of
real estate assets. Fee-based real estate services are offered through the
Company's wholly owned subsidiary, Parkway Realty Services LLC, which also
manages and/or leases approximately 1.8 million square feet for third party
owners as of July 1, 2007.  The Company generates revenue primarily by leasing
office space to its customers and providing management and leasing services to
third party office property owners (including joint venture interests).  The
primary drivers behind Parkway's revenues are occupancy, rental rates and
customer retention.

Occupancy.  Parkway's revenues are dependent on the occupancy of its
office buildings.  As a result of job losses and over supply of office
properties during 2001 through 2003, vacancy rates increased nationally and in
Parkway's markets.  In 2004, the office sector began to recover from high
vacancy rates due to improving job creation.  As of July 1, 2007, occupancy of
Parkway's office portfolio was 91.6% compared to 90.9% as of April 1, 2007 and 90.0%
as of July 1, 2006.  Not included in the July 1, 2007 occupancy rate are 19
signed leases totaling 129,000 square feet, which commence during the third and
fourth quarters of 2007 and will raise Parkway's percentage leased to 92.6%. 
To combat rising vacancy, Parkway utilizes innovative approaches to produce new
leases.  These include the Broker Bill of Rights, a short-form service
agreement and customer advocacy programs which are models in the industry and
have helped the Company maintain occupancy around 92% during a time when the
national occupancy rate is approximately 87%.  Parkway projects occupancy
ranging from 91% to 94% during 2007 for its office properties with projected
annual average occupancy of 92%.

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

Customer Retention.  Keeping existing customers is important as high
customer retention leads to increased occupancy, less downtime between leases,
and reduced leasing costs.  Parkway estimates that it costs five to six times
more to replace an existing customer with a new one than to retain the
customer.  In making this estimate, Parkway takes into account the sum of
revenue lost during downtime on the space plus leasing costs, which rise as
market vacancies increase.  Therefore, Parkway focuses a great deal of energy
on customer retention.  Parkway's operating philosophy is based on the premise
that it is in the customer retention business.  Parkway seeks to retain its
customers by continually focusing on operations at its office properties.  The
Company believes in providing superior customer service; hiring, training,
retaining and empowering each employee; and creating an environment of open
communication both internally and externally with customers and stockholders. 
Over the past ten years, Parkway maintained an average 73.7% customer retention
rate.  Parkway's customer retention for the three months and six months ended June
30, 2007 was 81.0% and 69.2%, respectively, compared to 61.3% and 70.9% for the
three months and six months ended June 30, 2006, respectively.

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



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

Page
  21 of 36









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



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



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



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



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



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



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



Page
  22 of 36









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



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



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



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



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



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



In
accordance with the GEAR UP Plan, the Company projects the following
acquisitions and dispositions for the remainder of 2007:



        
Fee simple office property
purchases totaling approximately $100 million;



        
Fund office property purchases
totaling approximately $124 million;



        
Contributions of assets to funds
or similar ventures where the Company will retain a 25% ownership interest are
projected to be made as shown below:



o       
Assets in Virginia totaling
883,000 square feet with an estimated net value of $95.5 million in the third
quarter of 2007;



o       
Assets in Columbia, South Carolina
totaling 867,000 square feet with an estimated value of $106 million in the
fourth quarter of 2007; and



o       
In connection with the proposed
ventures, Parkway may incur debt prepayment penalties and expense of approximately
$1.7 million.



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

Page
  23 of 36









The
Fund targets properties with an anticipated cash on cash return greater than 7%
and an anticipated leveraged internal rate of return of greater than 11%. 
Parkway serves as the general partner of the Fund and provides asset
management, property management, leasing and construction management services
to the Fund, for which it will be paid market-based fees.  After each partner
has received a 10% annual cumulative preferred return and a return of invested
capital, 20% of the excess cash flow will be paid to the general partner and
80% will be paid to the limited partners.    Through its general partner and
limited partner ownership interests, Parkway may receive a distribution of the
cash flow equivalent to 40%.  Parkway will have three years from the inception
date of the Fund to identify and acquire properties (the "Commitment Period"),
with funds contributed as needed to close acquisitions.  Parkway will
exclusively represent the Fund in making acquisitions within the target markets
and within certain predefined criteria.  Parkway will not be prohibited from
making fee-simple or joint venture acquisitions in markets outside of the
target markets, acquiring properties within the target markets that do not meet
the Fund's specific criteria or selling or joint venturing any currently owned
properties.  The term of the Fund will be seven years from the expiration of
the Commitment Period, with provisions to extend the term for two additional
one-year periods.



