UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,D.C. 20549

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**FORM 10-K**

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 x **ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009OR**

              o       **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from           to          Commission file number 1-11533**

** **

**Parkway Properties, Inc.**

(Exact name of registrant as specifiedin its charter)

| **Maryland**                      | **74-2123597**      |
|-----------------------------------|---------------------|
| (State or other jurisdiction      | (I.R.S. Employer    |
| of incorporation or organization) | Identification No.) |

**One Jackson Place Suite 1000188 East Capitol StreetJackson, Mississippi 39201**(Address of principal executive offices) (Zip Code) **(601) 948-4091**Registrant's telephone number:**www.pky.com**Registrant's website: 

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Securities registered pursuant to Section 12(b) of theAct: **Common Stock, $.001 Par Value8.00% Series D Cumulative Redeemable Preferred Stock $.001 Par ValueNew York Stock Exchange**Securities registered pursuant to Section 12(g) of the Act: **None**

      Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.       

 oYes  xNo

        Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.   

 oYes  xNo

        Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  xYes  oNo

       Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  oYes    oNo*   (*Registrant is notsubject to the requirements of Rule 405 of Regulation S-T at this time.)

        Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best ofregistrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. x 

        Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer ora smaller reporting company.  See definition of "large accelerated filer" inRule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o    Accelerated filer x    Non-accelerated filer o   Smaller reporting companyo

(do not check if a smaller reporting company)

        Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).           

  o Yes  x No

        The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, at June 30, 2009 was $269.8 million.

The number of shares outstanding in the registrant's class of common stock at March1, 2010 was 21,571,368.

**DOCUMENTS INCORPORATED BY REFERENCE**

        Portions of the Registrant's Proxy Statementfor the 2010 Annual Meeting of Shareholders are incorporated by reference intoPart III.

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

|                       |                                                                                                 | **Page** |
|-----------------------|-------------------------------------------------------------------------------------------------|----------|
|                       |                                                                                                 |          |
| **PART I.**           |                                                                                                 |          |
| Item 1.               | Business                                                                                        | 3        |
| Item 1A.              | Risk Factors                                                                                    | 6        |
| Item 1B.              | Unresolved Staff Comments                                                                       | 11       |
| Item 2.               | Properties                                                                                      | 12       |
| Item 3.               | Legal Proceedings                                                                               | 17       |
| Item 4.               | Submission of Matters to a Vote of Security Holders                                             | 17       |
|                       |                                                                                                 |          |
| **PART II.**          |                                                                                                 |          |
| Item 5.               | Market for Registrant's Common  Equity, Related Stockholder Matters and Issuer Purchases        |          |
|                       | of Equity Securities                                                                            | 17       |
| Item 6.               | Selected Financial Data                                                                         | 21       |
| Item 7.               | Management's Discussion and  Analysis of Financial Condition and Results of Operations          | 22       |
| Item 7A.              | Quantitative and Qualitative  Disclosures About Market Risk                                     | 43       |
| Item 8.               | Financial Statements and  Supplementary Data                                                    | 43       |
| Item 9.               | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure           | 81       |
| Item 9A.              | Controls and Procedures                                                                         | 81       |
| Item 9B.              | Other Information                                                                               | 83       |
|                       |                                                                                                 |          |
| **PART III.**         |                                                                                                 |          |
| Item 10.              | Directors, Executive Officers and  Corporate Governance                                         | 83       |
| Item 11.              | Executive Compensation                                                                          | 83       |
| Item 12.              | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters | 83       |
| Item 13.              | Certain Relationships and  Related Transactions, and Director Independence                      | 84       |
| Item 14               | Principal Accountant Fees and  Services                                                         | 84       |
|                       |                                                                                                 |          |
| **PART IV.**          |                                                                                                 |          |
| Item 15.              | Exhibits and Financial  Statement Schedules                                                     | 84       |
|                       |                                                                                                 |          |
| **SIGNATURES**        |                                                                                                 |
| Authorized Signatures | 87                                                                                              |

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**PART I**

**ITEM 1.    *Business*.**

*****Overview*

       Parkway Properties, Inc. is a real estate investment trust("REIT") specializing in the operation, leasing, acquisition andownership of office properties.  The Company performs these services for itsown account and for other institutional investors through co-ownershipstructures such as discretionary funds and/or partnerships.  The terms "we,""us," "our," "Parkway," or the "Company" refer to Parkway Properties, Inc.individually or together with its subsidiaries.    The Company isgeographically focused on the Southeastern and Southwestern United States andChicago.  Parkway and its predecessors have been public companies engaged inthe real estate business since 1971, and the management team has had experiencemanaging a public real estate company through all phases of the real estatebusiness cycle.  As part of its strategy, the Company places an emphasis onproperty operations and customer satisfaction with an ultimate goal ofachieving a high level of customer retention.    The Company isself-administered, in that it provides its own investment and administrativeservices internally through its own employees.  The Company is alsoself-managed, as it internally provides the management, maintenance and otherreal estate services that its properties require through its own employees,such as property managers and engineers and in some cases, leasingprofessionals.  In addition Parkway is self-leased for renewal leases for themajority of its office property portfolio.

       At January 1, 2010,Parkway owned or had an interest in 65 office properties located in 11 stateswith an aggregate of approximately 13.4 million square feet of leasable space. Included in the portfolio are one discretionary fund and several partnershiparrangements which encompass 21 properties totaling 3.9 million square feet,representing 29% of the portfolio.  With the discretionary fund and/or partnerships,the Company receives fees for asset management, property management, leasingand construction management services and potentially receives incentive feesupon sale if certain investment targets are achieved.  Increasing the number ofco-investments, and consequently the related fee income, is part of theCompany's strategy to transform itself to an operator-owner versus anowner-operator.  The strategy highlights the Company's strength in providingexcellent service in the operation and acquisition of office properties for investmentclients in addition to its direct ownership of real estate assets.  Fee-basedreal estate services are offered through the Company's wholly-owned subsidiary,Parkway Realty Services LLC, which also manages and/or leases approximately 1.3million square feet for third-party owners at January 1, 2010.

*Strategic Planning*      

 Parkway is a focused office REITwith a hands-on, service-oriented approach, a disciplined capital allocationprogram and a willingness to recycle assets.  However, we continue to focus onthe Company's strategy of transforming itself to an operator-owner from anowner-operator.  As part of the Company's culture, strategic plans play animportant role in planning for our future.  Our attention is focused on 2010and beyond as we continue to stand firm in our strategy to maximize shareholderreturns by managing our balance sheet to achieve a debt to gross asset valueratio of approximately 50% and a debt to earnings before interest, tax,depreciation and amortization ("EBITDA") multiple of 6.5 times.  Additionally,the Company will continue exiting non-strategic markets and entering key growthmarkets where Parkway can attain a critical mass of at least one million squarefeet. Focusing on customer retention continues to be a core part of theCompany's business and sets Parkway apart from other office property owners. Finally, the Company will continue to increase fee income and maximize ourreturn on equity and accretion by taking advantage of investment opportunitieswhile near the bottom of the recessionary cycle in our $750.0 million discretionaryfund with Teacher Retirement System of Texas ("TRS").  

*Discretionary Funds**andPartnerships*

* *

       Parkway intends tocontinue raising discretionary funds and forming partnerships with selectinvestors.  Under the terms of these funds and partnerships, where applicable, Parkwaywill manage all phases of the investment cycle including acquisition,financing, operations, leasing and dispositions.   The Company will receivefees for providing these services.  At December 31, 2009, Parkway had twodiscretionary funds and five partnership agreements of this nature.

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       On July 6, 2005, Parkway, throughaffiliated entities, entered into a limited partnership agreement forming a$500.0 million discretionary fund known as Parkway Properties Office Fund, L.P.("Ohio PERS Fund I") with Ohio Public Employees Retirement System ("Ohio PERS")for the purpose of acquiring high-quality multi-tenant office properties.  OhioPERS is a 75% investor and Parkway is a 25% investor in the fund, which is capitalizedwith approximately $200.0 million of equity capital and $300.0 million ofnon-recourse, fixed-rate first mortgage debt.  At February 15, 2008, the OhioPERS Fund I was fully invested. 

       The Ohio PERS Fund I targetedproperties with a leveraged internal rate of return of greater than 11%. Parkway serves as the general partner of the fund and provides assetmanagement, property management, leasing and construction management servicesto the fund, for which it is paid market-based fees.  After each partner hasreceived a 10% annual cumulative preferred return and a return of investedcapital, 60% will be distributed to Ohio PERS and 40% to Parkway.  The term of theOhio PERS Fund I will be seven years until February 2015, with provisions toextend the term for two additional one-year periods. 

       On May 14, 2008, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $750.0 million discretionary fund known as Parkway Properties OfficeFund II, L.P. ("Texas Teachers Fund II") with TRS for the purpose of acquiringhigh-quality multi-tenant office properties.  TRS is a 70% investor and Parkwayis a 30% investor in the fund, which will be capitalized with approximately $375.0million of equity capital and $375.0 million of non-recourse, fixed-rate firstmortgage debt.  Parkway's share of the equity contribution for the fund will be$112.5 million.  The Company intends to fund its share of equity contributionswith proceeds from asset sales, line of credit advances and/or sales of equity securities. The Texas Teachers Fund II targets acquisitions in the core markets of Houston,Austin, San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville,Jacksonville, Orlando, Tampa/St. Petersburg, and other growth markets to bedetermined by Parkway.

       The Texas Teachers Fund IItargets properties with an anticipated leveraged internal rate of return ofgreater than 10%.  Parkway serves as the general partner of the fund andprovides asset management, property management, leasing and constructionmanagement services to the fund, for which it will be paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulativepreferred return is received and invested capital is returned.  Thereafter, 56%will be distributed to TRS and 44% to Parkway.  Parkway has four years from theinception date, or through May 2012, to identify and acquire properties (the"Investment Period"), with funds contributed as needed to close acquisitions. Parkway will exclusively represent the fund in making acquisitions within thetarget markets and acquisitions with certain predefined criteria.  Parkway willnot be prohibited from making fee-simple or joint venture acquisitions inmarkets outside of the target markets, acquiring properties within the targetmarkets that do not meet Texas Teachers Fund II's specific criteria or sellingor joint venturing currently owned properties.  The term of Texas Teachers FundII will be seven years from the expiration of the Investment Period, withprovisions to extend the term for two additional one-year periods at thediscretion of Parkway.  At December 31, 2009, no investments had been made onbehalf of Texas Teachers Fund II.

* Third-Party Management*

       The Company benefits from a fully integrated management infrastructure,provided by its wholly-owned management subsidiary, Parkway Realty Services LLC("Parkway Realty").  In addition to the Company's owned properties,Parkway Realty currently manages and/or leases approximately 5.2 million netrentable square feet for third-party owners, joint venture interests and fundproperties.  The Company intends to expand its third-party fee business throughfunds or similar ventures as well as through third party management and leasingcontracts.  In 2009, the Company expanded Parkway Realty in Jacksonville,Florida and Houston, Texas.

*Financing Strategy*

* *

       The Company expects tocontinue seeking fixed rate, non-recourse mortgage financing with maturitiesfrom five to ten years typically amortizing over 25 to 30 years on selectoffice building investments as additional capital is needed.  The Companymonitors the total debt to total asset value ratio as defined in the loanagreements for the $311.0 million unsecured line of credit.  In addition to thetotal debt to total asset value ratio, the Company monitors interest, fixedcharge and modified fixed charge coverage ratios as well as the debt to EBITDA multiple. Management believes the total debt to total asset value, interest coverage,fixed charge coverage and modified fixed charge coverage ratios as well as thedebt to EBITDA multiple provide useful information on total debt levels as wellas the Company's ability to cover interest, principal and/or preferred dividendpayments with current income.

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       Parkway may, inappropriate circumstances, acquire one or more properties in exchange forParkway's equity securities.  Parkway has no set policy as to the amount orpercentage of its assets which may be invested in any specific property. Rather than a specific policy, Parkway evaluates each property in terms ofwhether and to what extent the property meets Parkway's investment criteria andstrategic objectives. The strategies and policies set forth above weredetermined, and are subject to review by, Parkway's Board of Directors whichmay change such strategies or policies based upon their evaluation of the stateof the real estate market, the performance of Parkway's assets, capital andcredit market conditions, and other relevant factors.  

* *

*Capital Allocation*

       Capital allocationreceives constant review by management and the Board of Directors consideringmany factors including the capital markets, our weighted average cost ofcapital, buying criteria (written and published), the real estate market andmanagement of the risk associated with the rate of return.  We examine allaspects of each type of investment whether it is a fund asset, Parkway commonstock, a mortgage loan receivable or a fee simple purchase. Each carries arelationship to replacement cost which is still an important underwritingdiscipline for us. Each has a current yield and a leveraged and unleveragedinternal rate of return that can be measured on a relative and absolutebasis.  Currently, management views investing in funds and similarventures as the highest priority of our capital allocation because it producesthe highest risk adjusted return as measured by internal rate of return andcurrent cash return.  Otherinvestment alternatives are available to us but with lesser return or slightlyhigher risk so we are principally focused on funds or similar ventures at thepresent time.  During 2009, the REIT industry continued to experiencesignificant volatility in capitalization rates.  As a result, the Companycontinues to monitor its buying criteria and to exercise discipline when makingcapital allocation decisions.

*Industry Segments*

       Parkway's primary businessis the operation and ownership of office properties. The Company accounts foreach office property or groups of related office properties as an individualoperating segment.  Parkway has aggregated its individual operating segmentsinto a single reporting segment due to the fact that the individual operatingsegments have similar operating and economic characteristics.   

       The individual operatingsegments exhibit similar economic characteristics such as being leased by the squarefoot, sharing the same primary operating expenses and ancillary revenueopportunities and being cyclical in the economic performance based on currentsupply and demand conditions.  The individual operating segments are alsosimilar in that revenues are derived from the leasing of office space tocustomers and each office property is managed and operated consistently inaccordance with Parkway's standard operating procedures.  The range and type ofcustomer uses of our properties is similar throughout our portfolio regardlessof location or class of building and the needs and priorities of our customersdo not vary from building to building.  Therefore, Parkway's managementresponsibilities do not vary from location to location based on the size of thebuilding, geographic location or class.

* *

*ManagementTeam*

      Parkway's management team consists of experienced office property specialistswith proven capabilities in office property (i) operations; (ii) leasing; (iii)management; (iv) acquisition/disposition; (v) financing; (vi) capitalallocation; and (vii) accounting and financial reporting.  Parkway's 14 seniorofficers have an average of 22 years of real estate industry experience, andhave worked together at Parkway for an average of 17 years.  Management hasdeveloped a highly service-oriented operating culture and believes that itsfocus on operations, proactive leasing, property management and assetmanagement activities will result in higher customer retention and occupancyand will translate into enhanced stockholder value.

*Administration*

*      *The Company isself-administered and self-managed and maintains its principal executiveoffices in Jackson, Mississippi.  At December 31, 2009, the Company had 259 employees. The operations of the Company are conducted from approximately 17,000 squarefeet of office space located at 188 East Capitol Street, One Jackson Place,Suite 1000, Jackson, Mississippi.  The building is owned by Parkway and isleased by Parkway at market rental rates.

* *

*Available Information*

       Parkway makes availablefree of charge on the "Investor Relations" page of its web site, www.pky.com,its filed and furnished reports on Form 10-K, 10-Q and 8-K and all amendments thereto,as soon as reasonably practicable after Parkway electronically files suchmaterial with, or furnishes it to, the Securities and Exchange Commission.

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       The Company's CorporateGovernance Guidelines, Code of Business Conduct and Ethics and the Charters ofthe Audit Committee, Nominating and Corporate Governance Committee andCompensation Committee of the Board of Directors are available on the "InvestorRelations" page of Parkway's web site.  Copies of these documents are alsoavailable free of charge in print upon written request addressed to InvestorRelations, Parkway Properties, Inc., One Jackson Place, Suite 1000, 188 EastCapitol Street, Jackson, Mississippi 39201.

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

       In addition to the otherinformation contained or incorporated by reference in this document, readers shouldcarefully consider the following risk factors.  Any of these risks or theoccurrence of any one or more of the uncertainties described below could have amaterial adverse effect on the Company's financial condition and theperformance of its business.  The Company refers to itself as "we" or "our" inthe following risk factors.

* *

*Our performance is subject torisks inherent in owning real estate investments.*

       Our investments aregenerally made in office properties.  We are, therefore, generally subject torisks incidental to the ownership of real estate.  These risks include:

- changes in supply of or demand     for office properties or customers for such properties in an area in which     we own buildings;

- the ongoing need for capital     improvements;

- increased operating costs, which     may not necessarily be offset by increased rents, including insurance     premiums, utilities and real estate taxes, due to inflation and other     factors;

- changes in tax, real estate and     zoning laws;

- changes in governmental rules     and fiscal policies; and

- civil unrest, acts of war, acts     of God, including earthquakes, hurricanes and other natural disasters     (which may result in uninsured losses) and other factors beyond our     control.

** **

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

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

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

*Customerdefaults could adversely affect our operations. *

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

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

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

*Ourcurrent and future joint venture investments could be adversely affected by thecapital markets, our lack of sole decision-making authority, our reliance onjoint venture partners' financial condition and any disputes that may arisebetween us and our joint venture partners.*

       Co-investingwith third parties through joint ventures is a part of our ongoing businessstrategy.  We may not be in a position to exercise sole decision-makingauthority regarding the properties owned through joint ventures.  Investmentsin joint ventures may, under certain circumstances, involve risks not presentwhen a third party is not involved, including reliance on our joint venturepartners and the possibility that joint venture partners might become bankruptor fail to fund their share of required capital contributions, thus exposing usto liabilities in excess of our share of the investment.  The funding ofParkway's capital contributions may be dependent on proceeds from asset sales,line of credit advances and/or sales of equity securities.  In limited cases,such as gross neglect, the Company can be terminated as the provider of certainfee-based services. Joint venture partners may have business interests or goalsthat are inconsistent with our business interests or goals and may be in aposition to take actions contrary to our policies or objectives.  Any disputesthat may arise between us and joint venture partners may result in litigationor arbitration that would increase our expenses.

*Ourproperties are subject to various federal, state and local regulatoryrequirements, such as environmental laws, state and local fire and safetyrequirements, building codes and land use regulations.*

       Failureto comply with these requirements could subject us to governmental fines orprivate litigant damage awards.  We believe that our properties are currentlyin material compliance with all applicable regulatory requirements.  However,we do not know whether existing requirements will change or whether futurerequirements, including any requirements that may emerge from pending or futureclimate change legislation, will require us to make significant unanticipatedexpenditures that will adversely impact our business, financial condition andresults of operations.