Financial
Condition

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



Office
and Parking Properties.In 2007,
Parkway continued the application of its strategy of operating and acquiring
office properties, joint venturing interests in office assets, as well as
liquidating non-core assets and office assets that no longer meet the Company's
investment criteria and/or the Company has determined value will be maximized
by selling.  During the six months ending June, 2007, total assets increased
$9.4 million or .6% and office and parking properties (before depreciation)
increased $20.8 million or 1.4%.

Purchases, Improvements and Development. Parkway's
investment in office and parking properties increased $9.9 million net of
depreciation to a carrying amount of $1.3 billion at June 30, 2007, and
consisted of 59 office and parking properties.  The primary reason for the increase
in office and parking properties relates to the net effect of the purchase of land
and an office property, building improvements, development costs, the sale of
two office properties and depreciation recorded during the quarter.



On
February 28, 2007, the Company purchased 2.5 acres of land in Jackson,
Mississippi for $1.8 million.  This land was purchased as part of the Company's
plan to develop the 194,000 square foot Class A+ office building known as The
Pinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company's
headquarters building.  The estimated cost of the development is $48.5 million with
expected completion in the fall of 2008.  The Company has received commitments
to lease approximately 72% of the new office space from four major customers. 
Parkway will be seeking partners for an 80% ownership interest in the
development.  The development is designed to utilize benefits available under
the Gulf Opportunity Zone Act for new developments in areas affected by
Hurricane Katrina.  During the six months ending June 30, 2007, the Company
incurred $3.8 million in development costs for The Pinnacle.



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



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



During the six months ending June 30, 2007, the Company capitalized building
improvements and additional purchase expenses of $24.5 million and recorded
depreciation expense of $29.6 million related to its office and parking
properties.



Intangible Assets, Net.For the six months ended June 30, 2007, intangible
assets net of related amortization decreased $4.1 million and was primarily due
to the amortization of the existing intangible assets for the period.

Page
  24 of 36









Notes Payable to Banks.Notes payable to banks decreased $8.2 million or 5.4%
during the six months ended June 30, 2007.  At June 30, 2007, notes payable to
banks totaled $144.1 million and the decrease is primarily attributable to the
net effect of proceeds from the sale of assets used to reduce bank lines of
credit offset by advances under bank lines of credit to purchase and develop
real estate, make improvements to office properties and retire existing debt.



Mortgage
Notes Payable.During the six months
ended June 30, 2007, mortgage notes payable increased $26.0 million or 3.7% and
is due to scheduled principal payments on mortgages of $8.1 million, the
prepayment of existing mortgage debt of $25.4 million and the placement of
mortgage debt of $59.5 million described below.



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



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



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



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

Page
  25 of 36









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



Six Months EndedJune 302007
  
  2006Net
  Income
  $    19,668
  
  $    20,900Adjustments
  to Net Income:Interest
  expense
  26,183
  
  18,665Amortization
  of financing costs
  583
  
  557Prepayment
  expense on early extinguishment of debt
  370
  
  -Depreciation
  and amortization
  38,380
  
  28,021Amortization
  of share based compensation
  727
  
  308Gain
  on real estate
  (20,310)
  
  (13,465)Tax
  expense
  105
  
  -EBITDA
  adjustments - unconsolidated joint ventures
  583
  
  1,627EBITDA
  adjustments - minority interest in real estate partnerships
  (7,470)
  
  (1,505)EBITDA
  (1)
  $    58,819
  
  $    55,108Interest
  Coverage Ratio:EBITDA
  $    58,819
  
  $    55,108Interest
  expense:Interest
  expense
  $    26,183
  
  $    18,665Capitalized
  interest
  37
  
  -Interest
  expense - unconsolidated joint ventures
  255
  
  756Interest
  expense - minority interest in real estate partnerships
  (2,723)
  
  (658)Total
  interest expense
  $    23,752
  
  $    18,763Interest
  Coverage Ratio
  2.48
  
  2.94Fixed
  Charge Coverage Ratio:EBITDA
  $    58,819
  
  $    55,108Fixed
  charges:Interest
  expense
  $    23,752
  
  $    18,763Preferred
  dividends
  2,400
  
  3,573Principal
  payments (excluding early extinguishment of debt)
  8,059
  
  7,375Principal
  payments - unconsolidated joint ventures
  24
  
  22Principal
  payments - minority interest in real estate partnerships
  (146)
  
  (147)Total
  fixed charges
  $    34,089
  
  $    29,586Fixed
  Charge Coverage Ratio
  1.73
  
  1.86Modified
  Fixed Charge Coverage Ratio:EBITDA
  $    58,819
  
  $    55,108Modified
  Fixed Charges:Interest
  expense
  $    23,752
  
  $    18,763Preferred
  dividends
  2,400
  
  3,573Total
  Modified Fixed Charges
  $    26,152
  
  $    22,336Modified
  Fixed Charge Coverage Ratio
  2.25
  
  2.47




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

Page
  26 of 36









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



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



Six Months EndedJune 302007
  
  2006EBITDA
  $    58,819
  
  $    55,108Amortization
  of above market leases
  698
  
  678Operating
  distributions from unconsolidated joint ventures
  670
  
  785Interest
  expense
  (26,183)
  
  (18,665)Prepayment
  expense on early extinguishment of debt
  (370)
  
  -Tax
  expense
  (105)
  
  -Increase
  in receivables and other assets
  (2,434)
  
  (2,526)Increase
  (decrease) in accounts payable and other liabilities
  1,171
  
  (812)Adjustments
  for minority interests
  5,983
  
  1,361Adjustments
  for unconsolidated joint ventures
  (1,131)
  
  (1,953)Cash
  flows provided by operating activities
  $    37,118
  
  $    33,976




Minority
Interest - Real Estate Partnerships. During the six months ending June 30,
2007, minority interest associated with real estate partnerships decreased $11.9
million or 13.2%.  The decrease is attributable to the distribution of the
minority interest partner's share of the $59.5 million mortgage notes payable
placed by the Fund offset by the minority interest partner's contribution
toward the purchase of an office property.

Stockholders'
Equity.Stockholders' equity increased
$1.1 million or .2% during the six months ended June 30, 2007, as a result of
the following (in thousands):

Increase(Decrease)Net
  income
  $     19,668Change
  in unrealized loss on equity securities
  (7)Change
  in market value of interest rate swaps
  (37)Comprehensive
  income
  19,624Common
  stock dividends declared
  (20,616)Preferred
  stock dividends declared
  (2,400)Exercise
  of stock options
  2,788Share
  based compensation expense
  727Shares
  distributed from deferred compensation plan
  354Shares
  issued through DRIP Plan
  363Shares
  issued in lieu of Directors' fees
  251Shares
  issued through Employee Stock Purchase Plan
  36Stock
  offering issuance costs
  (30)$       1,097




On
August 3, 2007, the Board of Directors authorized the repurchase of up to 1.7
million shares of Parkway's outstanding common stock through July 30, 2008. 
The shares may be purchased in the open market or in privately negotiated
transactions, and at times and in amounts that the Company deems appropriate.

Page
  27 of 36









Results
of Operations

Comments are for the three months and six months ended June 30, 2007 compared
to the three months and six months ended June 30, 2006.



Net
income available to common stockholders
for the three months ended June 30, 2007 was $18.0 million ($1.15 per basic
common share) as compared to net income available to common stockholders of
$17.4 million ($1.24 per basic common share) for the three months ended June
30, 2006.  Net income available to common stockholders for the six months ended
June 30, 2007 was $17.3 million ($1.10 per basic common share) as compared to
net income available to common stockholders of $17.3 million ($1.23 per basic
common share) for the six months ended June 30, 2006.  Net gain on the sale of
real estate and other assets of $20.3 million and $13.5 million were included
in net income available to common stockholders for the three months and six
months ended June 30, 2007 and 2006, respectively.