*Uninsuredand underinsured losses may adversely affect operations.*

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

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

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

- that     interest rates may rise; 
- that our     cash flow will be insufficient to make required payments of principal and     interest;
- that we     will be unable to refinance some or all of our debt;
- that any     refinancing will not be on terms as favorable as those of the existing     debt; 
- that     required payments on mortgages and on our other debt are not reduced if     the economic performance of any property declines;
- that debt     service obligations will reduce funds available for distribution to our     stockholders; 
- that any     default on our debt, due to noncompliance with financial covenants or     otherwise, could result in acceleration of those obligations; and
- that we     may be unable to refinance or repay the debt as it becomes due.

       Anincrease in interest rates would reduce our net income and funds fromoperations.  We may not be able to refinance or repay debt as it becomes duewhich may force us to refinance or to incur additional indebtedness at higherrates and additional cost or, in the extreme case, to sell assets or seekprotection from our creditors under applicable law.

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

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

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

       Thesale of a property subject to a mortgage may trigger pre-payment penalties,yield maintenance payments or make-whole payments to the lender, which wouldreduce the amount of gain or increase our loss on the sale of a property andcould make the sale of a property less likely.  Certain of our mortgages willhave significant outstanding principal balances on their maturity dates,commonly known as "balloon payments."  There is no assurance that wewill be able to refinance such balloon payments on the maturity of the loans,which may force disposition of properties on disadvantageous terms or requirereplacement with debt with higher interest rates, either of which would have anadverse impact on our financial performance and ability to pay distributions toinvestors.

*If the economic downturncontinues in the long-term, our business, results of operations, cash flows andfinancial condition could be adversely affected.*

* *

       In the U.S., market andeconomic conditions continue to be challenging with tighter credit conditionsand modest growth.  While recent economic data reflects a stabilization of theeconomy and credit markets, the cost and availability of credit may continue tobe adversely affected.  Furthermore, deteriorating economic conditionsincluding business layoffs, downsizing, industry slowdowns and other similarfactors that affect our customers could negatively impact commercial realestate fundamentals and result in lower occupancy, lower rental rates anddeclining values in our real estate portfolio.  The timing of changes inoccupancy levels tends to lag the timing of changes in overall economicactivity and employment levels.  Additionally, the economic situation couldhave an impact on our lenders or customers, causing them to fail to meet theirobligations to us.  No assurances can be given that the effects of the currenteconomic conditions will not have a material adverse effect on our business,financial condition and results of operations.

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

       OurBoard of Directors determines our growth, investment, financing,capitalization, borrowing, REIT status, operating and distribution policies. Although the Board of Directors has no present intention to amend or revise anyof these policies, these policies may be amended or revised without notice to andapproval from stockholders.  Accordingly, stockholders may not have controlover changes in our policies. 

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

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

- maintaining     ownership of specified minimum levels of real estate related assets;
- generating     specified minimum levels of real estate related income;
- maintaining     certain diversity of ownership requirements with respect to our shares;     and 
- distributing     at least 90% of our taxable income on an annual basis. 

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

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

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

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

*Therequirements necessary to maintain our REIT status may limit our ability toearn additional fee income at the REIT level, which may cause us to conductfee-generating activities through a taxable REIT subsidiary.*

       TheREIT provisions of the Code may limit our ability to earn additional managementfee and other fee income from joint ventures and third parties.  Our aggregate grossincome from fees and certain other non-qualifying sources cannot exceed 5% ofour annual gross income.  As a result, our ability to increase the amount offee income we earn at the REIT level may be limited, and we may have to conductfee-generating activities through a taxable REIT subsidiary.  Any fee income weearn through a taxable REIT subsidiary would be subject to federal, state, andlocal income tax at regular corporate rates, which would reduce our net incomefrom our fee-generating activities.

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

       Sincethe Internal Revenue Service, the United States Treasury Department andCongress frequently review federal income tax legislation, we cannot predict whether,when or to what extent new federal tax laws, regulations, interpretations orrulings will be adopted.  Any of such legislative action may prospectively orretroactively modify our tax treatment and, therefore, may adversely affecttaxation of us and/or our investors.

Page 9 of 87

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*Limitationson the ownership of our common stock may preclude the acquisition or change of controlof our Company. *

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

- any     proposed transfer will be void from the beginning and we will not     recognize such transfer;
- we may     institute legal proceedings to enjoin such transfer;
- we will     have the right to redeem the shares proposed to be transferred; and 
- the shares     proposed to be transferred will be automatically converted into and     exchanged for shares of a separate class of stock, the Excess Stock.

       ExcessStock has no dividend or voting rights but holders of Excess Stock do havecertain rights in the event of our liquidation, dissolution or winding up.  Ourcharter provides that we will hold the Excess Stock as trustee for the personor persons to whom the shares are ultimately transferred, until the time thatthe shares are retransferred to a person or persons in whose hands the shareswould not be Excess Stock and certain price-related restrictions aresatisfied.  These provisions may have an anti-takeover effect by discouragingtender offers or purchases of large blocks of stock, thereby limiting theopportunity for stockholders to receive a premium for their shares overthen-prevailing market prices.  Under the terms of our charter, our Board of Directorshas the authority to waive these ownership restrictions.

       Furthermore,under our charter, the Board of Directors has the authority to classify andreclassify any of our unissued shares of capital stock into shares of capitalstock with such preferences, rights, powers and restrictions as the Board of Directorsmay determine. The authorization and issuance of a new class of capital stockcould have the effect of delaying or preventing someone from taking control ofus, even if a change in control were in our stockholders' best interests.

*There maybe future dilution of our common stock, and resales of our common stock in thepublic market following a stock offering that may cause the market price forour common stock to fall.*

       OurCharter authorizes our Board of Directors to, among other things, issueadditional shares of capital stock without stockholder approval.  We may issuecommon stock, preferred stock or securities convertible or exchangeable intoequity securities to raise additional capital.  Holders of our common stockhave no preemptive rights that entitle them to purchase their pro rata share ofany offering of shares of any class or series.  Accordingly, the issuance ofany additional shares of common or preferred stock or convertible securities couldbe substantially dilutive to existing holders of our common stock.  At December31, 2009, 21,624,228 shares of our common stock and 2,400,000 shares of ourSeries D preferred stock were issued and outstanding.  Furthermore, the resaleby shareholders of our common stock in the public market following thisoffering or any future offering could have the effect of depressing the marketprice for our common stock.

*The priceof our common stock is volatile and may decline.*

       Themarket price of our common stock may fluctuate widely as a result of a numberof factors, many of which are outside our control.  In addition, the stockmarket is subject to fluctuations in share prices and trading volumes thataffect the market prices of the shares of many companies.  These broad marketfluctuations have adversely affected and may continue to adversely affect themarket price of our common stock.  Among the factors that could affect themarket price of our common stock are:

Page 10 of 87

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- actual or     anticipated quarterly fluctuations in our operating results and financial     condition;
- changes in     revenues or earnings estimates or publication of research reports and     recommendations by financial analysts or actions taken by rating agencies     with respect to our securities or those of other REITs;
- the     ability of our tenants to pay rent to us and meet their other obligations     to us under current lease terms;
- our     ability to re-lease spaces as leases expire;
- our     ability to refinance our indebtedness as it matures; 
- any     changes in our distribution policy;
- any future     issuances of equity securities;
- strategic     actions by us or our competitors, such as acquisitions or restructurings;
- general     market conditions and, in particular, developments related to market     conditions for the real estate industry; and
- domestic     and international economic factors unrelated to our performance.

*Maryland**business statutes may limit the ability of a third party to acquirecontrol of us.*

       Marylandlaw provides protection for Maryland corporations against unsolicited takeoversby limiting, among other things, the duties of the directors in unsolicitedtakeover situations.  The duties of directors of Maryland corporations do notrequire them to (a) accept, recommend or respond to any proposal by a personseeking to acquire control of the corporation, (b) authorize the corporation toredeem any rights under, or modify or render inapplicable, any stockholdersrights plan, (c) make a determination under the Maryland Business CombinationAct, or (d) act or fail to act solely because of the effect of the act orfailure to act may have on an acquisition or potential acquisition of controlof the corporation or the amount or type of consideration that may be offeredor paid to the stockholders in an acquisition.  Moreover, under Maryland law the act of a director of a Maryland corporation relating to or affecting anacquisition or potential acquisition of control is not subject to any higherduty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director ofa Maryland corporation satisfies the applicable standards of conduct fordirectors under Maryland law.

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

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

None.

Page 11 of 87

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**ITEM 2.  *Properties*.**

** **

**General**

       The Company operates andinvests principally in office properties in the Southeastern and SouthwesternUnited States and Chicago, but is not limited to any specific geographicalregion or property type.  At January 1, 2010, the Company owned or had aninterest in 65 office properties comprising approximately 13.4 million squarefeet of office space located in 11 states.

During 2009, the Company did notmake any investments in office properties.  However, investments in office propertiesduring 2008 were funded through a variety of sources, including:

•              Cashreserves and cash generated from operating activities;

•              Salesof non-strategic-assets;

•              Salesof office properties;

•              Contributionsfrom partners;

•              Fixedrate, non-recourse mortgage financing with maturities ranging from five to tenyears; and

•              Advanceson the Company's line of credit.

** **

**Office Buildings**

       Other than as discussedunder "Item 1. Business", the Company intends to hold and operate itsportfolio of office buildings for investment purposes.  The Company does notpropose any program for the renovation or improvement of any of the officebuildings other than those discussed in "Item 2 - Properties - SignificantProperties", except as called for under the renewal of existing leases or thesigning of new leases or improvements necessary to upgrade recent acquisitionsto the Company's operating standards.  All such improvements are expected to befinanced by cash flow from the portfolio of office properties, advances on theCompany's line of credit or contributions from partners.

       We believe that ourinsurance coverage contains policy specifications and insured limits that arecustomary for similar properties, business activities and markets, and webelieve our properties are adequately insured.  However, an uninsured losscould result in loss of capital investment and anticipated profits. 

        All office building investments compete for customers with similarproperties located within the same market primarily on the basis of location,rent charged, services provided and the design and condition of theimprovements.  The Company also competes with other REITs, financialinstitutions, pension funds, partnerships, individual investors and others whenattempting to acquire office properties.

 Page12 of 87

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      The following table sets forth certain information about office properties theCompany owned or had an interest in at January 1, 2010:

| ** **         | ** **        | ** **         | ** **    | ** **   | **Estimated** | ** **   | ** **   |
|--------------------|-------------------|--------------------|---------------|--------------|---------------|--------------|--------------|
| ** **         | ** **        | ** **         | ** **    | ** **   | **Average**   | **% of**     | ** **   |
| ** **         | **Number**        | **Total Net**      | **% of**      | **Average**  | **Market**    | **Leases**   | **%**        |
| ** **         | **of**            | **Rentable**       | **Total Net** | **Rent Per** | **Rent Per**  | **Expiring** | **Leased**   |
| ** **         | **Office**        | **Square Feet**    | **Rentable**  | **Square**   | **Square**    | **In**       | **at**       |
| **Location**       | **Properties(1)** | **(in thousands)** | **Feet**      | **Foot (2)** | **Foot (3)**  | **2010 (4)** | **1/1/2010** |
| Chicago, IL        | 4                 | 2,893              | 21.7%         | $30.56       | $27.96        | 10.2%        | 88.6%        |
| Houston, TX        | 13                | 2,194              | 16.4%         | 20.18        | 22.50         | 10.2%        | 92.3%        |
| Atlanta, GA        | 9                 | 1,784              | 13.4%         | 21.72        | 20.87         | 8.0%         | 88.8%        |
| Memphis, TN        | 6                 | 1,199              | 9.0%          | 21.87        | 21.04         | 11.2%        | 90.2%        |
| Jackson, MS        | 7                 | 1,112              | 8.3%          | 18.53        | 18.64         | 14.1%        | 86.0%        |
| Orlando, FL        | 5                 | 923                | 6.9%          | 23.75        | 21.21         | 17.2%        | 86.3%        |
| Phoenix, AZ        | 3                 | 687                | 5.1%          | 27.43        | 23.44         | 6.3%         | 85.8%        |
| Richmond, VA       | 6                 | 496                | 3.7%          | 17.71        | 16.40         | 12.1%        | 65.6%        |
| Jacksonville, FL   | 4                 | 482                | 3.6%          | 19.40        | 17.94         | 4.8%         | 91.3%        |
| Nashville, TN      | 1                 | 436                | 3.3%          | 17.66        | 17.50         | 1.5%         | 86.9%        |
| Columbia, SC       | 2                 | 407                | 3.1%          | 15.65        | 16.25         | 25.2%        | 84.6%        |
| Charlotte, NC      | 1                 | 326                | 2.4%          | 18.38        | 18.00         | 9.2%         | 76.5%        |
| Ft. Lauderdale, FL | 2                 | 216                | 1.6%          | 23.53        | 22.08         | 11.6%        | 66.4%        |
| Hampton Roads, VA  | 1                 | 172                | 1.3%          | 18.99        | 18.00         | 15.9%        | 86.3%        |
| Other Markets      | 1                 | 32                 | 0.2%          | 13.99        | 8.00          | 7.6%         | 7.6%         |
| ** **         | 65                | 13,359             | 100.0%        | $22.98       | $22.14        | 10.7%        | 87.0%        |

(1)  Includes 44 office properties owned directly and 21 office properties ownedthrough joint ventures.

(2)  Average rent per square foot is defined as the weighted average current grossrental rate including expense escalations for leased office space in thebuilding at January 1, 2010.

(3)  Estimated average gross market rent per square foot is based upon informationobtained from (i) the Company's own experience in leasing space at theproperties; (ii) leasing agents in the relevant markets with respect to quotedrental rates and completed leasing transactions for comparable properties in therelevant markets; and (iii) publicly available data with respect thereto. Estimated average market rent is weighted by the net rentable square feetexpiring in each property.

(4)   The percentage of leases expiring in 2010 represents the ratio of squarefeet under leases expiring in 2010 divided by total net rentable square feet.

      The following table sets forth scheduled lease expirations for properties ownedat January 1, 2010 on leases executed at January 1, 2010, assuming no customerexercises renewal options:

| ** **     | ** ** | **Net**            |                 | **Annualized**      | **Weighted Avg**     | **Weighted Est**     |
|----------------|------------|--------------------|-----------------|---------------------|----------------------|----------------------|
| ** **     | ** ** | **Rentable**       | **Percent of**  | **Rental**          | **Expiring Gross**   | **Avg Market**       |
| **Year of**    | **Number** | **Square Feet**    | **Total Net**   | **Amount**          | **Rental Rate  Per** | **Rent Per Net**     |
| **Lease**      | **of**     | **Expiring**       | **Rentable**    | **Expiring (1)**    | **Net Rentable**     | **Rentable**         |
| **Expiration** | **Leases** | **(in thousands)** | **Square Feet** | **(in thousands)**  | **Square Foot  (2)** | **Square Foot  (3)** |
| 2010           | 323        | 1,432              | 10.7%           | $  32,953 | $23.02               | $  21.19             |
| 2011           | 285        | 2,231              | 16.7%           | 51,503              | 23.09                | 22.23                |
| 2012           | 240        | 1,539              | 11.5%           | 35,890              | 23.32                | 21.91                |
| 2013           | 153        | 1,119              | 8.4%            | 25,774              | 23.03                | 21.10                |
| 2014           | 134        | 1,355              | 10.2%           | 30,075              | 22.19                | 21.87                |
| 2015           | 87         | 1,311              | 9.8%            | 26,777              | 20.43                | 17.21                |
| Thereafter     | 110        | 2,639              | 19.7%           | 64,204              | 24.33                | 23.28                |
|                | 1,332      | 11,626             | 87.0%           | $267,176            | $22.98               | $22.14               |

(1)    Annualizedrental amount expiring is defined as net rentable square feet expiringmultiplied by the weighted average expiring annual rental rate per net rentablesquare foot.

(2)    Weighted average expiring gross rental rate is theweighted current rental rate including escalations for operating expenses.

(3)    Estimated average market rent is based uponinformation obtained from (i) the Company's own experience in leasing space atthe properties; (ii) leasing agents in the relevant markets with respect toquoted rental rates and completed leasing transactions for comparableproperties in the relevant markets; and (iii) publicly available data withrespect thereto.  Estimated average market rent is weighted by the new rentablesquare feet expiring in each property.