Office
and Parking Properties.The analysis
below includes changes attributable to same store properties, acquisitions and
dispositions of office properties.  Same store properties are those that the
Company owned for the current and prior year reporting periods, excluding
properties classified as discontinued operations.  At June 30, 2007, same store
properties consisted of 52 properties comprising 10.1 million square feet. 
Properties acquired in 2006 and 2007 that do not meet the definition of same
store properties consisted of nine properties with 2.4 million square feet.



The
following table represents income from office and parking properties for the
three months and six months ended June 30, 2007 and 2006 (in thousands):



Three Months Ended June 30
  
  Six Months Ended June 30Increase
  %
  
  
  
  Increase
  %2007
  2006
  (Decrease)
  Change
  
  2007
  2006
  (Decrease)
  ChangeIncome
  from office and parking properties:Same store
  properties
  $
  48,292
  $
  47,263
  $
  1029
  2.2%
  
  $
  97,196
  $
  94,741
  $
  2,455
  2.6%Properties
  acquired in 2006
  12,527
  454
  12,073
  2659.3%
  
  25,161
  454
  24,707
  5442.1%Properties
  acquired in 2007
  274
  -
  274
  0.0%
  
  274
  -
  274
  0.0 %Properties
  disposed
  (8)
  1,159
  (1,167)
  -100.7%
  
  (8)
  2,342
  (2,350)
  -100.3%Total
  income from office andparking
  properties
  $
  61,085
  $
  48,876
  $
  12,209
  25.0%
  
  $
  122,623
  $
  97,537
  $
  25,086
  25.7%




Income
from office and parking properties for same store properties increased $1.0
million and $2.5 million for the three months and six months ended June 30,
2007, respectively, compared to the same periods for 2006.  The primary reason
for the increase is due to an increase in same store occupancy and average
rental rates for same store properties for the six months ended June 30, 2007
compared to June 30, 2006.  Average same store occupancy was 91.5% for the six months
ended June 30, 2007 compared to 89.1% for the same period of 2006.  Same store
rental rates increased 1.9% for the six months ended June 30, 2007 compared to
the same period of 2006.



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



Three Months Ended June 30
  
  Six Months Ended June 30Increase
  %
  
  
  
  Increase
  %2007
  2006
  (Decrease)
  Change
  
  2007
  2006
  (Decrease)
  ChangeIncome
  from office and parking properties:Same
  store properties
  $
  22,448
  $
  22,000
  $
  448
  2.0%
  
  $
  44,724
  $
  45,026
  $
  (302)
  -0.7%Properties
  acquired in 2006
  6,178
  151
  6,027
  3991.4%
  
  12,118
  151
  11,967
  7925.2%Properties
  acquired in 2007
  110
  -
  110
  0.0%
  
  110
  -
  110
  0.0 %Office
  property development
  57
  -
  57
  0.0%
  
  57
  -
  57
  0.0%Properties
  disposed
  26
  641
  (615)
  -95.9%
  
  44
  1,244
  (1,200)
  -96.5%Total income from office andparking
  properties
  $
  28,819
  $
  22,792
  $
  6,027
  26.4%
  
  $
  57,053
  $
  46,421
  $
  10,632
  22.9%




Property
operating expenses for same store properties increased $448,000 for the three
months ended June 30, 2007 compared to the same period of 2006 and decreased
$302,000 for the six months ended June 30, 2007 compared to the same period of
2006.  The primary reason for the year to date decrease is due to decreased
utilities.

Page
  28 of 36









Depreciation and amortization expense attributable to
office and parking properties increased $5.1 million and $10.8 million for the three
months and six months ended June 30, 2007, respectively, compared to the same
period for 2006 and is due to the increase in the net investment in office and
parking properties due to additional purchases and improvements to properties.



Management
Company Income.  Management company income decreased $4.0 million for the
three months and six months ending June 30, 2007 compared to the same period of
2006 and is primarily due to the additional management and incentive fee
recorded in 2006 as a result of the economic returns generated above an
internal rate of return hurdle rate achieved over the life of the Viad joint
venture.  The fees were received and recognized by Parkway in the second
quarter of 2006 at closing of the sale of Viad Corporate Center.



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



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



Share
based compensation expense of $727,000 and $308,000 was recognized for the six
months ending June 30, 2007 and 2006, respectively.  Total compensation expense
related to nonvested awards subject to service conditions not yet recognized
was $4.7 million as of June 30, 2007.  The weighted average period over which
this expense is expected to be recognized is approximately 3.0 years.  Total
potential compensation expense associated with shares that vest based on
performance conditions is $1.5 million as of June 30, 2007.