Page 13 of 87

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**Customers**

       The office properties areleased to 1,332 customers, which are in a wide variety of industries includingbanking, insurance, professional services (including legal, accounting, andconsulting), energy, financial services and telecommunications.  Our largestcustomer and 25 largest customers accounted for 5.1% and 42.3% respectively, ofour annualized rental revenue.  The following table sets forth informationconcerning the 25 largest customers of the properties owned directly or throughjoint ventures at January 1, 2010 (in thousands, except footnotes):

|      |                                              |            |                             |                                     | **Leased**     | **Annualized** |
|------|----------------------------------------------|------------|-----------------------------|-------------------------------------|----------------|----------------|
|      |                                              | **No. of** | **Square Footage Expiring** |                                     | **Square**     | **Rental**     |
|      | **Customer**                                 | **Props.** | **2010**                    | **2011**                            | **2012**       | **2013**       | **2014** | **Thereafter** | **Feet (1)** | **Revenue (1)** |
|      | General Services  Administration (GSA)       | 15         | 98                     | 25                             | 21        | 58        | 3  | 278  | 483  |  $ | 10,809  |
| (2)  | Health Care Service  Corporation (BCBS)      | 1          | 33                     | -                              | 62        | -         | -  | 168  | 263  | 6,796  |
| (3)  | Cox Enterprises                              | 2          | -                      | 193                            | -         | 90        | -  | 34  | 317  | 6,609  |
| (4)  | Blue Cross Blue Shield of  Georgia, Inc.     | 1          | -                      | -                              | -         | -         | 252  | -  | 252  | 6,438  |
| (5)  | U. S. Cellular Corporation                   | 1          | -                      | 195                            | -         | -         | -  | -  | 195  | 5,694  |
| (6)  | Regions Financial  Corporation               | 1          | 7                      | -                              | -         | 8         | -  | 250  | 265  | 5,472  |
|      | Nabors Industries/Nabors  Corporate Services | 1          | 205                    | -                              | -         | -         | -  | -  | 205  | 4,413  |
|      | Federal Home Loan Bank of  Chicago           | 1          | 103                    | 14                             | -         | -         | -  | -  | 117  | 3,766  |
| (7)  | Bank of America, NA                          | 6          | -                      | 6                              | 9         | 16        | 13  | 160  | 204  | 3,460  |
|      | Extra Space Storage                          | 1          | -                      | -                              | -         | -         | -  | 134  | 134  | 2,917  |
|      | Schlumberger Technology                      | 1          | -                      | -                              | 155       | -         | -  | -  | 155  | 2,677  |
|      | Clear Channel Communications                 | 1          | -                      | -                              | -         | -         | -  | 73  | 73  | 2,579  |
| (8)  | Young & Rubicam                          | 1          | 2                      | 9                              | -         | -         | -  | 69  | 80  | 2,543  |
|      | Golin-Harris Communications,  Inc.           | 1          | -                      | -                              | 67        | -         | -  | -  | 67  | 2,391  |
| (9)  | Honeywell                                    | 1          | -                      | -                              | -         | -         | -  | 102  | 102  | 2,357  |
|      | United Healthcare Services                   | 1          | -                      | -                              | 67        | -         | -  | -  | 67  | 2,347  |
|      | Federal Express                              | 4          | -                      | 1                              | 1         | -         | -  | 90  | 92  | 2,330  |
|      | Louisiana-Pacific  Corporation               | 1          | -                      | -                              | -         | -         | -  | 105  | 105  | 2,158  |
|      | Stein Mart, Inc.                             | 1          | -                      | -                              | -         | -         | -  | 107  | 107  | 2,135  |
| (10) | Forman, Perry, Watkins,  Krutz & Tardy   | 1          | -                      | 140                            | -         | -         | -  | -  | 140  | 2,105  |
|      | CB Richard Ellis                             | 2          | 41                     | -                              | 11        | -         | -  | -  | 52  | 2,074  |
|      | Motorola, Inc.                               | 1          | -                      | 68                             | -         | -         | -  | -  | 68  | 1,973  |
|      | The Meridian Resource  Corporation           | 1          | -                      | 78                             | -         | -         | -  | -  | 78  | 1,950  |
|      | Shefsky & Froelich, Ltd.                 | 1          | -                      | -                              | -         | -         | -  | 69  | 69  | 1,897  |
|      | Southwestern Energy Company                  | 1          | -                      | -                              | -         | -         | 118  | -  | 118  | 1,808  |
|      |                                              |            | 489                    | 729                            | 393       | 172       | 386  | 1,639  | 3,808  |  $ | 89,698  |
|      |                                              |            |                             | Total Rentable Square Footage (1)   | 13,359    |                |  |
|      |                                              |            |                             | Total Annualized Rental Revenue (1) | $212,251  |                |  |

| (1)  | Annualized  Rental Revenue represents the gross rental rate (including escalations) per  square foot, multiplied by the number of square feet leased by the customer.   Annualized rent for customers in unconsolidated joint ventures is calculated  based on our ownership interest.  However, leased square feet represents 100%  of square feet leased through direct ownership or through joint ventures.                                                                        |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Health  Care Service Corporation ("BCBS"), which is located at 111 East Wacker in  Chicago, Illinois, has the option to cancel 168,405 square feet in March 2012  with a notice date of September 2010.  We expect BCBS to exercise the early  termination option.  If exercised, Parkway will receive a lease termination  fee of approximately $7.4 million, which will be received and recorded into  income over the remaining lease term through March 2012.           |
| (3)  | Cox  Enterprises, which is located in the Peachtree Dunwoody Pavilion in Atlanta,  Georgia, has the option to cancel 106,758 square feet in June 2012, which  requires a 12-month notice.                                                                                                                                                                                                                                                                                                       |
| (4)  | Blue  Cross Blue Shield of Georgia, Inc., which is located in the Capital City  Plaza in Atlanta, Georgia, has the option to cancel 23,671 square feet in  June 2012, which requires a 15-month written notice.                                                                                                                                                                                                                                                                                 |
| (5)  | U.S.  Cellular Corporation, which is located in the Citicorp Plaza in Chicago,  Illinois, has the option to cancel 3,161 square feet at anytime with six  months written notice.                                                                                                                                                                                                                                                                                                                |
| (6)  | Regions  Financial Corporation, which is located in the Morgan Keegan Tower in Memphis,  Tennessee, has the option to cancel 17,572 square feet beginning in May 2010  with nine months written notice.                                                                                                                                                                                                                                                                                         |
| (7)  | Bank  of America, NA, which is located in the Bank of America Plaza in Nashville,  Tennessee, has exercised a one-time option to cancel 20,410 square feet  effective January 31, 2010.  The lease also provides an option to cancel  143,875 square feet in October 2014 with a 12-month notice.  Additionally,  Bank of America, successor to Countrywide Home Loans, has the option to  cancel 8,707 square feet in June of 2010 and June of 2011 with six months  written notice. |
| (8)  | Young  & Rubicam, which is located in 233 North Michigan in Chicago, Illinois,  has the option to cancel approximately 34,000 square feet in October of 2015  with a 12-month written notice.                                                                                                                                                                                                                                                                                               |
| (9)  | Honeywell,  which is located in the Honeywell Building in Houston, Texas, has a lease  cancellation option in December 2014, which requires a 12-month notice.                                                                                                                                                                                                                                                                                                                                  |
| (10) | Forman,  Perry, Watkins, Krutz & Tardy, which is located in the City Centre in  Jackson, Mississippi, has certain cancellation rights pending changes in  litigation legislation.                                                                                                                                                                                                                                                                                                           |

Page 14 of 87

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**Significant Properties**

       TheCompany has two properties, 233 North Michigan and 111 East Wacker, whose bookvalue at December 31, 2009 exceeds ten percent of total assets.  

       The 233North Michigan building ("233 North Michigan") is a 32-story Class Aoffice property with an attached four-level, below grade parking garage.  TheCompany, through its wholly-owned direct and indirect subsidiaries, acquiredfee simple title to 233 North Michigan in June 2001.  The building wasconstructed in 1972 and includes 1.0 million rentable square feet("RSF") of Class A office and storage space and 45,000 RSF of retailspace.  The building was 87.8% leased at January 1, 2010, with an averageeffective annual rental rate per square foot of $33.14.  The average occupancyand rental rate per square foot over the past five years are as follows:

| **Year** | **Average  Occupancy** | **Average  Rental Rate per Square Foot** |
|----------|------------------------|------------------------------------------|
| 2005     | 91.6%                  | $30.86                                   |
| 2006     | 92.9%                  | $30.50                                   |
| 2007     | 93.5%                  | $31.64                                   |
| 2008     | 92.5%                  | $31.50                                   |
| 2009     | 90.5%                  | $31.55                                   |

       233North Michigan's major customers include governmental agencies and businessesthat provide legal, accounting, insurance, advertising and other financialservices.  Retail customers include financial service companies, restaurantsand other numerous service-oriented amenity tenants.

       Leaseexpirations for 233 North Michigan at January 1, 2010 are as follows (inthousands, except number of leases):

| ** ** | **Square  Feet** | **Percentage**   | **Annualized**     | **Percentage  of**    | ** **     |
|------------|------------------|------------------|--------------------|-----------------------|----------------|
| ** ** | **Of  Leases**   | **Of  Total**    | **Rental**         | **Total  Annualized** | **Number  of** |
| **Year**   | **Expiring**     | **Square  Feet** | **Revenue  (1)**   | **Rental  Revenue**   | **Leases**     |
| 2010       | 90               | 8.4%             | $  2,878 | 9.2%                  | 11             |
| 2011       | 99               | 9.2%             | 3,028              | 9.7%                  | 10             |
| 2012       | 82               | 7.7%             | 2,856              | 9.2%                  | 8              |
| 2013       | 20               | 1.9%             | 839                | 2.7%                  | 5              |
| 2014       | 86               | 8.0%             | 3,247              | 10.4%                 | 8              |
| 2015       | 39               | 3.6%             | 682                | 2.2%                  | 1              |
| 2016       | 100              | 9.3%             | 3,831              | 12.3%                 | 6              |
| 2017       | 2                | 0.2%             | 72                 | 0.2%                  | 1              |
| 2018       | 92               | 8.6%             | 3,110              | 10.0%                 | 4              |
| 2019       | -                | 0.0%             | -                  | 0.0%                  | -              |
| Thereafter | 330              | 30.9%            | 10,601             | 34.1%                 | 4              |
|            | 940              | 87.8%            | $31,144            | 100.0%                | 58             |
|            |                  |                  |                    |                       |                |

 
(1)     Annualizedrental revenue represents the gross rental rate (including escalations) persquare foot, multiplied by the number of square feet leased by the customer.

       233 NorthMichigan has one customer that occupies 10% or more of the rentable squarefootage.  This customer's nature of business relates to the federalgovernment.  The customer's lease expires November 30, 2020 and has aneffective rental rate of $28.50 per square foot over the term of the lease.

       For taxpurposes, depreciation is calculated over 39 years for building and garage, 7to 39 years for building and tenant improvements and 5 to 7 years forequipment, furniture and fixtures.  The federal tax basis net of accumulatedtax depreciation of 233 North Michigan is as follows at December 31, 2009 (inthousands):

**233  North**

**Michigan**

Land

$  17,420

Building and Garage

148,106

Building Improvements

1,084

Tenant Improvements

5,239

       Real estatetax expense for 2009, 2008 and 2007 for 233 North Michigan was $8.0 million ineach year.

       233 North Michigan is subject to a non-recourse first mortgage(the "233 Mortgage").  The 233 Mortgage totaled $91.5 million atDecember 31, 2009 and has a fixed interest rate of 4.94% with payments based ona 25 year amortization.  The 233 Mortgage matures on July 11, 2011 at whichtime a balloon payment of $84.2 million is due.

Page 15 of 87
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       The 111East Wacker building ("111 East Wacker") is a 32-story Class A officeproperty with an attached four-level, below grade parking garage. The Company,through its wholly-owned direct and indirect subsidiaries, acquired fee simpletitle to 111 East Wacker in July 2006.  The building was constructed in 1970and includes 979,000 RSF of Class A office and storage space and 34,000 RSF ofretail space.  The building was 95.1% leased at January 1, 2010, with anaverage effective annual rental rate per square foot of $29.57.  The averageoccupancy and rental rate per square foot over the past four years are asfollows:

**Year**

**Average  Occupancy**

**Average  Rental Rate per Square Foot**

2006

89.9%

$24.25

2007

85.0%

$23.90

2008

94.1%

$26.05

2009

95.7%

$27.31

       111East Wacker's major customers include governmental agencies, an insurancecompany and businesses that provide legal, accounting, insurance, advertisingand other financial services.  Retail customers include financial servicecompanies, restaurants and other numerous service-oriented amenity tenants.

       Lease expirationsfor 111 East Wacker at January 1, 2010 are as follows (in thousands, exceptnumber of leases):

** **

**Square  Feet**

**Percentage**

**Annualized**

**Percentage  of**

** **

** **

**Of  Leases**

**Of  Total**

**Rental**

**Total  Annualized**

**Number  of**

**Year**

**Expiring**

**Square  Feet**

**Revenue  (1)**

**Rental  Revenue**

**Leases**

2010

152

15.0%

$   4,885

17.1%

11

2011

60

5.9%

1,835

6.4%

11

2012

186

18.4%

5,949

20.9%

10

2013

106

10.5%

3,295

11.6%

14

2014

15

1.5%

493

1.7%

5

2015

102

10.1%

2,796

9.8%

5

2016

62

6.1%

1,821

6.4%

4

2017

221

21.9%

5,644

19.8%

5

2018

14

1.4%

455

1.6%

2

2019

44

4.3%

1,327

4.7%

2

Thereafter

-

0.0%

-

0.0%

-

962

95.1%

$28,500

100.0%

69

(1)    Annualized rental revenue represents the gross rental rate (includingescalations) per square feet, multiplied by the number of square feet leased bythe customer.

       111East Wacker has two customers that occupy 10% or more of the rentable squarefootage.  Information regarding these customers is as follows:

**Nature  of Business**

**Lease  Expiration**

**Effective  Rental Rate Per Square Foot**

**Lease  Options**

Insurance

(1)

$31.06

(2)

Financial  Services

(3)

$30.76

None

(1)    This customer has 33,000 square feet expiring in 2010, 62,000 squarefeet in 2012 and 168,000 square feet expiring in 2017.  The 33,000 square feetexpiring in 2010 has been leased to a new customer whose lease commences May 1,2010.

(2)    The lease provides an option to cancel 168,000 square feet in March 2012with a notice in September 2010.

(3)    This customer has 102,000 square feet expiring in 2010 and 14,000 squarefeet expiring in 2011.  Of the 102,000 square feet expiring in 2010, 99,000square feet has been leased to a new customer whose lease commences July 1,2010. 

Page 16 of 87
****
       For taxpurposes, depreciation is calculated over 39 years for building and garage, 7to 39 years for building and tenant improvements and 5 to 7 years forequipment, furniture and fixtures.  The federal tax basis net of accumulatedtax depreciation of 233 North Michigan is as follows at December 31, 2009 (inthousands):

**111  East**

**Wacker**

Land

$  23,285

Building and Garage

155,303

Building Improvements

18,572

Tenant Improvements

349

       Realestate tax expense for 2009, 2008 and 2007 for 111 East Wacker was $7.1million, $6.1 million and $5.7 million, respectively.

       111East Wacker is subject to a non-recourse first mortgage (the "111Mortgage").  The 111 Mortgage totaled $148.5 million at December 31, 2009and has a fixed interest rate of 6.29% with payments based on a 30 yearamortization and interest only payments for five years.  The 111 Mortgagematures on July 11, 2016 at which time a balloon payment of $139.5 million isdue.

       Currently,the Company is planning to invest approximately $2.0 million to $3.0 millionrelated to improvements of the exterior plaza at 111 East Wacker in 2010. TheCompany believes that each building is adequately covered by insurance.

       We compete with aconsiderable number of other real estate companies seeking to acquire and leaseoffice space in Chicago.  Principal factors of competition in our business arethe quality of properties (including the design and condition of improvements),leasing terms (including rent and other charges and allowances for tenantimprovements), attractiveness and convenience of location, the quality andbreadth of tenant services provided and reputation as an owner and operator ofquality office properties in the relevant market.  Our ability to compete alsodepends on, among other factors, trends in the national and local economies,financial condition and operating results of current and prospective tenants,availability and cost of capital, taxes and governmental regulations andlegislation.

       TheCompany did not have any material liens or encumbrances that exceeded 10% oftotal assets at December 31, 2009.

Non-StrategicAssets

       Since January 1, 1996,Parkway has pursued a strategy of liquidating its non-strategic assets andusing the proceeds from such sales to acquire office properties and pay downshort-term debt.  The Company defines non-strategic assets as all office andparking properties in markets where the Company has not achieved critical massof greater than one million square feet as well as markets that do not havehigher rent growth potential.  Additionally, the Company has 12 acres of undevelopedland in New Orleans, Louisiana that is considered a non-strategic asset.  

** **

**ITEM 3.  *LegalProceedings.***

       The Company and itssubsidiaries are, from time to time, parties to litigation arising from theordinary course of their business.  Management of Parkway does not believe thatany such litigation will materially affect the financial position or operationsof Parkway.

**ITEM 4.  *Submissionof Matters to a Vote of Security Holders.***

       None.

** **

**PART II**

** **

**ITEM 5.  *Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.***

       The Company's common stock($.001 par value) is listed and trades on the New York Stock Exchange under thesymbol "PKY".  The number of record holders of the Company's common stock at January1, 2010, was 2,336.

Page 17 of 87
****
       At March 1, 2010, the lastreported sales price per common share on the New York Stock Exchange was $17.08. The following table sets forth, for the periods indicated, the high and lowlast reported sales prices per share of the Company's common stock and the pershare cash distributions paid by Parkway during each quarter.

** **

**Year Ended**

** **

**Year Ended**

** **

**December 31, 2009**

** **

**December 31, 2008**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**    High**

**Low**

**Distributions**

March 31

$18.94

$   8.60

$0.325

$38.76

$31.80

$0.650

June 30

$16.22

$10.17

0.325

$40.60

$33.72

0.650

September 30

$20.86

$10.88

0.325

$41.89

$31.47

0.650

December 31

$21.50

$17.29

0.325

$37.82

$11.10

0.325

$1.300

$2.275

       Commonstock distributions during 2009 and 2008 ($1.30 and $2.275 per share,respectively) were taxable as follows for federal income tax purposes:

** **

**Year  Ended**

** **

**December  31**

** **

**2009**

**2008**

Ordinary  income

$0.71

$0.844

Post May 5,  2003 capital gain

-

0.197

Unrecaptured  Section 1250 gain

-

0.893

Return of  capital

0.59

0.341

** **

$1.30

$2.275

      In the budgeting and planning process for 2010, the Company contemplated itsoverall capital needs and the opportunities that are anticipated over the nextfew years in light of the sources of capital that are available to us.  TheCompany thinks it is advisable to make more discretionary capital available tothe Company at this point in the cycle for acquisition opportunities, both onbehalf of Texas Teachers Fund II and other opportunities that may arise outsideof the fund.  This led to the decision to raise an additional $22 million perannum in capital by reducing the common stock dividend to $0.30 per share perannum, which approximates projected 2010 taxable income. Many factors weighedinto the Company's decision to make this large dividend adjustment.  First, theincreased costs associated with leasing the Company's existing and futurevacancies during this recessionary cycle; second, the desire to further improvethe balance sheet to meet capital structure goals set out in early 2009; third,to make available additional capital for the investments the Company is nowseeing in the market place for Texas Teachers Fund II; and finally, to give theCompany more discretionary capital available at this point in the cycle foracquisition opportunities that might be seen outside of Texas Teachers Fund II.

       The following table showsthe high and low Series D preferred share prices and per share distributionspaid for each quarter of 2009 and 2008 reported by the New York Stock Exchange.

** **

**Year  Ended**

** **

**Year  Ended**

** **

**December  31, 2009**

** **

**December  31, 2008**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**High**

**Low**

**Distributions**

March 31

$17.54

$10.13

$0.50

$24.95

$22.95

$0.50

June 30

$20.50

$12.68

0.50

$25.57

$23.52

0.50

September 30

$23.07

$17.90

0.50

$25.01

$18.95

0.50

December 31

$24.25

$20.53

0.50

$22.50

$12.00

0.50

$2.00

$2.00

       At January1, 2010, there were five holders of record of the Company's 2.4 millionoutstanding shares of Series D preferred stock.  Series D preferred stockdistributions during 2009 and 2008 were taxable as follows for federal incometax purposes:

Page 18 of 87
****
**Year  Ended December 31**

**2009**

**2008**

Ordinary  income

$2.00

$1.16

Post  May 5, 2003 capital gain

-

0.15

Unrecaptured  Section 1250 gain

-

0.69

$2.00

$2.00

**Purchases of Equity Securitiesby the Issuer**

** **

** **

** **

**Total Number**

**Maximum Number**

** **

** **

** **

**of Shares  Purchased**

**of Shares that**

** **

**Total Number**

**Average**

**as Part of  Publicly**

**May Yet Be**

** **

**of Shares**

**Price Paid**

**Announced Plans**

**Purchased Under**

**Period**

**Purchased**

**per Share**

**or Programs**

**the Plans or  Programs**

10/01/09 to 10/31/09

860(1)

$19.25

-

-

11/01/09 to 11/30/09

-   

-

-

-

12/01/09 to 12/31/09

-   

-

-

-

Total

860   

$19.25

-

-

(1)   As permitted under the Company's equity compensation plan, theseshares were withheld by the Company to satisfy tax withholding obligations foremployees in connection with the vesting of stock.  Shares withheld for taxwithholding obligations do not affect the total number of shares available forrepurchase under any approved common stock repurchase plan.  At December 31,2009, the Company did not have an authorized stock repurchase plan in place.

** **

**Securities Authorized forIssuance Under Equity Compensation Plans**

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

** **

Page 19 of 87
****
**Performance Graph**

       The following graphprovides a comparison of cumulative stockholder return for the period fromDecember 31, 2004 through December 31, 2009 among Parkway, the Standard &Poor's 500 Index ("S&P 500") and the National Association of Real EstateInvestment Trusts ("NAREIT") Equity REIT Total Return Index ("NAREIT Equity"). The stock performance graph assumes an investment of $100 in the shares ofParkway common stock and each index and the reinvestment of any dividends.  Thehistorical information set forth below is not necessarily indicative of futureperformance.

       The performance graph andrelated information shall not be deemed "soliciting material" or deemed to be"filed" with the SEC, nor shall such information be incorporated by referenceinto any future filing, except to the extent that the Company specificallyincorporates it by reference into such filing.

**Years Ended  December 31**

**2004**

**2005**

**2006**

**2007**

**2008**

**2009**

Parkway

 $ 100.00 

 $   83.65 

 $ 112.48 

 $   86.30 

 $   45.26 

 $   57.46 

NAREIT Equity

 $ 100.00 

 $ 112.16

 $ 151.49 

 $ 127.72

 $   79.53 

 $ 101.79 

S & P 500

 $ 100.00 

 $ 104.91

 $ 121.48 

 $ 128.16 

 $   80.74

 $ 102.11 

Source: SNL Financial LC, Charlottesville, Virginia

Page 20 of 87
****
**ITEM6.  *Selected Financial Data.***

**Year Ended  12/31/09**

**Year Ended  12/31/08**

**Year Ended  12/31/07**

**Year Ended  12/31/06**

**Year Ended  12/31/05**

(In thousands, except per share data)

**Operating  Data**:

Revenues

     Income  from office and parking properties

 $

266,345 

 $

263,475 

 $

233,304 

 $

197,889 

 $

175,977 

     Management  company income

1,870 

1,936 

1,605 

5,329 

2,997 

Total revenues

268,215 

265,411 

234,909 

203,218 

178,974 

Expenses

     Property  operating expenses

128,084 

126,169 

107,990 

93,089 

82,375 

     Depreciation  and amortization

92,726 

91,716 

74,379 

61,607 

48,255 

     Impairment  loss on real estate

- 

2,542 

- 

- 

340 

     Management  company expense

2,299 

1,947 

1,188 

1,141 

607 

     General and administrative  and other

6,108 

9,725 

6,602 

4,656 

4,473 

Total expense

229,217 

232,099 

190,159 

160,493 

136,050 

Operating income

38,998 

33,312 

44,750 

42,725 

42,924 

Other income and expenses

      Interest and other income

1,609 

1,332 

526 

39 

253 

      Equity in earnings of  unconsolidated joint ventures

445 

894 

1,008 

751 

1,496 

      Gain (loss) on real  estate, joint venture interests, 

           involuntary  conversion and other assets

(7,524)

- 

20,307 

17,646 

1,379 

      Interest expense

(55,693)

(59,426)

(52,546)

(43,044)

(33,824)

Income (loss) from continuing  operations

(22,165)

(23,888)

14,045 

18,117 

12,228 

      Income (loss) from  discontinued operations

- 

(795)

2,473 

1,997 

4,585 

      Gain on sale of real  estate from discontinued operations

- 

22,588 

- 

5,083 

4,181 

Total discontinued operations

- 

21,793 

2,473 

7,080 

8,766 

Net income (loss)

(22,165)

(2,095)

16,518 

25,197 

20,994 

Noncontrolling interest - real  estate partnerships

10,562 

11,369 

3,174 

485 

(187)

Net  income (loss) for Parkway Properties, Inc.

 (11,603)

 9,274 

 19,692 

 25,682 

 20,807 

Dividends  on preferred stock

(4,800)

(4,800)

(4,800)

(4,800)

(4,800)

Dividends on convertible  preferred stock

- 

- 

- 

(1,773)

(2,346)

Net  income (loss) available to common stockholders

 $

(16,403)

 $

4,474 

 $

14,892 

 $

19,109 

 $

13,661 

Net income (loss) per common  share attributable to

     Parkway Properties, Inc.

       Basic:

      Income (loss) from  continuing operations 

           attributable to  Parkway Properties, Inc.

 $

(0.85)

 $

(1.15)

 $

0.80 

 $

0.84 

 $

0.34 

      Discontinued operations

- 

1.45 

0.16 

0.50 

0.63 

      Net income (loss)  attributable to Parkway Properties, Inc.

 $

(0.85)

 $

0.30 

 $

0.96 

 $

1.34 

 $

0.97 

      Diluted:

      Income (loss) from  continuing operations attributable to 

            Parkway Properties,  Inc.

 $

(0.85)

 $

(1.15)

 $

0.79 

 $

0.83 

 $

0.34 

      Discontinued operations

- 

1.45 

0.16 

0.49 

0.62 

      Net income (loss)  attributable to Parkway Properties, Inc.

 $

(0.85)

 $

0.30 

 $

0.95 

 $

1.32 

 $

0.96 

Book value per common share (at  end of year)

 $

18.32 

 $

22.83 

 $

25.09 

 $

27.42 

 $

27.42 

Dividends per common share

 $

1.30 

 $

2.275 

 $

2.60 

 $

2.60 

 $

2.60 

Weighted average shares  outstanding:

      Basic

19,304 

15,023 

15,482 

14,306 

14,065 

      Diluted

19,304 

15,023 

15,648 

14,487 

14,233 

**Balance Sheet Data:**

**     **Office and  parking investments, net of depreciation

 $

1,401,890 

 $

1,455,239 

 $

1,314,602 

 $

1,303,213 

 $

1,040,929 

**     **Investment in  unconsolidated joint ventures

2,512 

11,057 

11,236 

11,179 

12,942 

**     **Total assets

1,612,146 

1,687,855 

1,535,794 

1,512,346 

1,188,342 

**     **Notes payable  to banks

100,000 

185,940 

212,349 

152,312 

150,371 

**     **Mortgage notes  payable

852,700 

869,581 

714,501 

696,012 

483,270 

**     **Total  liabilities

1,041,314 

1,154,415 

1,015,380 

931,760 

701,048 

**     **Preferred stock

57,976 

57,976 

57,976 

57,976 

57,976 

**     **Convertible  preferred stock

- 

- 

- 

- 

28,122 

**     **Noncontrolling  interest-real estate partnerships

116,687 

127,192 

80,506 

90,280 

12,778 

**     **Total  stockholders' equity attributable to Parkway 

**            **Properties,  Inc.

454,145 

406,248 

439,908 

490,306 

474,516 

** **

** **

Page 21 of 87
****
**ITEM 7.  *Management's Discussion andAnalysis of Financial Condition and Results of Operations.***

** **

**Overview**

       Parkwayis a self-administered and self-managed REIT specializing in the acquisition,operations, leasing and ownership of office properties.  The Company isgeographically focused on the Southeastern and Southwestern United States and Chicago.  At January 1, 2010, Parkway owned or had an interest in 65 office propertieslocated in 11 states with an aggregate of approximately 13.4 million squarefeet of leasable space.  Included in the portfolio are 21 properties totaling 3.9million square feet that are owned jointly with other investors, representing 29%of the portfolio.  The Company's goal is to transform itself from being anowner-operator to being an operator-owner.    The Company will continueexecuting on this strategy, which highlights the Company's strength inproviding excellent service in the operation of office properties in additionto its direct ownership of real estate assets. Fee-based real estate servicesare offered through the Company's wholly-owned subsidiary, Parkway RealtyServices LLC, which also manages and/or leases approximately 1.3 million squarefeet for third-party owners at January 1, 2010.  The Company generates revenueprimarily by leasing office space to its customers and providing management andleasing services to third-party office property owners (including joint ventureinterests).  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.  At January1, 2010, occupancy of Parkway's office portfolio was 87.0% compared to 88.3% atOctober 1, 2009 and 90.1% at January 1, 2009.  To combat rising vacancy,Parkway utilizes innovative approaches to produce new leases.  These includethe Broker Bill of Rights, a short-form service agreement and customer advocacyprograms which are models in the industry and have helped the Company maintainoccupancy at a premium above the national occupancy rate of approximately 83%. Parkway currently projects an average annual occupancy range of approximately 85.0%to 87.0% during 2010 for its office properties.

* *

*       Rental Rates*.  Anincrease in vacancy rates has the effect of reducing market rental rates andvice versa.  Parkway's leases typically have three to seven year terms.  Asleases expire, the Company replaces the existing leases with new leases at thecurrent market rental rate.  At January 1, 2010, Parkway had $0.84 per squarefoot in rental rate embedded loss in its office property leases.  Embedded lossis defined as the difference between the weighted average in place cash rentsand the weighted average market rental rate.  Parkway currently expectsembedded rent loss per square foot to increase in 2010.

       *Customer Retention.* Keeping existing customers is important as high customer retention leads toincreased occupancy, less downtime between leases, and reduced leasing costs. Parkway estimates that it costs five to six times more to replace an existingcustomer 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 spaceplus leasing costs, which rise as market vacancies increase.  Therefore,Parkway focuses a great deal of energy on customer retention.  Parkway'soperating philosophy is based on the premise that it is in the customerretention business.  Parkway seeks to retain its customers by continuallyfocusing on operations at its office properties.  The Company believes inproviding superior customer service; hiring, training, retaining and empoweringeach employee; and creating an environment of open communication bothinternally and externally with customers and stockholders.  Over the past tenyears, Parkway maintained an average 71.0% customer retention rate.  Parkway'scustomer retention for the year ended December 31, 2009 was 61.9% compared to 70.7%for the year ended December 31, 2008.  Lower customer retention in 2009 wasdriven by the loss of 43 customers totaling approximately 265,000 square feetdue to financial distress and the Company's decision to take back approximately135,000 square feet in connection with early lease renewals.  These two factorscontributed to the decline in occupancy in 2009 and had a 13% negative impacton customer retention for the year.

*       Discretionary Funds.* On July 6, 2005, Parkway, through affiliated entities, entered into a limitedpartnership agreement forming Ohio PERS Fund I for the purpose of acquiringhigh-quality multi-tenant office properties.  Ohio PERS is a 75% investor andParkway is a 25% investor in the Fund, which is capitalized with approximately $200.0million of equity capital and $300.0 million of non-recourse, fixed-rate firstmortgage debt.  At February 15, 2008, Ohio PERS Fund I was fully invested.

Page 22 of 87
****
       The Ohio PERS Fund I targetedproperties with an anticipated leveraged internal rate of return of greaterthan 11%.  Parkway serves as the general partner of the fund and provides assetmanagement, property management, leasing and construction management servicesto the fund, for which it is paid market-based fees.  After each partner hasreceived a 10% annual cumulative preferred return and a return of investedcapital, 60% will be distributed to Ohio PERS and 40% to Parkway.  The term of OhioPERS Fund I will be seven years until February 2015, with provisions to extendthe term for two additional one-year periods. 

** **

       On May 14, 2008, Parkway,through affiliated entities, entered into a limited partnership agreementforming a $750.0 million discretionary fund, known as Texas Teachers Fund IIwith the TRS for the purpose of acquiring high-quality multi-tenant officeproperties.  TRS is a 70% investor and Parkway is a 30% investor in the fund,which will be capitalized with approximately $375.0 million of equity capitaland $375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway'sshare of the equity contribution for the fund will be $112.5 million.  TheCompany intends to fund its share of equity contributions with proceeds from assetsales, line of credit advances and/or sales of equity securities.  The TexasTeachers Fund II targets acquisitions in the core markets of Houston, Austin,San Antonio, Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville,Jacksonville, Orlando, Tampa/St. Petersburg,  and other growth markets to bedetermined by Parkway.

       The Texas Teachers Fund IItargets properties with an anticipated leveraged internal rate of return ofgreater than 10%.  Parkway serves as the general partner of the fund andprovides asset management, property management, leasing and constructionmanagement services to the fund, for which it will be paid market-based fees. Cash will be distributed pro rata to each partner until a 9% annual cumulativepreferred return is received and invested capital is returned.  Thereafter, 56%will be distributed to TRS and 44% to Parkway.  Parkway has four years from theinception date, or through May 2012, to identify and acquire properties (the"Investment Period"), with funds contributed as needed to close acquisitions. Parkway will exclusively represent the fund in making acquisitions within thetarget markets and acquisitions with certain predefined criteria.  Parkway willnot be prohibited from making fee-simple or joint venture acquisitions inmarkets outside of the target markets, acquiring properties within the targetmarkets that do not meet Texas Teachers Fund II's specific criteria or sellingor joint venturing currently owned properties.  The term of Texas Teachers FundII will be seven years from the expiration of the Investment Period, withprovisions to extend the term for two additional one-year periods at thediscretion of Parkway.  At December 31, 2009, no investments had been made onbehalf of Texas Teachers Fund II.

*Strategic Planning*

      Parkway is a focused office REIT with a hands-on, service-oriented approach, adisciplined capital allocation program and a willingness to recycle assets. However, we continue to focus on the Company's strategy of transforming itselfto an operator-owner from an owner-operator.  As part of the Company's culture,strategic plans play an important role in planning for our future.  Ourattention is focused on 2010 and beyond as we continue to stand firm in our strategyto maximize shareholder returns by managing our balance sheet to achieve a debtto gross asset value ratio of approximately 50% and a debt to EBITDA multipleof 6.5 times.  Additionally, the Company will continue exiting non-strategicmarkets and entering key growth markets where Parkway can attain a criticalmass of at least one million square feet. Focusing on customer retentioncontinues to be a core part of the Company's business and sets Parkway apartfrom other office property owners.  Finally, the Company will continue toincrease fee income and maximize our return on equity and accretion by takingadvantage of investment opportunities while near the bottom of the recessionarycycle in our $750.0 million discretionary fund with TRS.  

       As we entered 2009, theCompany outlined several goals which we wanted to accomplish throughout theyear.  Those goals and related accomplishments are listed below:

•        **Pay down short-term debt and improve the balance sheet.** At December 31, 2008, the Company had $185.9 million outstanding on our line ofcredit as compared to $100.0 million outstanding at December 31, 2009.  Thereduction in our outstanding balance on the line of credit is principally aresult of the $84.5 million common stock offering in April 2009.

•        **Delay new investments in the Texas Teachers Fund II untilthere is further clarity in values.**  The Company did not make anyinvestments on behalf of Texas Teachers Fund II during 2009, however we expectthere will be good opportunities for accretive purchases in 2010.

•        **Reduce expenses at the corporate and property level. **TheCompany reduced its property operating expenses, excluding bad debt expense, byapproximately $1.0 million and reduced general and administrative expenses by approximately$3.6 million compared to 2008.

•        **Achieve embedded rent growth on expiring leases.**  During2009, the Company signed renewal and expansion leases totaling 2.0 millionsquare feet with a rental rate decrease of $0.38 per square foot, or a 1.6% decline,which was better than anticipated at the beginning of the year.

Page 23 of 87
********
•        **Make strategic sales of assets.**  During 2009, we completedthe sale of two non-strategic office properties in Hampton Roads, Virginia andHouston, Texas for a total gross sales price of $16.5 million.  

•        **Act upon opportunities. **The significant investment opportunitiesfrom distressed real estate owners and lenders that the Company expected to seein 2009 did not occur.  However, we do expect to see these type ofopportunities arise in 2010.  We did accomplish the expansion of Parkway Realtyand our third-party business in Jacksonville, Florida and Houston, Texas duringthe year.

** **

**Financial Condition**

*** ***

***Comments are for thebalance sheet dated December 31, 2009 as compared to the balance sheet datedDecember 31, 2008.***

       *Office and ParkingProperties. * In 2009, Parkway continued the execution of its strategyof operating office properties, as well as liquidating non-strategic assetsthat either no longer meet the Company's investment criteria or the Company hasdetermined value will be maximized by selling.  The Company delayed new investmentsin office properties in 2009 until there was further clarity in values butexpects that there will be investment opportunities in 2010.  During the yearended December 31, 2009, total assets decreased $75.7 million or 4.5% andoffice and parking properties and real estate development (before depreciation)increased $491,000 or 0.03%.

** **

**Improvements**

       Parkway's investment in officeand parking properties decreased $53.3 million net of depreciation, to acarrying amount of $1.4 billion at December 31, 2009 and consisted of 59 officeand parking properties.  The primary reason for the decrease in office andparking properties relates to the net effect of building improvements, and developmentcosts, offset by the sale of two office properties and depreciation recordedduring the year.

       During the year endedDecember 31, 2009, the Company capitalized building improvements and additionalpurchase costs of $27.4 million and recorded depreciation expense of $67.6million related to its office and parking properties.

**Dispositions**

** **

       During the year endedDecember 31, 2009, Parkway sold two office properties as follows (inthousands):

** **

** **

** **

**Square**

**Date**

**Gross**

**Gain**

**Office Property**

**Location**

**Feet**

**Sold**

**Sales Price**

**(Loss)**

Lynnwood  Plaza

Hampton  Roads, Virginia

82

02/20/09

 $

7,767 

 $

(70)

1717  St. James Place

Houston,  Texas

110

06/01/09

8,700 

540 

192

 $

16,467 

 $

470 

       *Investment inunconsolidated joint ventures*.  For the year ended December 31, 2009,investment in unconsolidated joint ventures decreased $8.5 million or 77.3% andis due to a non-cash other-than-temporary impairment loss totaling $8.8 millionrecognized during the fourth quarter of 2009 in connection with the valuationof the Company's investments in RubiconPark I, LLC and RubiconPark II, LLC.  Theimpairment is principally due to two customers totaling over 120,000 squarefeet in the office properties that are unable to meet their rent obligationsdue to financial difficulty.  Of the total square footage, 90,000 square feethas been vacated and another 30,000 square feet is expected to be vacatedduring 2010.  Additionally, on January 20, 2010, the Company's joint venturepartner, Rubicon U.S. REIT, filed for Chapter 11 bankruptcy protection,rendering our partner unable to support their continuing share of the jointventure obligations.