General
and Administrative Expense.  General and administrative expense increased
$623,000 and $1.1 million for the three months and six months ended June 30,
2007, respectively, compared to the same period of 2006 and is primarily
attributable to increased personnel costs, share based compensation expense and
professional fees.



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

Page
  29 of 36









Interest
Expense.Interest expense, including
amortization, increased $4.3 million and $7.9 million for the three months and
six months ended June 30, 2007, respectively, compared to the same period of
2006 and is comprised of the following (in thousands):



Three Months Ended June 30
  
  Six Months Ended June 30Increase
  %
  
  
  
  Increase
  %2007
  2006
  (Decrease)
  Change
  
  2007
  2006
  (Decrease)
  ChangeInterest expenses:Mortgage
  interest expense
  $
  10,394
  $
  6,868
  $
  3,526
  51.3%
  
  $
  20,644
  $
  13,678
  $
  6,966
  50.9%Bank
  line interest expense
  2,687
  2,466
  221
  9.0%
  
  5,166
  4,614
  552
  12.0%Subsidiary
  redeemable preferredmembership
  interest
  187
  187
  -
  0.0%
  
  373
  373
  -
  0.0%Debt
  prepayment expense
  494
  -
  494
  0.0%
  
  370
  -
  370
  0.0%Mortgage
  loan cost amortization
  192
  161
  31
  19.3%
  
  389
  323
  66
  20.4%Bank
  loan cost amortization
  98
  114
  (16)
  -14.0%
  
  194
  234
  (40)
  -17.1%Total interest expense
  $
  14,052
  $
  9,796
  $
  4,256
  43.4%
  
  $
  27,136
  $
  19,222
  $
  7,914
  41.2%




Mortgage
interest expense increased $3.5 million and $7.0 million for the three months
and six months ended June 30, 2007, respectively, compared to the same period
for 2006 and is due to the net effect of new loans placed or assumed in 2007
and 2006 and the early extinguishment of two mortgages in 2007.  The average
interest rate on mortgage notes payable as of June 30, 2007 and 2006 was 5.8%
and 5.7%, respectively.



Liquidity
and Capital Resources



Statement of Cash Flows.Cash and cash equivalents were $8.2 million and $4.5 million
at June 30, 2007 and December 31, 2006, respectively.  Cash flows provided by
operating activities for the six months ended June 30, 2007 were $37.1 million
compared to $34.0 million for the same period of 2006.  The increase in cash
flows from operating activities of $3.1 million is primarily attributable to
the effect of the timing of receipt of revenues and payment of expenses.



Cash
used in investing activities was $19.6 million for the six months ended June 30,
2007 compared to cash used in investing activities of $40.8 million for the
same period of 2006.  The decrease in cash used in investing activities of $21.2
million is primarily due to the net effect of increased proceeds on the sale of
office properties, offset by an increase in office property improvements and
development costs.



Cash
used in financing activities was $13.8 million for the six months ended June 30,
2007 compared to cash provided by financing activities of $7.2 million for the
same period of 2006.  The decrease in cash provided by financing activities of
$21.0 million is primarily due to the net effect of an early extinguishment of two
mortgage notes payable in 2007, proceeds from the sale of office properties
used to reduce bank lines of credit, offset by proceeds received on mortgage
placements in 2007.



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



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



At
June 30, 2007, Parkway had a total of $144.1 million outstanding under a
four-year $140 million unsecured revolving credit facility and a five-year $60
million unsecured term loan, both led by Wachovia Bank and syndicated to nine
other banks (the "$200 million line"), a $15 million unsecured line of credit
with PNC Bank (the "$15 million line") and a $9 million unsecured line of
credit with Trustmark National Bank (the "$9 million line").  The weighted
average interest rate on unsecured lines of credit was 6.2% and 5.8% at June 30,
2007 and 2006, respectively.