       *Intangible Assets, Net.* For the year ended December 31, 2009, intangible assets net of relatedamortization decreased $17.7 million or 22.3% and was primarily due to annualamortization of the existing intangible assets. 

*       Accounts Payable andOther Liabilities.*  Accounts payable and other liabilities decreased by$10.3 million or 10.4% for the year ended December 31, 2009 primarily due to a reductionin accrued development costs, the amortization of below market lease intangibleliabilities and the decrease in the  market value liability associated withinterest rate swaps.

Page 24 of 87
****
       *Notes Payable to Banks*. Notes payable to banks decreased $85.9 million or 46.2% for the year endedDecember 31, 2009.  At December 31, 2009, notes payable to banks totaled $100.0million and the decrease is primarily attributable to proceeds received from theCompany's April 2009 $84.5 million common stock offering.

       The Company's $311.0million unsecured credit facility requires compliance with a number ofrestrictive financial covenants, including tangible net worth, fixed chargecoverage ratio, unencumbered interest coverage ratio, total debt to total assetratio, secured debt to total asset value ratio, secured recourse debt to totalasset value ratio and unencumbered pool restrictions.  At December 31, 2009the Company was in compliance with these financial covenants.

       *Mortgage Notes Payable.* Mortgage notes payable decreased $16.9 million or 1.9% during theyear ended December 31, 2009, as a result of the following (in thousands):

**Increase**

**(Decrease)**

Placement of mortgage debt on  wholly-owned properties

 $

18,500 

Principal paid on early  extinguishment of debt

(21,766)

Scheduled principal payments

(13,615)

 $

(16,881)

       On February 27, 2009, theCompany paid off the mortgage note payable secured by the 1717 St. James, 5300Memorial and Town and Country office buildings in Houston, Texas, with a totalprincipal balance of $21.8 million with advances under the Company's line ofcredit.  The mortgage had an interest rate of 4.83% and was scheduled to matureMarch 1, 2009.  The mortgage represented the Company's only outstandingmaturity in 2009.

       On May 4, 2009, theCompany placed an $18.5 million seven-year non-recourse first mortgage with afixed interest rate of 7.6% per annum, and the proceeds were used to reduceborrowings under the line of credit.  The mortgage is secured by two office buildingsin Houston, Texas totaling 303,000 square feet.

       On February 8, 2010, theCompany completed a $35.0 million non-recourse, fixed-rate first mortgage loanrelated to the refinance of a $60.0 million recourse mortgage that wasscheduled to mature in May 2010.  The loan bears interest at 7.25% and issecured by the Company's Capital City Plaza building in Atlanta, Georgia.  Theloan will mature in March 2017 and includes the option to be prepaid at the endof five years at a cost of 1% of the outstanding loan balance.  The Companyused its existing line of credit to pay the $25.0 million difference on thematuring loan.

       The Company expects tocontinue seeking fixed-rate, non-recourse mortgage financing with maturitiesfrom five to ten years typically amortizing over 25 to 30 years on selectoffice building investments as additional capital is needed.  The Companymonitors the total debt to total asset value ratio as defined in the loanagreements for the $311.0 million unsecured line of credit.  In addition to thetotal debt to total asset value ratio, the Company monitors interest, fixedcharge and modified fixed charge coverage ratios and the debt to EBITDA  multiple. The interest coverage ratio is computed by comparing the cash interest accruedto EBITDA.  The fixed charge coverage ratio is computed by comparing the cashinterest accrued, principal payments made on mortgage loans and preferreddividends paid to EBITDA.  The modified fixed charge coverage ratio is computedby comparing cash interest accrued and preferred dividends paid to EBITDA.  Thedebt to EBITDA multiple is computed by comparing Parkway's share of total debtto EBITDA computed for a trailing 12-month period.  Management believes thetotal debt to total asset value, interest coverage, fixed charge coverage andmodified fixed charge coverage ratios and debt to EBITDA multiple provideuseful information on total debt levels as well as the Company's ability tocover interest, principal and/or preferred dividend payments with currentincome.

Page 25 of 87
****
       

The computationof the Company's proportionate share of the interest, fixed charge, modifiedfixed charge coverage ratios, the debt to EBITDA multiple and thereconciliation of net income to EBITDA are as follows for the year endedDecember 31, 2009 and 2008 (in thousands):

**Year Ended**

**December 31**

**2009**

** **

**2008**

**Net  income (loss)**

 $

(11,603)

 $

9,274 

**Adjustments  to net income (loss):**

        Interest  expense

53,374 

58,616 

        Amortization  of financing costs

2,319 

1,825 

        Prepayment  expenses - early extinguishment of debt

- 

2,153 

        Depreciation  and amortization

92,726 

93,589 

        Amortization  of share-based compensation

2,581 

2,276 

         Net (gain) loss on real estate investments and involuntary conversion

7,524 

(20,046)

        Tax  expense

2 

2 

        EBITDA  adjustments - unconsolidated joint ventures

1,358 

1,270 

        EBITDA  adjustments - noncontrolling interest in real estate partnerships

(32,698)

(32,750)

** **

**EBITDA  (1)**

 $

115,583 

 $

116,209 

** **

**Interest  coverage ratio:**

EBITDA

 $

115,583 

 $

116,209 

Interest  expense:

        Interest  expense

 $

53,374 

 $

58,616 

        Capitalized  interest

- 

836 

        Interest  expense - unconsolidated joint ventures

501 

509 

        Interest  expense - noncontrolling interest in real estate partnerships

(12,283)

(11,837)

Total  interest expense

 $

41,592 

48,124 

**Interest  coverage ratio**

2.78 

2.41 

** **

**Fixed  charge coverage ratio:**

EBITDA

 $

115,583 

 $

116,209 

Fixed  charges:

        Interest  expense

 $

41,592 

 $

48,124 

        Preferred  dividends

4,800 

4,800 

        Principal  payments (excluding early extinguishment of debt)

13,615 

13,640 

        Principal  payments - unconsolidated joint ventures

142 

54 

        Principal  payments - noncontrolling interest in real estate partnerships

(981)

(337)

Total  fixed charges

 $

59,168 

 $

66,281 

**Fixed  charge coverage ratio**

1.95 

1.75 

** **

**Modified  fixed charge coverage ratio:**

EBITDA

 $

115,583 

 $

116,209 

Modified  fixed charges:

        Interest  expense

 $

41,592 

 $

48,124 

        Preferred  dividends

4,800 

4,800 

Total  fixed charges

 $

46,392 

 $

52,924 

**Modified  fixed charge coverage ratio**

2.49 

2.20 

**Debt  to EBITDA multiple:**

EBITDA  - trailing 12 months

 $

115,583 

 $

116,209 

Parkway's  share of total debt:

Mortgage  notes payable 

 $

852,700 

 $

869,581 

Notes  payable to banks

100,000 

185,940 

Adjustments  for unconsolidated joint ventures

2,507 

9,754 

Adjustments  for noncontrolling interest in real estate partnerships

(215,604)

(216,585)

Parkway's  share of total debt

 $

739,603 

 $

848,690 

**Debt  to EBITDA multiple**

6.40 

7.30 

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

Page 26 of 87
****
       The Company believes thatEBITDA helps investors and Parkway's management analyze the Company's abilityto service debt and pay cash distributions.  However, the material limitationsassociated with using EBITDA as a non-GAAP financial measure compared to cashflows provided by operating, investing and financing activities are that EBITDAdoes not reflect the Company's historical cash expenditures or future cashrequirements for working capital, capital expenditures or the cash required tomake interest and principal payments on the Company's outstanding debt. Although EBITDA has limitations as an analytical tool, the Company compensatesfor the limitations by only using EBITDA to supplement GAAP financialmeasures.  Additionally, the Company believes that investors should considerEBITDA in conjunction with net income and the other required GAAP measures ofits performance and liquidity to improve their understanding of Parkway'soperating results and liquidity.  

       Parkway views EBITDAprimarily as a liquidity measure and, as such, the GAAP financial measure mostdirectly comparable to it is cash flows provided by operating activities. Because EBITDA is not a measure of financial performance calculated inaccordance with GAAP, it should not be considered in isolation or as asubstitute for operating income, net income, cash flows provided by operating,investing and financing activities prepared in accordance with GAAP.  Thefollowing table reconciles EBITDA to cash flows provided by operatingactivities for the year ended December 31, 2009 and 2008 (in thousands):

**Year Ended**

**December 31**

**2009**

**2008**

EBITDA

 $

115,583 

 $

116,209 

Amortization of above market  leases

51 

45 

Amortization of mortgage loan  discount

(607)

(518)

Operating distributions from  unconsolidated joint ventures

392 

1,042 

Interest expense

(53,374)

(58,616)

Prepayment expense - early  extinguishment of debt

- 

(2,153)

Tax expense

(2)

(2)

Change in deferred leasing  costs

(16,348)

(8,738)

Change in receivables and other  assets

3,678 

(1,474)

Change in accounts payable and  other liabilities

228 

(2,164)

Adjustments for noncontrolling  interests

22,136 

21,381 

Adjustments for unconsolidated  joint ventures

(1,803)

(2,164)

Cash flows provided by  operating activities

 $

69,934 

 $

62,848 

       *Equity. *Total equityincreased $37.4 million or 7.0% during the year ended December 31, 2009 as aresult of the following (in thousands):

** **

**Increase**

**(Decrease)**

Net loss  attributable to Parkway Properties, Inc.

 $

(11,603)

Net loss  attributable to noncontrolling interest

(10,562)

Net loss 

(22,165)

Change in  market value of interest rate swaps

2,836 

Comprehensive  loss

(19,329)

Common stock  dividends declared

(26,070)

Preferred  stock dividends declared 

(4,800)

Shares  issued through common stock offering

84,457 

Share-based  compensation

2,581 

Shares  withheld to satisfy tax withholding obligation on vesting of restricted stock

(58)

Shares  issued in lieu of Directors' fees

58 

Net shares  distributed from deferred compensation plan

496 

Contribution  of capital by noncontrolling interest

57 

 $

37,392 

** **

       On April 28, 2009, theCompany sold 6.25 million shares of common stock to UBS Investment Bank at agross offering price of $13.71 per share and a net price of $13.56 per share. The Company used the net proceeds of $84.5 million to reduce outstandingborrowings under the Company's line of credit and for general corporatepurposes.

Page 27 of 87
****
** **

       On December 23, 2009, theCompany entered into agreements under which it may issue up to $75.0 million incommon stock in an at the market ("ATM") offering with Wells Fargo Securities,Bank of America/Merrill Lynch, J.P. Morgan and Morgan Keegan and Company, Inc. Any proceeds from the ATM offering will be utilized for general corporatepurposes, including acquisitions.  There were no shares issued under the ATMoffering at December 31, 2009.

**Results of Operations**

***Comments are for the year ended December 31, 2009 compared to the year endedDecember 31, 2008.***

       Net loss available tocommon stockholders for the year ended December 31, 2009, was $16.4 million ($0.85per basic common share) as compared to net income available to commonstockholders of $4.5 million ($0.30 per basic common share) for the year endedDecember 31, 2008.  The primary reason for the decrease in net income availableto common stockholders for the year ended December 31, 2009 compared to theyear ended December 31, 2008 is due to the decrease in gain on sale of realestate from discontinued operations in the amount of $22.6 million, which isattributable to three assets sold in 2008.  Net gains on the sale of realestate and involuntary conversion of $1.3 million, offset by impairment lossestotaling $8.8 million, were included in net loss available to commonstockholders for the year ended December 31, 2009.  Net gains on the sale ofreal estate of $22.6 million, offset by impairment losses totaling $2.5million, were included in net income available to common stockholders for theyear ended December 31, 2008.  The change in gain (loss) on sale of real estateinvestments, involuntary conversion and other assets as well as the discussionof other variances for income and expense items that comprise net lossavailable to common stockholders is discussed in detail below.

*** ***

       *Office and ParkingProperties. *The analysis below includes changes attributable to same-storeproperties, acquisitions and dispositions of office properties.  Same-storeproperties are those that the Company owned during both the current and prioryear reporting periods, excluding properties classified as discontinuedoperations.  At December 31, 2009, same-store properties consisted of 57properties comprising 12.2 million square feet.  One property with 189,000square feet was developed in 2008 and does not meet the definition of asame-store property for the year ended December 31, 2009.

       The following table representsrevenue from office and parking properties for the years ended December 31, 2009and 2008 (in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2009**

**2008**

**(Decrease)**

**Change**

Revenue from office and parking  properties:

     Same-store properties

 $

254,775 

 $

256,715 

 $

(1,940)

-0.8%

      Properties acquired in 2008

7,315 

3,763 

3,552 

94.4%

      Office property development

3,673 

166 

3,507 

2112.7%

      Properties disposed

582 

2,831 

(2,249)

-79.4%

Total revenue from office and 

     parking properties

 $

266,345 

 $

263,475 

 $

2,870 

1.1%

       Revenue from office and parking properties for same-store properties decreased$1.9 million or 0.8% for the year ended December 31, 2009 compared to the same periodfor 2008.  The primary reason for the decrease is due to a decrease in leasetermination fee income of $2.7 million, offset by a 2.6% increase in same-storeaverage rental rates for same-store properties for the year ended December 31,2009 compared to December 31, 2008.

Page 28 of 87
****
      The following table represents property operating expenses for the years endedDecember 31, 2009 and 2008 (in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2009**

**2008**

**(Decrease)**

**Change**

Property operating expenses:

      Same-store properties

 $

122,432 

 $

122,671 

 $

(239)

-0.2%

      Properties acquired in 2008

3,686 

1,768 

1,918 

108.5%

      Office property development

1,667 

183 

1,484 

810.9%

      Properties disposed

299 

1,547 

(1,248)

-80.7%

Total property

      operating expenses

 $

128,084 

 $

126,169 

 $

1,915 

1.5%

       Property operatingexpenses for same-store properties decreased $239,000 or 0.2% for the yearended December 31, 2009 compared to the same period for 2008.  The primaryreason for the decrease is decreased personnel expenses and utilities offset byincreased bad debt expense and ad valorem taxes.

       Depreciation andamortization expense attributable to office and parking properties increased $1.0million or 1.1% for the year ended December 31, 2009 compared to the sameperiod for 2008 and is due to the additional depreciation associated with the developmentof an office property in 2008, the acquisition of office properties in 2008,and improvements to properties.

       *Hurricane Ike Impact*.The Company had 13 wholly-owned properties and one jointly-owned propertytotaling 2.3 million square feet in Houston, Texas, which sustained someproperty damage from Hurricane Ike on September 13, 2008.  Damages for the 14properties were approximately $6.3 million.  The Company's insurance deductiblerelated to these claims was approximately $2.2 million.  Approximately $365,000represents repair and clean up costs with the remainder representingcapitalized costs.  In 2009, the Company recorded a net gain of approximately$823,000 related to an involuntary conversion of the damaged assets. 

       *Share-BasedCompensation Expense. *Share-based compensation expense of $2.6 million and$2.3 million was recognized for the years ended December 31, 2009 and 2008,respectively.  Total compensation expense related to nonvested awards not yetrecognized was $2.2 million at December 31, 2009.  The weighted average periodover which this expense is expected to be recognized is approximately 1.8 years.

       During the year endedDecember 31, 2009, a total of 30,416 restricted shares vested and were issuedto officers of the Company.  These shares vested upon the achievement of thegoals of the GEAR UP Plan.  The compensation expense relating to the vesting ofthe GEAR UP performance-based restricted shares of $1.4 million was recognizedin 2008.

       During the year endedDecember 31, 2009, the Board of Directors approved a grant of 120,500restricted shares to officers of the Company.  Excluding forfeitures, there are119,750 restricted shares outstanding that are valued at $1.9 million.  Theshares vest at a rate of 29,938 shares per year over the four years followingthe grant date and were subject to certain performance-based goals that were establishedand achieved for 2009.  Due to the achievement of the 2009 performance goals,29,938 restricted shares vested and were issued to officers of the Company onFebruary 10, 2010.

       On January 4, 2010, 91,000restricted shares vested and were issued to officers of the Company.  Theseshares were granted to the officers of the Company in January 2003 and vestedseven years from the grant date.

       *General andAdministrative Expense.* General and administrative expense decreased $3.6million from $9.7 million in 2008 to $6.1 million in 2009 and is primarilyattributable to decreased personnel costs and professional fees.  Additionally,2008 included $1.4 million in expense associated with the vesting of the GEARUP performance-based restricted stock.

Page 29 of 87
****
*       Gain on Sale of RealEstate Investment and Involuntary Conversions. *For the year ended December31, 2009, the Company recorded a net gain on the sale of real estate of$470,000 related to the sale of two office properties and a gain on involuntaryconversion of $823,000 related to assets damaged by Hurricane Ike.  For theyear ended December 31, 2008, the Company recorded a $22.6 million gain on thesale of three office properties. This gain has been classified as a gain on saleof real estate from discontinued operations.  

       *Impairment Loss on RealEstate and Investments in Unconsolidated Joint Ventures.*  During the fourthquarter of 2009, the Company recognized a non-cash other-than-temporaryimpairment loss of $8.8 million in connection with the valuation of theCompany's investments in RubiconPark I, LLC and RubiconPark II, LLC.  Theimpairment is principally due to two customers totaling over 120,000 squarefeet in the office properties that are unable to meet their rent obligationsdue to financial difficulty. Of the total square footage, 90,000 square feet hasbeen vacated and another 30,000 square feet is expected to be vacated during2010.  Additionally, on January 20, 2010, the Company's joint venture partner,Rubicon U.S. REIT, filed for Chapter 11 bankruptcy protection, rendering ourpartner unable to support their continuing share of the joint ventureobligations.  During the year ended December 31, 2008, the Company recognizedan impairment loss of $2.5 million on two office properties and 12 acres ofland in New Orleans, Louisiana. 

       *Interest Expense. *Interestexpense, including amortization, decreased $3.7 million or 6.3% for the yearended December 31, 2009 compared to the same period for 2008 and is comprisedof the following (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2009**

**2008**

**(Decrease)**

**Change**

Interest expense:

      Mortgage interest  expense

 $

47,831 

 $

47,406 

 $

425 

0.9 %

      Bank line interest  expense

5,543 

10,196 

(4,653)

-45.6 %

      Debt prepayment expense

- 

13 

(13)

-100.0 %

      Mortgage loan cost  amortization

1,291 

1,115 

176 

15.8 %

      Bank loan cost amortization

1,028 

696 

332 

47.7 %

Total interest expense

 $

55,693 

 $

59,426 

 $

(3,733)

-6.3 %

       Mortgage interest expenseincreased $425,000 or 0.9% for the year ended December 31, 2009 compared to thesame period for 2008 and is due to the net effect of new loans placed in 2008and 2009, the refinancing of one loan in 2008, and the early extinguishment ofthree mortgages in 2008 and one mortgage in 2009.  Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operations -Financial Condition - Mortgage Notes Payable," includes a discussion ofmortgages placed and extinguished in 2009.  The average interest rate onmortgage notes payable at December 31, 2009 and 2008 was 5.6% and 5.5%,respectively.

       Bank line interest expensedecreased $4.7 million or 45.6% for the year ended December 31, 2009 comparedto the same period for 2008.  The change is primarily due to a decrease inaverage borrowings of $87.0 million for the year ended December 31, 2009compared to the year ended December 31, 2008, and a decrease in averageinterest rate from 4.8% for the year ended December 31, 2008 to 4.3% for theyear ended December 31, 2009.  The decrease in average borrowings is primarilyattributable to proceeds received from the Company's April 2009 $84.5 million commonstock offering. 

       *DiscontinuedOperations.*  Discontinued operations is comprised of the following for theyears ended December 31, 2009 and 2008 (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2009**

**2008**

**(Decrease)**

**Change**

Discontinued operations:

      Loss from discontinued  operations

 $

- 

 $

(795)

 $

795 

-100.0%

      Gain on sale of real  estate

            from  discontinued operations

- 

22,588      

(22,588)

-100.0%

Total discontinued operations 

 $

- 

 $

21,793 

 $

(21,793)

-100.0%

Page 30 of 87
****
       The gains and all currentand prior period income from the following office property dispositions areincluded in discontinued operations for the years ended December 31, 2009 and2008 (in thousands):

** **

** **

**Square**

**Date of**

**Net Sales**

**Net Book Value**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**of Real Estate**

**on Sale**

Town Point Center

 Norfolk, Virginia 

131

07/15/08

$  12,180

$  10,621

$   1,559 

Wachovia Plaza

 St. Petersburg, Florida 

186

08/18/08

25,492

16,154

9,338 

Capitol Center

 Columbia, South Carolina 

460

09/05/08

46,792

35,101

11,691 

2008 Dispositions

777

$  84,464

$  61,876

$ 22,588 

* *

***Comments are for the yearended December 31, 2008 compared to the year ended December 31, 2007.***

       Net income available tocommon stockholders for the year ended December 31, 2008, was $4.5 million($0.30 per basic common share) as compared to net income available to commonstockholders of $14.9 million ($0.96 per basic common share) for the year endedDecember 31, 2007.  The primary reasons for the $10.4 million decrease in netincome available to common stockholders for the year ended December 31, 2008compared to the year ended December 31, 2007 relates to an increase in interestexpense and general administrative expense.  The explanation for the increasein these expenses as well as variances for other income and expense items thatcomprise net income available to common stockholders is discussed in detailbelow.  

      Gains on the sale of real estate of $22.6 million were included in net incomeavailable to common stockholders for the year ended December 31, 2008. Additionally, for the year ended December 31, 2008, the Company recordednon-cash impairment losses totaling $2.5 million in connection with twocontracted office property sales and the valuation of approximately 12 acres ofland.  Net gains on the sale of real estate and other assets of $20.3 millionwere included in net income available to common stockholders for the year endedDecember 31, 2007.

      *Office and Parking Properties*.  The analysis below includes changesattributable to same-store properties, acquisitions and dispositions of officeproperties.  Same-store properties are those that the Company owned during boththe current and prior year reporting periods, excluding properties classifiedas discontinued operations.  At December 31, 2008, same-store propertiesconsisted of 57 properties comprising 11.3 million square feet.  Propertiesacquired or developed in 2008 that do not meet the definition of same-storeproperties consisted of four properties with 1.3 million square feet in 2008.

       The following tablerepresents revenue from office and parking properties for the years endedDecember 31, 2008 and 2007 (in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2008**

**2007**

**(Decrease)**

**Change**

Revenue from office and parking  properties:

      Same-store properties

 $

234,819 

 $

228,807 

 $

6,012 

2.6%

      Properties acquired in 2007   

3,797 

423 

3,374 

797.6%

      Properties acquired in 2008

24,704 

- 

24,704 

0.0%

      Office property development

166 

- 

166 

0.0%

      Properties disposed

(11)

4,074 

(4,085)

-100.3%

Total revenue from office and 

     parking properties

 $

263,475 

 $

233,304 

 $

30,171 

12.9%

       Revenue from office and parking properties for same-store propertiesincreased $6.0 million or 2.6% for the year ended December 31, 2008 compared tothe same period for 2007.  The primary reason for the increase is due to anincrease in lease termination fee income of $1.7 million, an increase inexpense reimbursement income as a result of higher operating expenses and anincrease in same-store average rental rates for same-store properties for theyear ended December 31, 2008 compared to December 31, 2007.  Same-store rentalrates increased 2.5% for the year ended December 31, 2008 compared to the sameperiod of 2007.

Page 31 of 87
****
      The following table represents property operating expenses for the years endedDecember 31, 2008 and 2007 (in thousands):

**Year Ended December 31**

 
** **

** **

**Increase**

**%**

 
**2008**

**2007**

**(Decrease)**

**Change**

 
Property operating expenses:

 
      Same-store properties

 $

112,184 

 $

105,606 

 $

6,578 

6.2%

 
      Properties acquired in  2007

2,023 

194 

1,829 

942.8%

 
      Properties acquired in  2008

11,795 

- 

11,795 

0.0%

 
      Office property  development

183 

93 

90 

96.8%

 
      Properties disposed

(16)

2,097 

(2,113)

-100.8%

 
Total property 

 
      operating expenses

 $

126,169 

 $

107,990 

 $

18,179 

16.8%

       Property operatingexpenses for same-store properties increased $6.6 million or 6.2% for the yearended December 31, 2008 compared to the same period for 2007.  The primaryreason for the increase is due to increased utilities, real estate taxes andrepairs associated with Hurricane Ike discussed below.

       Depreciation and amortizationexpense attributable to office and parking properties increased $17.3 millionor 23.3% for the year ended December 31, 2008 compared to the same period for2007 and is due to additional depreciation associated with the acquisition ofoffice properties and improvements to properties.

       *Share-BasedCompensation Expense.*  Share-based compensation expense of $2.3 million and$1.5 million was recognized for the years ended December 31, 2008 and 2007,respectively.  Total compensation expense related to nonvested awards not yetrecognized was $3.1 million at December 31, 2008.  The weighted average periodover which this expense is expected to be recognized is approximately 2.2years.  Total compensation expense associated with shares that vest based on theCompany meeting the goals of the GEAR UP Plan was $1.4 million and was recordedin 2008.

       During the year endedDecember 31, 2008, the Board of Directors approved the grant of 38,017 restrictedshares to officers of the Company.  The shares were valued at $1.2 million and36,975 shares will vest four years from grant date and 1,042 shares vested uponthe achievement of the cumulative goals of the GEAR UP Plan, which endedDecember 31, 2008.  Compensation expense was recorded on the shares that vestedon performance conditions in 2008 when the Company determined that it wasprobable that the goal would be achieved.

       *General andAdministrative Expense.* General and administrative expense increased $3.1million from $6.6 million in 2007 to $9.7 million in 2008 and is primarilyattributable to increased personnel costs, share-based compensation expense andprofessional fees.  In 2008, the Company recorded approximately $1.4 million inshare-based compensation expense as a result of achieving the GEAR UP Planfinancial goal.

*       Gain on Sale of RealEstate and Impairment Loss on Real Estate. *For the year ended December 31,2008, the Company recorded a $22.6 million gain on the sale of three officeproperties. This gain has been classified as a gain on sale of real estate fromdiscontinued operations.  The Company also recognized an impairment loss of$2.5 million on two office properties and 12 acres of land in New Orleans,Louisiana during 2008.  For the year ended December 31, 2007, Parkway recordeda gain on the sale of two office properties in Knoxville, Tennessee in theamount of $20.3 million. 

Page 32 of 87
****
       *Interest Expense. *Interestexpense, including amortization, increased $6.9 million or 13.1% for the yearended December 31, 2008 compared to the same period for 2007 and is comprisedof the following (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2008**

**2007**

**(Decrease)**

**Change**

Interest expense:

      Mortgage interest  expense

 $

47,406 

 $

39,988 

 $

7,418 

18.6%

      Bank line interest  expense

10,196 

10,564 

(368)

-3.5%

      Subsidiary redeemable

            preferred  membership interest

- 

449 

(449)

-100.0%

      Debt prepayment expense

13 

369 

(356)

-96.5%

      Mortgage loan cost  amortization

1,115 

758 

357 

47.1%

      Bank loan cost amortization

696 

418 

278 

66.5%

Total interest expense

 $

59,426 

 $

52,546 

 $

6,880 

13.1%

       Mortgage interest expenseincreased $7.4 million or 18.6% for the year ended December 31, 2008 comparedto the same period for 2007 and is due to the net effect of new loans placed orassumed in 2008 and 2007, the refinancing of one loan and the earlyextinguishment of three mortgages in 2008.  The average interest rate onmortgage notes payable at December 31, 2008 and 2007 was 5.5% and 5.6%,respectively.

       Bank line interest expensedecreased $368,000 or 3.5% for the year ended December 31, 2008 compared to thesame period for 2007.  The change is primarily due to the net effect ofproceeds received from the sale of assets, borrowings due to additionalpurchases of office investments and a decrease in average interest rate from6.2% during the year ended December 31, 2007 as compared to 4.8% during thesame period in 2008.

       *Discontinued Operations.* Discontinued operations is comprised of the following for the years endedDecember 31, 2008 and 2007 (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2008**

**2007**

**(Decrease)**

**Change**

Discontinued operations:

      Income (loss) from  discontinued operations

 $

(795)

 $

2,473 

 $

(3,268)

-132.1%

      Gain on sale of real  estate

            from  discontinued operations

22,588 

- 

22,588 

0.0%

Total discontinued operations 

 $

21,793 

 $

2,473 

 $

19,320 

781.2%

       The gains and all currentand prior period income from the following office property dispositions areincluded in discontinued operations for the years ended December 31, 2008 and2007 (in thousands):

** **

** **

**Square**

**Date of**

**Net Sales**

**Net Book Value**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**of Real Estate**

**on Sale**

Town Point Center

 Norfolk, Virginia 

131

07/15/08

 $

12,180 

 $

10,621 

 $

1,559 

Wachovia Plaza

 St. Petersburg, Florida 

186

08/18/08

25,492 

16,154 

9,338 

Capitol Center

 Columbia, South Carolina 

460

09/05/08

46,792 

35,101 

11,691 

2008 Dispositions

777

 $

84,464 

 $

61,876 

 $

22,588 

****Liquidity and Capital Resources**

       *Statement of CashFlows.  *Cash and cash equivalents were $20.7 million and $15.3 million atDecember 31, 2009 and December 31, 2008, respectively.  Cash flows provided byoperating activities for the year ended December 31, 2009 were $69.9 millioncompared to $62.8 million for the same period of 2008.  The change in cashflows from operating activities is primarily attributable to the effect of thetiming of receipt of revenues and payment of expenses.

Page 33 of 87
****
       Cash used in investingactivities was $15.2 million for the year ended December 31, 2009 compared to $204.9million for the same period of 2008.  The decrease in cash used by investingactivities of $189.7 million is primarily due to the net effect of officeproperty purchases in 2008 and reduced development costs in 2009, offset by theimpact of increased property sales in 2008.

       Cash used in financingactivities was $49.4 million for the year ended December 31, 2009 compared tocash provided by financing activities of $146.1 million for the same period of2008.  The decrease in cash provided by financing activities of $195.5 millionis primarily due to additional mortgage placements in 2008 and contributionsfrom noncontrolling interest partners to fund office property purchases in2008, offset by proceeds received from the common stock offering in 2009.

** **

       *Liquidity.  *TheCompany plans to continue pursuing the acquisition of additional investmentsthat meet the Company's investment criteria and intends to use its line ofcredit, proceeds from the refinancing of mortgages, proceeds from the sale of non-strategicassets, proceeds from the sale of portions of owned assets through jointventures, possible sales of securities and cash balances to fund thoseacquisitions.  

       The Company's cash flowsare exposed to interest rate changes primarily as a result of its lines ofcredit used to maintain liquidity and fund capital expenditures and expansionof the Company's real estate investment portfolio and operations.  TheCompany's interest rate risk management objective is to limit the impact ofinterest rate changes on earnings and cash flows and to lower its overallborrowing costs.  To achieve its objectives, the Company borrows at fixedrates, but also utilizes an unsecured revolving credit facility, an unsecuredterm-loan and an unsecured line of credit (collectively, the "Company's line ofcredit").

       TheCompany's line of credit allows Parkway to borrow up to a combined $311.0million and it matures in April 2011.  At December 31, 2009, the Company had atotal of $100.0 million outstanding under its line of credit.  At December 31,2009, the following amounts were outstanding under the Company's line of credit(in thousands):

** **

** **

**Interest**

** **

**Outstanding**

**Line of Credit**

**Lender**

**Rate**

**Maturity**

**Balance**

$15.0 Million Unsecured Line of  Credit (1)

PNC Bank

    -

04/27/11

$               -    

$236.0 Million Unsecured Line  of Credit (2)

Wells Fargo

4.8%

04/27/11

40,000

$60.0 Million Unsecured Term  Loan (3)

Wells Fargo

4.8%

04/27/11

60,000

4.8%

$  100,000

(1)    The interest rate on the $15.0 million unsecured line of credit with PNCBank is currently LIBOR plus 200 basis points. The Company pays fees on theunused portion of the line of 25 basis points.

(2)    The $236.0 million unsecured line of credit is led by Wells Fargo andsyndicated to eight other banks.  The interest rate on the line of credit iscurrently LIBOR plus 115 basis points or the Prime interest rate plus 25 basispoints.  At December 31, 2009, all amounts outstanding under the line of creditare fixed by an interest rate swap agreement.  The Company pays an annualadministration fee of $35,000 and fees on the unused portion of the revolverranging between 12.5 and 20 basis points based upon overall Company leverage,with the rate set at 20 basis points at December 31, 2009.  

(3)     The $60.0million unsecured term loan is led by Wells Fargo and syndicated to eight otherbanks.  The interest rate on the term loan is fixed by an interest rate swapagreement.  Excluding the interest rate swap agreement, the interest rate onthe term loan is LIBOR plus 115 basis points.

Page 34 of 87
****
       To protect against thepotential for rapidly rising interest rates, the Company entered into interestrate swap agreements in 2008.  The Company designated the swaps as hedges ofthe variable interest rates on the Company's borrowings under the Wells Fargounsecured revolving credit facility and a portion of the debt placed on thePinnacle at Jackson Place.  These swaps are considered to be fully effectiveand changes in the fair value of the swaps are recognized in accumulated othercomprehensive income (loss).  The Company's interest rate hedge contracts at December31, 2009 and 2008 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

** **

**Market  Value**

** **

**Balance**

** **

** **

** **

** **

**Liability**

**Type of**

**Sheet**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Location**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2009**

**2008**

Swap

Accounts  Payable

and  Other Liabilities

$100,000

03/31/11

1  - Month LIBOR

4.785%

 $

(3,585)

 $

(5,262)

Swap

Accounts  Payable and Other Liabilities

$23,500

12/01/14

1  - Month LIBOR

5.800%

(1,307)

(2,466)

 $

(4,892)

 $

(7,728)

      AtDecember 31, 2009, the Company had $852.7 million in mortgage notes payablewith an average interest rate of 5.6% secured by office properties, and $100.0million drawn under its line of credit.  Parkway's pro rata share ofunconsolidated joint venture debt was $2.5 million with an average interest rateof 5.8% at December 31, 2009.  During the fourth quarter of 2009, the Companyfully reserved its investment in the RubiconPark I, LLC joint venture.  TheCompany's investment includes a 13.85% interest in a non-recourse firstmortgage, or $7.1 million, which is not reflected in Parkway's share of unconsolidatedjoint venture debt as a result of this write-off.

       The Company monitors thetotal debt to total asset value ratio as defined in the loan agreements for the$311.0 million unsecured line of credit.  In addition to the total debt tototal asset value ratio, the Company also monitors interest, fixed charge andmodified fixed charge coverage ratios as well as the debt to EBITDA multiple. The interest coverage ratio is computed by comparing the cash interest accruedto EBITDA.  This ratio for the years ended December 31, 2009 and 2008 was 2.78and 2.41 times, respectively.  The fixed charge coverage ratio is computed bycomparing the cash interest accrued, principal payments made on mortgage loansand preferred dividends paid to EBITDA.  This ratio for the years endedDecember 31, 2009 and 2008 was 1.95 and 1.75 times, respectively.   Themodified fixed charge coverage ratio is computed by comparing the cash interestaccrued and preferred dividends paid to EBITDA.  This ratio for the years endedDecember 31, 2009 and 2008 was 2.49 and 2.20 times, respectively.  The debt toEBITDA multiple is computed by comparing Parkway's share of total debt toEBITDA for a trailing 12-month period.  The debt to EBITDA multiple for theyears ended December 31, 2009 and 2008 was 6.4 times and 7.3 times,respectively.  Management believes the total debt to total asset value,interest coverage, fixed charge coverage and modified fixed charge coverageratios as well as the debt to EBITDA multiple provide useful information ontotal debt levels as well as the Company's ability to cover interest, principaland/or preferred dividend payments with current income.

       Thetable below presents the principal payments due and weighted average interestrates for the mortgage notes payable at December 31, 2009.

**Total**

**Recurring**

**Average**

**Mortgage**

**Balloon**

**Principal**

**Interest Rate**

**Maturities**

**Payments**

**Amortization**

2010

5.6%

 $

139,968

 $

126,411

 $

13,557

2011

5.8%

112,942

102,694

10,248

2012

6.0%

65,242

56,738

8,504

2013

6.0%

8,651

-

8,651

2014

6.0%

9,211

-

9,211

Thereafter

5.4%

516,686

486,127

30,559

 $

852,700

 $

771,970

 $

80,730

Fair Value at 12/31/09

 $

795,892

Page 35 of 87
****
       OnFebruary 20, 2009, the Company sold Lynnwood Plaza, an 82,000 square footoffice property located in Hampton Roads, Virginia, for a gross sales price of$7.8 million. Parkway received net cash proceeds from the sale of $7.1 million,which were used to reduce amounts outstanding under the Company's line ofcredit.