Page
  30 of 36









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



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



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



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



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



FairMarket ValueType of
  Notional
  Maturity
  
  Fixed
  June 30Hedge
  Amount
  Date
  Reference Rate
  Rate
  2007
  2006Swap
  $40,000
  12/31/08
  1-Month LIBOR
  4.360%
  $     506
  $ 1,053Swap
  $20,000
  12/31/08
  1-Month LIBOR
  4.245%
  289
  578$     795
  $ 1,631




At June 30, 2007, the Company had $722.0 million in mortgage
notes payable with an average interest rate of 5.8% secured by office
properties and $144.1 million drawn under bank lines of credit.  Parkway's pro
rata share of unconsolidated joint venture debt was $9.8 million with an
average interest rate of 5.2% at June 30, 2007.  Based on the Company's total
market capitalization of approximately $1.6 billion at June 30, 2007 (using the
June 30, 2007 closing price of $48.03 per common share), the Company's debt
represented approximately 48.3% of its total market capitalization.  The
Company targets a debt to total market capitalization rate at a percentage in
the range of 45% to 50%.  This rate may vary at times pending acquisitions,
sales and/or equity offerings.  In addition, volatility in the price of the Company's
common stock may affect the debt to total market capitalization ratio. 
However, over time the Company plans to maintain a percentage in the range of
45% to 50%.

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  31 of 36









In
addition to the debt to total market capitalization ratio, the Company also monitors
interest, fixed charge and modified fixed charge coverage ratios.  The interest
coverage ratio is computed by comparing the cash interest accrued to earnings
before interest, taxes, depreciation and amortization ("EBITDA").  This ratio
for the six months ended June 30, 2007 and 2006 was 2.48 and 2.94 times,
respectively.  The fixed charge coverage ratio is computed by comparing the
cash interest accrued, principal payments made on mortgage loans and preferred
dividends paid to EBITDA.  This ratio for the six months ended June 30, 2007
and 2006 was 1.73 and 1.86 times, respectively.   The modified fixed charge
coverage ratio is computed by comparing the cash interest accrued and preferred
dividends paid to EBITDA.  This ratio for the six months ended June 30, 2007
and 2006 was 2.25 and 2.47 times, respectively.    In accordance with the GEAR
UP Plan, Parkway has established a self-imposed limit for the modified fixed
charge coverage ratio of 2.5 times as the Company's pledge not to use leverage
to achieve Company goals.  Management believes the debt to market
capitalization, interest coverage, fixed charge coverage and modified fixed
charge coverage ratios provide useful information on total debt levels as well
as the Company's ability to cover interest, principal and/or preferred dividend
payments with current income.



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



Average
  
  Mortgage Notes PayableInterest Rate
  
  (In thousands)2007*
  5.8%
  
  $      7,5222008
  5.9%
  
  55,9382009
  5.9%
  
  36,2012010
  5.9%
  
  97,4762011
  6.1%
  
  111,6652012
  6.1%
  
  63,041Thereafter
  6.3%
  
  350,179Total
  
  
  $  722,022Fair value at 06/30/07
  
  
  $  716,549




*Remaining six months



The Company presently has plans to make additional
capital improvements at its office properties in 2007 of approximately $22.8
million.  These expenses include tenant improvements, capitalized acquisition
costs and capitalized building improvements.  Approximately $11.1 million of
these improvements relate to upgrades on properties acquired in recent years
that were anticipated at the time of purchase.  All such improvements are
expected to be financed by cash flow from the properties, capital expenditure
escrow accounts, advances on the bank lines of credit or contributions from
partners.



In 2006, the Company announced the proposed
development of a 194,000 square foot Class A+ office building in Jackson, Mississippi known as The Pinnacle at Jackson Place, adjacent
to the Company's headquarters building.  The estimated cost of the development
is $48.5 million with expected completion in the fall of 2008.  In 2007, the
Company expects to incur approximately $11 million in construction costs.  The
Company has received commitments to lease approximately 72% of the new office
space from four major customers.  Parkway will be seeking partners for an 80%
ownership interest in the development.  The
development is designed to utilize benefits available under the Gulf
Opportunity Zone Act for new developments in areas affected by Hurricane
Katrina.



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



      
Fee simple office
property purchases totaling approximately $100 million, which will be funded
with proceeds from sales and/or bank lines of credit.



      Fund office property
purchases totaling approximately $124 million.  Parkway's equity contribution
will be approximately $12.4 million and will be funded with proceeds from sales
and/or bank lines of credit.



        
Contributions of asset
to funds or similar ventures where the Company will retain a 25% ownership
interest are projected to be made as shown below:



o       
Assets in Virginia
totaling 883,000 square feet with an estimated net value of $95.5 million in
the third quarter of 2007;



o       
Assets in Columbia,
South Carolina totaling 867,000 square feet with an estimated value of $106
million in the fourth quarter of 2007; and



Page
  32 of 36









o       
In connection with the
proposed ventures, Parkway may incur debt prepayment penalties and expense of approximately
$1.7 million.



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

Contractual Obligations



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



Funds
From Operations



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



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

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  33 of 36









Three Months Ended
  June 30
  
  Six Months Ended
  June 302007
  
  2006
  
  2007
  
  2006Net
  income
  $
  19,240
  
  $
  19,159
  
  $
  19,668
  
  $
  20,900Adjustments
  to derive funds from operations:Depreciation and amortization
  19,168
  
  14,082
  
  38,379
  
  27,608Depreciation and amortization - discontinued
  operations
  1
  
  213
  
  1
  
  413Minority interest depreciation and
  amortization
  (2,284)
  
  (415)
  
  (4,675)
  
  (825)Adjustments for unconsolidated joint ventures
  161
  
  214
  
  322
  
  503Preferred dividends
  (1,200)
  
  (1,200)
  
  (2,400)
  
  (2,400)Convertible preferred dividends
  -
  
  (586)
  
  -
  
  (1,173)Gain on sale of real estate
  (20,260)
  
  (13,584)
  
  (20,260)
  
  (13,584)Funds from operations applicable to commonshareholders
  $
  14,826
  
  $
  17,883
  
  $
  31,035
  
  $
  31,442


Inflation



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



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



Forward-Looking
Statements



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



Item
3.  Quantitative and Qualitative Disclosures About Market Risk



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

Item 4.  Controls and
Procedures



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



Page
  34 of 36









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



PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

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



Item
4.        Submission of Matters to a Vote of Security Holders.



On May 10, 2007, the Company held its Annual Meeting
of Stockholders.  At the Annual Meeting, the following nine directors were
elected to serve until the next Annual Meeting.



SHARES OF
  COMMON STOCKFOR
  
  WITHHOLD
  AUTHORITYDaniel P. Friedman
  
  13,732,081
  
  17,723Roger P. Friou
  
  13,632,360
  
  117,444Martin L. Garcia
  
  13,731,194
  
  18,609Matthew W. Kaplan
  
  13,729,660
  
  20,144Michael J. Lipsey
  
  13,659,643
  
  90,161Steven G. Rogers
  
  13,727,353
  
  22,451Leland R. Speed
  
  13,384,230
  
  365,574Troy A. Stovall
  
  13,689,309
  
  60,495Lenore M. Sullivan
  
  13,730,793
  
  19,011


In addition, the following items were also approved at the May 10, 2007 Annual
Meeting:



Proposal to consider and ratify the appointment of Ernst
&Young LLP as independent accountants of the Company for the 2007 fiscal
year.

SHARES OF
  COMMON STOCKFOR
  
  13,627,444AGAINST
  
  116,838ABSTAIN
  
  5,522


Item
6.        Exhibits



10.1     Second Amendment to Credit
Agreement among Parkway Properties, LP as Borrower; 111 Capitol Building
Limited Partnership, Parkway Jackson, LLC, Parkway Lamar LLC, Parkway
Properties, Inc. and Parkway Properties General Partners, Inc. collectively as
Guarantors; Wachovia Bank, National Association as Agent; Wachovia Capital
Markets, LLC as Sole Lead Arranger and Sole Book Runner; and the Lenders
identified therein dated as of May 31, 2007 (incorporated by reference to the
Company's Form 8-K filed May 31, 2007).

10.2     Amendment to Bylaws dated
July 12, 2007 (incorporated by reference to the Company's Form 8-K filed July
13, 2007).

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

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

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

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



Page
  35 of 36









SIGNATURES



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



|DATE:   August 7, 2007 | PARKWAY PROPERTIES, INC.
|---------------------- | ------------------------
|                       |                         
|                       |                         
|                       | BY:                     
|                       |                         
|                       |                         
|                       |                         

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