       OnFebruary 27, 2009, the Company paid off the mortgage note payable secured by1717 St. James, 5300 Memorial and Town and Country office buildings in Houston,Texas, with a total principal balance of $21.8 million with advances under theCompany's line of credit. The mortgage had an interest rate of 4.83% and wasscheduled to mature on March 1, 2009. The mortgage represented the Company'sonly outstanding maturity in 2009.

       On April28, 2009, the Company sold 6.25 million shares of common stock to UBSInvestment Bank at a gross offering price of $13.71 per share and a net priceof $13.56 per share. The Company used the net proceeds of $84.5 million toreduce outstanding borrowings under the Company's line of credit and forgeneral corporate purposes.

       On May 4,2009, the Company placed an $18.5 million seven-year non-recourse firstmortgage with a fixed interest rate of 7.6% per annum, and the proceeds wereused to reduce borrowings under the line of credit. The mortgage is secured by twooffice buildings in Houston, Texas.

       On June 1, 2009, theCompany sold 1717 St. James Place, a 110,000 square foot office propertylocated in Houston, Texas, for a gross sales price of $8.7 million, and Parkwayreceived net cash proceeds from the sale of $8.4 million.

       On December 23, 2009, theCompany entered into agreements under which it may issue up to $75.0 million incommon stock in an at the market ("ATM") offering with Wells Fargo Securities,Bank of America/Merrill Lynch, J.P. Morgan and Morgan Keegan and Company, Inc. Anyproceeds from the ATM offering will be utilized for general corporate purposes,including acquisitions. There were no shares issued under the ATM offering atDecember 31, 2009.

       On February 8, 2010, theCompany completed a $35.0 million non-recourse, fixed-rate first mortgage loanrelated to the refinance of a $60.0 million recourse mortgage that wasscheduled to mature in May 2010.  The loan bears interest at 7.25% and issecured by the Company's Capital City Plaza building in Atlanta, Georgia.  Theloan will mature in March 2017 and includes the option to be prepaid at the endof five years at a cost of 1% of the outstanding loan balance.  The Companyused its existing line of credit to pay the $25.0 million difference on thematuring loan.

       The Company has $66.4million in remaining debt maturities for 2010, and the Company plans torefinance this debt with non-recourse first mortgages.  Additionally, theCompany's existing line of credit capacity could be utilized to pay such debtmaturities.

       The Company presently hasplans to make recurring capital improvements to its office properties in 2010of approximately $45.0 to $50.0 million on a consolidated basis, withapproximately $38.0 million to $43.0 million representing Parkway'sproportionate share of recurring capital improvements.  These costs includetenant improvements, leasing costs and recurring building improvements. Additionally, the Company plans to make improvements related to upgrades onproperties acquired in recent years that were anticipated at the time ofpurchase and major renovations that are nonrecurring in nature to officeproperties in 2010 of approximately $4.0 million to $6.0 million.  All suchimprovements are expected to be financed by cash flow from the properties,capital expenditure escrow accounts, advances from the Company's line of creditand contributions from partners.

    In the budgeting and planning process for 2010, the Company contemplated itsoverall capital needs and the opportunities that are anticipated over the nextfew years in light of the sources of capital that are available to us.  TheCompany thinks it is advisable to make more discretionary capital available tothe Company at this point in the cycle for acquisition opportunities, both onbehalf of Texas Fund II and other opportunities that may arise outside of the fund. This led to the decision to raise an additional $22 million per annum incapital by reducing the common stock dividend to $0.30 per share per annum,which approximates projected 2010 taxable income. Many factors weighed into theCompany's decision to make this large dividend adjustment.  First, the increasedcosts associated with leasing the Company's existing and future vacancies duringthis recessionary cycle; second, the desire to further improve the balancesheet to meet capital structure goals set out in early 2009; third, to makeavailable additional capital for the investments the Company is now seeing inthe market place for Texas Fund II; and finally, to give the Company morediscretionary capital available at this point in the cycle for acquisitionopportunities that might be seen outside of Texas Fund II.

Page 36 of 87
****
       TheCompany anticipates that its current cash balance, operating cash flows,contributions from partners and borrowings (including borrowings under theworking capital line of credit) will be adequate to pay the Company's (i)operating and administrative expenses, (ii) debt service obligations, (iii)distributions to shareholders, (iv) capital improvements, and (v) normal repairand maintenance expenses at its properties, both in the short and long term. In addition, the Company may use proceeds from sales of assets, sales of equitysecurities and borrowings to fund property acquisitions and pay debts as theymature.  

** **

**Off-Balance Sheet Arrangements**

       At December 31,2009, the Company was invested in four unconsolidated joint ventures withunrelated investors. These joint ventures are accounted for using the equitymethod of accounting, as Parkway does not control, but has the ability tosignificantly influence the operations of the joint ventures and is not theprimary beneficiary. As a result, the assets and liabilities of the jointventures are not included in Parkway's consolidated balance sheet. Information relating to the unconsolidated joint ventures at December 31, 2009is detailed below. 

** **

** **

** **

**Parkway's**

** **

** **

** **

**Ownership**

**Joint Ventures**

**Property Name**

**Location**

**Interest**

** **

** **

** **

** **

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

Parkway Joint Venture, LLC

UBS Building/River Oaks

Jackson, MS

20.0%

RubiconPark I, LLC

Lakewood/Falls Pointe

Atlanta, GA

20.0%

Carmel Crossing

Charlotte, NC

RubiconPark II, LLC

Maitland 200

Orlando, FL

20.0%

       Cash distributions fromunconsolidated joint ventures are made to each partner based on theirpercentage of ownership in each entity.  Cash distributions made to partnersin joint ventures where the percentage of debt assumed is disproportionate tothe ownership percentage in the venture is distributed based on each partner'sshare of cash available for distribution before debt service, based on theirownership percentage, less the partner's share of debt service based on thepercentage of debt assumed by each partner.

       Parkway provides management,construction and leasing services for all of the unconsolidated joint venturesexcept for the Wink-Parkway Partnership, and receives market-based fees forthese services.  The portion of fees earned on unconsolidated jointventures attributable to Parkway's ownership interest is eliminated inconsolidation.

       At December 31, 2009, theCompany's investment in unconsolidated joint ventures was $2.5 million, or 0.2%of total assets.

       During the fourth quarterof 2009, the Company recognized a non-cash other-than-temporary impairment lossof $8.8 million in connection with the valuation of the Company's investmentsin RubiconPark I, LLC and RubiconPark II, LLC.  The impairment is principallydue to two customers totaling over 120,000 square feet in the office propertiesthat are unable to meet their rent obligations due to financial difficulty.  Ofthe total square footage 90,000 square feet has been vacated and another 30,000square feet is expected to be vacated during 2010.  Additionally, on January20, 2010, the Company's joint venture partner, Rubicon U.S. REIT, filed forChapter 11 bankruptcy protection, rendering our partner unable to support theircontinuing share of the joint venture obligations.  

**Contractual Obligations**

       We have contractualobligations including mortgage notes payable and lease obligations.  The tablebelow presents total payments due under specified contractual obligations byyear through maturity at December 31, 2009 (in thousands):

**Payments Due By Period**

**Contractual  Obligations**

**Total**

**2010**

**2011**

**2012**

**2013**

**2014**

**Thereafter**

Long-Term Debt 

 $

	1,183,698 

 $

	190,750 

 $

	253,914 

 $

	99,730 

 $

	40,678 

 $

	67,273 

 $

	531,353 

Capital  Lease Obligations

	6,855 

	198 

	198 

	191 

	171 

	136 

	5,961 

Operating  Leases

	796 

	499 

	288 

	9 

	- 

	- 

	- 

Purchase  Obligations

	29,750 

	18,297 

	5,639 

	481 

	481 

	1,861 

	2,991 

Ground  Lease Payments

	15,583 

	187 

	187 

	187 

	187 

	187 

	14,648 

Total

 $

	1,236,682 

 $

	209,931 

 $

	260,226 

 $

	100,598 

 $

	41,517 

 $

	69,457 

 $

	554,953 

Page 37 of 87
****
      The amounts presented abovefor long-term debt and capital lease obligations include principal and interestpayments.  The amounts presented for purchase obligations represent theremaining tenant improvement allowances and lease inducement costs for leasesin place and commitments for building improvements at December 31, 2009.

       Parkway has a 75%ownership interest in MBALP and acts as the managing general partner.  MBALP isprimarily funded with financing from a third-party lender, which is secured bya first lien on the rental property of the partnership.  The creditors of MBALPdo not have recourse to Parkway.  In acting as the general partner, Parkway iscommitted to providing additional funding to partnership deficits up to anaggregate amount of $1.0 million.  To date Parkway has not been required toprovide any additional funding to MBALP.

       Parkwayhas a 30% ownership interest in Texas Teachers Fund II and acts as the generalpartner.  Texas Teachers Fund II will be capitalized with approximately $375.0million of equity capital and $375.0 million of non-recourse, fixed-rate firstmortgage debt.  Parkway's share of the equity capital for the fund will be$112.5 million.  Parkway has four years from the inception date, or through May2012, of Texas Teachers Fund II to identify and acquire properties, with fundscontributed as needed to purchase office investments.

**Critical Accounting Estimates**

       *General. *Parkway'sinvestments are generally made in office properties.  Therefore, the Company isgenerally subject to risks incidental to the ownership of real estate.  Some ofthese risks include changes in supply or demand for office properties ortenants for such properties in an area in which we have buildings; changes inreal estate tax rates; and changes in federal income tax, real estate andzoning laws.  The Company's discussion and analysis of financial condition andresults of operations is based upon its Consolidated Financial Statements.  TheCompany's Consolidated Financial Statements include the accounts of ParkwayProperties, Inc., its majority owned subsidiaries and joint ventures in whichthe Company has a controlling interest. Parkway also consolidates subsidiarieswhere the entity is a variable interest entity and Parkway is the primarybeneficiary.  The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses for the reporting period.  Actualresults could differ from our estimates.

       The accounting policiesand estimates used in the preparation of our Consolidated Financial Statementsare more fully described in the notes to our Consolidated FinancialStatements.  However, certain of the Company's significant accounting policiesare considered critical accounting policies due to the increased level ofassumptions used or estimates made in determining their impact on ourConsolidated Financial Statements.

       Parkway considers criticalaccounting policies and estimates to be those used in the determination of thereported amounts and disclosure related to the following:

           (1)  Revenuerecognition;

           (2)  Impairment ordisposal of long-lived assets;

           (3)  Depreciable livesapplied to real estate and improvements to real estate;

           (4)  Initialrecognition, measurement and allocation of the cost of real estate acquired;and

           (5)  Allowance fordoubtful accounts.

       *Revenue Recognition. *Revenuefrom real estate rentals is recognized on a straight-line basis over the termsof the respective leases.  The cumulative difference between lease revenuerecognized under this method and contractual lease payment terms is recorded asstraight line rent receivable on the accompanying balance sheets.  

       When the Company is theowner of the tenant improvements, the leased space is ready for its intendeduse when the tenant improvements are substantially completed. In limitedinstances, when the tenant is the owner of the tenant improvements,straight-line rent is recognized when the tenant takes possession of theunimproved space.

Page 38 of 87
****
       The leases also typicallyprovide for tenant reimbursement of a portion of common area maintenance and otheroperating expenses.  Property operating cost recoveries from customers("expense reimbursements") are recognized as revenue in the period in which theexpenses are incurred.  The computation of expense reimbursements is dependenton the provisions of individual customer leases.  Most customers make monthlyfixed payments of estimated expense reimbursements.  The Company makesadjustments, positive or negative, to expense reimbursement income quarterly toadjust the recorded amounts to the Company's best estimate of the finalproperty operating costs based on the most recent quarterly budget.  After theend of the calendar year, the Company computes each customer's final expensereimbursements and issues a bill or credit for the difference between the actualamount and the amounts billed monthly during the year.  

       Management company incomerepresents market-based fees earned from providing management, construction,leasing, brokerage and acquisition services to third parties. Management feeincome is computed and recorded monthly in accordance with the terms set forthin the stand alone management service agreements. Leasing and brokeragecommissions are recognized pursuant to the terms of the stand alone agreementsat the time underlying leases are signed, which is the point at which theearnings process is complete and collection of the fees is reasonably assured.Fees relating to the purchase or sale of property are recognized when theearnings process is complete and collection of the fees is reasonably assured,which usually occurs at closing. All fees on Company-owned properties andconsolidated joint ventures are eliminated in consolidation.  The portion offees earned on unconsolidated joint ventures attributable to Parkway'sownership interest is eliminated in consolidation. 

       *Impairment or Disposalof Long-Lived Assets.*  Changes in the supply or demand of tenants for ourproperties could impact our ability to fill available space.  Should asignificant amount of available space exist for an extended period, ourinvestment in a particular office building may be impaired.  We evaluate ourreal estate assets upon the occurrence of significant adverse changes to assesswhether any impairment indicators are present that affect the recovery of thecarrying amount. 

       Weclassify certain assets as held for sale based on management having theauthority and intent of entering into commitments for sale transactions toclose in the next twelve months.  We consider an office property as held forsale once we have executed a contract for sale, allowed the buyer to completeits due diligence review and received substantial non-refundable deposit. Until a buyer has completed its due diligence review of the asset, necessaryapprovals have been received and substantive conditions to the buyer'sobligation to perform have been satisfied, we do not consider a sale to beprobable.  When the Company identifies an asset as held for sale, we estimatethe net realizable value of such asset and discontinue recording depreciationon the asset.  The Company records assets held for sale at the lower ofcarrying amount or fair value less cost to sell.  With respect to assetsclassified as held and used, we periodically review these assets to determinewhether our carrying amount will be recovered.  A long-lived asset isconsidered impaired if its carrying value exceeds the estimated fair value. Fair value is based on the estimated and realizable contract sales price (ifavailable) for the asset less estimated costs to sell.  If a sales price is notavailable, the estimated undiscounted cash flows of the asset for the remaininguseful life are used to determine if the carrying value is recoverable.  Thecash flow estimates are based on assumptions about employing the asset for itsremaining useful life.  Factors considered in projecting future cash flows includebut are not limited to:  existing leases, future leasing and terminations,market rental rates, capital improvements, tenant improvements, leasing commissions,inflation and other known variables.  Upon impairment, the Company wouldrecognize an impairment loss to reduce the carrying value of the long-livedasset to our estimate of its fair value.  The estimate of fair value and cashflows to be generated from properties requires us to make assumptions.  If oneor more assumptions prove incorrect or if the assumptions change, therecognition of an impairment loss on one or more properties may be necessary inthe future, which would result in a decrease to net income.

       In 2009, Parkway recordednon-cash other-than-temporary impairment losses totaling $8.8 million inconnection with the valuation of two investments in unconsolidated jointventures, RubiconPark I, LLC and RubiconPark II, LLC.  The impairment isprincipally due to two customers totaling over 120,000 square feet in theoffice properties that are unable to meet their rent obligations due to financialdifficulty.  Of the total square footage, 90,000 square feet has been vacatedand another 30,000 square feet is expected to be vacated during 2010. Additionally, on January 20, 2010, the Company's joint venture partner, RubiconU.S. REIT, filed for Chapter 11 bankruptcy protection, rendering our partnerunable to support their continuing share of the joint venture obligations.  In2008, Parkway recorded an impairment loss of two contracted office propertysales in the amount of $1.8 million, and an impairment loss on 12 acres of landin New Orleans, Louisiana in the amount of $717,000.

*       Depreciable LivesApplied to Real Estate and Improvements to Real Estate.*  Depreciation ofbuildings and parking garages is computed using the straight-line method overan estimated useful life of 40 years.  Depreciation of building improvements iscomputed using the straight-line method over the estimated useful life of theimprovement.  If our estimate of useful lives proves to be incorrect, thedepreciation expense recognized would also be incorrect.  Therefore, a changein the estimated useful lives assigned to buildings and improvements wouldresult in either an increase or decrease in depreciation expense, which wouldresult in an increase or decrease in earnings.

Page 39 of 87
****
       *Initial Recognition,Measurement and Allocation of the Cost of Real Estate Acquired.*  Parkwayaccounts for its acquisitions of real estate by allocating the fair value ofreal estate to acquired tangible assets, consisting of land, building, garage,building improvements and tenant improvements, identified intangible assets andliabilities, consisting of the value of above and below market debt assumedwith the acquisition.  

* *

*      *Parkway allocatesthe purchase price of properties to tangible and intangible assets based onfair values. The Company determines the fair value of the tangible andintangible components using a variety of methods and assumptions all of whichresult in an approximation of fair value.  Differing assumptions and methodscould result in different estimates of fair value and thus, a differentpurchase price allocation and corresponding increase or decrease in depreciationand amortization expense.

* *

*       Allowance for DoubtfulAccounts. *Accounts receivable are reduced by an allowance for amounts thatmay become uncollectible in the future.  Our receivable balance is comprisedprimarily of rents and operating expense recoveries due from customers.  Changein the supply of or demand for office properties could impact our customers'ability to honor their lease obligations, which could in turn affect ourrecorded revenues and estimates of the collectability of our receivables. Revenue from real estate rentals is recognized and accrued as earned on a prorata basis over the term of the lease.  We regularly evaluate the adequacy ofour allowance for doubtful accounts considering such factors as credit qualityof our customers, delinquency of payment, historical trends and currenteconomic conditions.  We provide an allowance for doubtful accounts for customerbalances that are over 90 days past due and for specific customer receivablesfor which collection is considered doubtful.  Actual results may differ fromthese estimates under different assumptions or conditions, which could resultin an increase or decrease in bad debt expense.

**Recent Accounting Pronouncements**

      Effective January 1, 2009,the Company adopted Financial Accounting Standards Board ("FASB") AccountingStandard Codification ("ASC") 805, "Business Combinations" ("FASB ASC 805"),which expands the scope of previous accounting guidance regarding businesscombinations to include all transactions and other events in which one entityobtains control over one or more other businesses. FASB ASC 805 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or afterDecember 15, 2008, requires that the acquisition related transaction costs beexpensed as incurred and also includes new disclosure requirements. The impactof FASB ASC 805 on the Company's overall financial position and results ofoperations will be determined by the markets in which the Company invests. AtDecember 31, 2009, the application of FASB ASC 805 had not impacted theCompany's overall financial position or results of operations.

       Effective January 1, 2009,the Company adopted FASB ASC 810-10-65, "Noncontrolling Interests inConsolidated Financial Statements" ("FASB ASC 810-10-65"). FASB ASC 810-10-65establishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. FASB ASC 810-10-65also amends certain consolidation procedures for consistency with therequirements of FASB ASC 805. FASB ASC 810-10-65 is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December15, 2008. Upon adoption of FASB ASC 810-10-65, the Company reclassified itsnoncontrolling interest in real estate partnerships from noncontrollinginterest to equity in the accompanying December 31, 2009 and December 31, 2008consolidated balance sheets. In addition, the Company has separately disclosedthe amount of consolidated net loss attributable to the Company and itsnoncontrolling interest in consolidated real estate partnerships in theaccompanying December 31, 2009, 2008, and 2007 consolidated statements ofincome.

       Effective January 1, 2009,the Company adopted FASB ASC 815-10-65, "Disclosures about DerivativeInstruments and Hedging Activities" ("FASB ASC 815-10-65"). FASB ASC 815-10-65requires all entities with derivative instruments to disclose informationregarding how and why the entity uses derivative instruments and how derivativeinstruments and related hedged items affect the entity's financial position,financial performance, and cash flows. The Statement is effective prospectivelyfor periods beginning on or after November 15, 2008. The application of FASBASC 815-10-65 did not have a material impact on the Company's overall financialposition and results of operations upon adoption.

       Effective January 1, 2009,the Company adopted FASB ASC 323-10, "Equity Method Investment AccountingConsiderations" ("FASB ASC 323-10"), which applies to all investments accountedfor under the equity method and clarifies the accounting for certaintransactions and impairment considerations involving those investments. FASBASC 323-10 is effective for financial statements issued for fiscal yearsbeginning on or after December 15, 2008, and interim periods within thosefiscal years. The application of FASB ASC 323-10 did not have a material impacton the Company's overall financial position and results of operation upon itsadoption.

Page 40 of 87
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       During the second quarterof 2009, the Company adopted FASB ASC 825-10-65, "Interim Disclosures aboutFair Value of Financial Instruments" ("FASB ASC 825-10-65"), which requiresfair value disclosures for financial instruments that are not reflected in theConsolidated Balance Sheets at fair value.  Prior to the issuance of FASB ASC825-10-65, the fair values of those assets and liabilities were disclosedannually.  Upon adoption of FASB ASC 825-10-65, the Company is now required todisclose this information on a quarterly basis, providing quantitative andqualitative information about fair value estimates for all financial instrumentsnot measured in the consolidated balance sheets at fair value.

       During the second quarterof 2009, the Company adopted FASB ASC 855, "Subsequent Events" ("FASB ASC855"), which establishes the accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued.  FASB ASC 855 requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate, that is, whether that date represents the date the financial statementswere issued or were available to be issued.  The adoption of FASB ASC 855 didnot have a material impact on the Company's overall financial position andresults of operations.

       In June 2009, the FASBissued Statement of Financial Accounting Standards ("SFAS") No. 166,"Accounting for Transfers of Financial Assets, an Amendment of FASB StatementNo. 140" ("SFAS No. 166") which amends SFAS No. 140, "Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities," by:eliminating the concept of a qualifying special-purpose entity ("QSPE");clarifying and amending the derecognition criteria for a transfer to beaccounted for as a sale; amending and clarifying the unit of account eligiblefor sale accounting; and requiring that a transferor initially measure at fairvalue and recognize all assets obtained (for example beneficial interests) andliabilities incurred as a result of a transfer of an entire financial asset orgroup of financial assets accounted for as a sale.  Additionally, on and afterthe effective date, existing QSPEs (as defined under previous accountingstandards) must be evaluated for consolidation by reporting entities inaccordance with the applicable consolidation guidance.  SFAS No. 166 requiresenhanced disclosures about, among other things, a transferor's continuinginvolvement with transfers of financial assets accounted for as sales, therisks inherent in the transferred financial assets that have been retained, andthe nature and financial effect of restrictions on the transferor's assets thatcontinue to be reported in the consolidated balance sheets.  SFAS No. 166 willbe effective as of the beginning of interim and annual reporting periods that beginafter November 15, 2009.  The application of SFAS No. 166 in 2010 did not havea material impact on the Company's overall financial position and results ofoperations upon adoption.  In December 2009, the FASB issued Accounting StandardsUpdate ("ASU") 2009-16, "Topic 860 - Transfers and Servicing", which formallycodifies SFAS No. 166.

       In June 2009, the FASBissued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS No.167").  SFAS No 167 amends FIN 46(R), "Consolidation of Variable InterestEntities," and changes the consolidation guidance applicable to a variableinterest entity ("VIE").  It also amends the guidance governing thedetermination of whether an enterprise is the primary beneficiary of a VIE, andis, therefore, required to consolidate an entity, by requiring a qualitativeanalysis rather than a quantitative analysis.  The qualitative analysis willinclude, among other things, consideration of who has the power to direct theactivities of the entity that most significantly impact the entity's economicperformance and who has the obligation to absorb losses or the right to receivebenefits of the VIE that could potentially be significant to the VIE.  Thisstandard also requires continuous reassessments of whether an enterprise is theprimary beneficiary of a VIE.  Previously, FIN 46(R) required reconsiderationof whether an enterprise was the primary beneficiary of a VIE only whenspecific events had occurred.  QSPEs, which were previously exempt from theapplication of this standard, will be subject to the provisions of thisstandard when it becomes effective.  SFAS No. 167 also requires enhanceddisclosures about an enterprise's involvement with a VIE.  SFAS No. 167 will beeffective as of the beginning of interim and annual reporting periods thatbegin after November 15, 2009.  The application of SFAS No. 167 in 2010 did nothave a material impact on the Company's overall financial position and resultsof operations upon adoption as the Company will continue to account for itsunconsolidated joint ventures under the equity method of accounting.  InDecember 2009, the FASB issued ASU 2009-17, "Topic 810 - Consolidations", whichformally codifies SFAS No. 167.

Page 41 of 87
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       In June 2009, the FASBissued ASU 2009-01, "Topic 105 - Generally Accepted Accounting Principles -amendments based on Statement of Financial Accounting Standards No. 168 - TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles" ("ASU 2009-01"), which will become the source ofauthoritative United States GAAP recognized by the FASB to be applied bynongovernmental entities.  ASU 2009-01 brings together in one place allauthoritative GAAP previously in levels A through D of the GAAP hierarchy thathas been issued by a standard setter, for example, FASB Statements, FASBInterpretations, EITF Abstracts, FASB Staff Positions and AICPA Accounting andAuditing Guides.   ASU 2009-01 is effective as of the beginning of interim andannual reporting periods that begin after September 15, 2009.  At December 31,2009, the Company has adopted ASU 2009-01.

**FundsFrom Operations**

       Management believes thatfunds from operations available to common shareholders ("FFO") is anappropriate measure of performance for equity REITs and computes this measurein accordance with the NAREIT definition of FFO.  Funds from operations isdefined by NAREIT as net income (computed in accordance with GAAP), excludinggains or losses from sales of property and extraordinary items under GAAP, plusdepreciation and amortization, and after adjustments to derive the Company'spro rata share of FFO of consolidated and unconsolidated joint ventures. Further, the Company does not adjust FFO to eliminate the effects ofnon-recurring charges.  The Company believes that FFO is a meaningfulsupplemental measure of its operating performance because historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate assets diminishes predictably over time, asreflected through depreciation and amortization expenses.  However, since realestate values have historically risen or fallen with market and otherconditions, many industry investors and analysts have considered presentation ofoperating results for real estate companies that use historical cost accountingto be insufficient.  Thus, NAREIT created FFO as a supplemental measure ofoperating performance for real estate investment trusts that excludeshistorical cost depreciation and amortization, among other items, from netincome, as defined by GAAP.  The Company believes that the use of FFO, combinedwith the required GAAP presentations, has been beneficial in improving theunderstanding of operating results of real estate investment trusts among theinvesting public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cashavailable to fund cash needs.  Funds from operations should not be consideredan alternative to net income as an indicator of the Company's operatingperformance or as an alternative to cash flow as a measure of liquidity.

      The following table presents a reconciliation of the Company's net income toFFO for the years ended December 31, 2009 and 2008 (in thousands):
 **Year  Ended** **December 31** **2009****2008**Net income (loss) for  Parkway Properties, Inc. $(11,603) $9,274 Adjustments to derive funds from  operations:  
     Depreciation  and amortization
92,726 91,716 
     Depreciation  and amortization - discontinued operations
- 1,873 
     Noncontrolling  interest depreciation and amortization

(20,138)

(20,644)

     Adjustments  for unconsolidated joint ventures

848 

750 
     Preferred  dividends
(4,800)

(4,800)

     Gain  on sale of real estate

(470)

(22,588)
Funds from operations  available to common shareholders (1) $56,563  $55,581 
(1)     Fundsfrom operations available to common shareholders for the years ended December31, 2009 and 2008 include the following items (in thousands):

**Year Ended  December 31**

**2009**

**2008**

Gain on involuntary conversion

 $

823 

 $

- 

Non-cash impairment losses

(8,817)

(2,542)

Non-cash purchase accounting adjustment

- 

(657)

Loss on extinguishment of debt

- 

(2,153)

GEAR UP restricted stock expense

- 

(1,395)

Lease termination fee income

1,167 

3,741 

Page 42 of 87
****
**Inflation**

       Inflation hasnot had a significant impact on the Company because of the relatively lowinflation rate in the Company's geographic areas of operation.  Additionally,most of the leases require the customers to pay their pro rata share ofoperating expenses, including common area maintenance, real estate taxes,utilities and insurance, thereby reducing the Company's exposure to increasesin operating expenses resulting from inflation.  The Company's leases typicallyhave three to seven year terms, which may enable the Company to replaceexisting leases with new leases at market base rent, which may be higher orlower than the existing lease rate.

**Forward-Looking Statements**

       In addition to historicalinformation, certain sections of this Form 10-K may contain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, such as those that are notin the present or past tense, that discuss the Company's beliefs, expectationsor intentions or those pertaining to the Company's capital resources,profitability and portfolio performance and estimates of market rental rates. Forward-looking statements involve numerous risks and uncertainties. Thefollowing factors, among others discussed herein and in the Company's filingsunder the Securities Exchange Act of 1934, could cause actual results andfuture events to differ materially from those set forth or contemplated in theforward-looking statements:  defaults or non-renewal of leases, increasedinterest rates and operating costs, failure to obtain necessary outsidefinancing, difficulties in identifying properties to acquire and in effectingacquisitions, failure to qualify as a real estate investment trust under theInternal Revenue Code of 1986, as amended, environmental uncertainties, risksrelated to natural disasters, financial market fluctuations, changes in realestate and zoning laws and increases in real property tax rates.  The successof the Company also depends upon the trends of the economy, including interestrates, income tax laws, governmental regulation, legislation, populationchanges and those risk factors discussed elsewhere in this Form 10-K and in theCompany's filings under the Securities Exchange Act of 1934.  Readers arecautioned not to place undue reliance on forward-looking statements, whichreflect management's analysis only as the date hereof.  The Company assumes noobligation to update forward-looking statements.****

**ITEM 7A.  *Quantitativeand Qualitative Disclosures About Market Risk.***

** **

**      **See informationappearing under the caption "Liquidity" appearing in Item 7."Management's Discussion and Analysis of Financial Condition and Resultsof Operations".

** **

**      **At December 31, 2009,total outstanding debt was $952.7 million of which $183.5 million or 19.3% isvariable rate debt.  If market rates of interest on the variable rate debtfluctuate by 10% (or approximately 40 basis points), the change in interestexpense on the variable rate debt would increase or decrease future earningsand cash flows by approximately $728,000 annually.

** **

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

**Index to Consolidated  Financial Statements**

**Page**

Reports  of Independent Registered Public Accounting Firm

44

Consolidated Balance Sheets - at  December 31, 2009 and 2008

47

Consolidated Statements of  Income - for the years ended December 31, 2009, 2008 and 2007

48

Consolidated Statements of Changes  in Equity - for the years ended December 31, 2009, 2008 and 2007

49

Consolidated Statements of Cash  Flows - for the years ended December 31, 2009, 2008 and 2007

50

Notes to Consolidated Financial  Statements

51

Schedule  II - Valuations and Qualifying Accounts

76

Schedule  III - Real Estate and Accumulated Depreciation

77

Note  to Schedule III - Real Estate and Accumulated Depreciation

80

Schedule  IV - Mortgage Loan on Real Estate

81

Note  to Schedule IV - Mortgage Loan on Real Estate

81

** **

Page 43 of 87
****
**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**THE BOARD OF DIRECTORS AND SHAREHOLDERS**

**PARKWAY PROPERTIES, INC.:**

We haveaudited the accompanying consolidated balance sheets of Parkway Properties,Inc. and subsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of income, changes in equity, and cash flows for eachof the years in the two-year period ended December 31, 2009. In connection withour audits of the consolidated financial statements, we also have auditedfinancial statement schedules II, III and IV. These consolidated financialstatements and financial statement schedules are the responsibility of theCompany's management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedules based onour audits. 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Parkway Properties,Inc. and subsidiaries as of December 31, 2009 and 2008, and the results oftheir operations and their cash flows for each of the years in the two-yearperiod ended December 31, 2009, in conformity with U.S. generally acceptedaccounting principles.  Also, in our opinion, the related financial statementschedules, when considered in relation to the basic consolidated financialstatements taken as a whole, present fairly, in all material respects, theinformation set forth therein.

As discussedin note A to the consolidated financial statements, Parkway Properties, Inc. changedits method of accounting for noncontrolling interests in real estatepartnerships effective January 1, 2009.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Parkway Properties, Inc.'s internal controlover financial reporting as of December 31, 2009, based on the criteriaestablished in *Internal Control - Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 5, 2010, expressed an unqualified opinion on theeffectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Jackson, Mississippi

March 5, 2010

Page 44 of 87
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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**THE BOARD OF DIRECTORS AND SHAREHOLDERSPARKWAY PROPERTIES, INC.:**

** **

We have audited the accompanyingconsolidated statements of income, changes in equity, and cash flows for yearended December 31, 2007. Our audit also included the financial statementSchedule II listed in the index at Item 15(a) 2 for the year ended December 31, 2007. These financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audit.  We did not audit thefinancial statements of Parkway Properties Office Fund, LP, a consolidatedjoint venture, which statements reflect total assets of $276.7 million as of December 31, 2007 and total revenues of $33.5 million for the year ended December 31, 2007. Those statements were audited by other auditors whose report has beenfurnished to us, and our opinion, insofar as it relates to the amounts includedfor Parkway Properties Office Fund, LP, is based solely on the report of theother auditors.

We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provide a reasonable basis for our opinion.

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated changes in equity, results of operations, and cash flows ofParkway Properties, Inc. for the year ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, therelated financial statement Schedule II, listed in the index at Item 15(a)2 forthe year ended December 31, 2007 when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

/s/ Ernst & Young, LLP

March 4, 2010

** **

** **

Page 45 of 87
****
**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**The PartnersofParkway Properties Office Fund, LP:**

We have audited the consolidatedhistorical‐cost statements of operations, changes in partners' capitaland cash flows of Parkway Properties Office Fund, LP (the Partnership) for theyear ended December 31, 2007, not included herein. We also have audited thesupplemental consolidated current-value statements of operations and changes inpartners' capital of the Partnership for the year ended December 31, 2007, notincluded herein. These consolidated financial statements are the responsibilityof the Partnership's management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, the consolidatedhistorical-cost financial statements referred to above present fairly, in allmaterial respects, the financial position of Parkway Properties Office Fund, LPand the results of its operations and its cash flows for the year endedDecember 31, 2007, in conformity with U.S. generally accepted accountingprinciples.

As described in note 11, thesupplemental consolidated current-value financial statements have been preparedby management to present relevant financial information that is not provided bythe consolidated historical-cost financial statements and are not intended to bea presentation in conformity with U.S. generally accepted accountingprinciples. In addition, the supplemental consolidated current-value financialstatements do not purport to present the net realizable, liquidation, or marketvalue of the Partnership as a whole. Furthermore, amounts ultimately realizedby the Partnership from the disposal of properties may vary significantly fromthe current values presented.

In our opinion, the supplementalconsolidated current‐value financial statements referred to above presentfairly, in all material respects, the information set forth in them on thebasis of accounting described in note 11.

Our audit was made for thepurpose of forming an opinion on the consolidated historical-cost and consolidatedcurrent-value financial statements taken as a whole. The consolidatinginformation included in Schedules I - IV is presented for purposes ofadditional analysis of the consolidated current-value financial statementsrather than to present the financial position and results of operations of theindividual companies. The consolidating information has been subjected to theauditing procedures applied in the audit of the consolidated current-valuefinancial statements and, in our opinion, is fairly stated in all material respectsin relation to the consolidated current-value financial statements taken as awhole.

/s/ KPMG LLP

Jackson, Mississippi

February 26, 2008

Page 46 of 87
****
** **

**PARKWAYPROPERTIES, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data)**

**December 31**

**December 31**

**2009**

**2008**

**Assets**

Real estate related investments:

     Office and parking properties

 $

1,738,040 

 $

1,737,549 

     Real estate development

609 

609 

     Accumulated depreciation

(336,759)

(282,919)

1,401,890 

1,455,239 

     Land available for sale

750 

750 

     Mortgage loan

8,126 

7,519 

     Investment in unconsolidated joint ventures

2,512 

11,057 

1,413,278 

1,474,565 

Rents receivable and other assets

116,437 

118,512 

Intangible assets, net

61,734 

79,460 

Cash and cash equivalents

20,697 

15,318 

 $

1,612,146 

 $

1,687,855 

** **

** **

** **

**Liabilities**

** **

** **

Notes payable to banks

 $

100,000 

 $

185,940 

Mortgage notes payable 

852,700 

869,581 

Accounts payable and other liabilities

88,614 

98,894 

1,041,314 

1,154,415 

** **

** **

** **

**Equity**

** **

** **

Parkway Properties, Inc. shareholders' equity:

** **

** **

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

     shares authorized, issued and outstanding

57,976 

57,976 

Common stock, $.001 par value, 67,600,000 shares authorized,

     21,624,228 and 15,253,396 shares issued and  outstanding

     in 2009 and 2008, respectively

22 

15 

Common stock held in trust, at cost, 71,255 and 85,300 

     shares in 2009 and 2008, respectively 

(2,399)

(2,895)

Additional paid-in capital

515,398 

428,367 

Accumulated other comprehensive loss

(4,892)

(7,728)

Accumulated deficit

(111,960)

(69,487)

     Total Parkway Properties, Inc. shareholders' equity

454,145 

406,248 

Noncontrolling interest - real estate partnerships

116,687 

127,192 

     Total equity

570,832 

533,440 

 $

1,612,146 

 $

1,687,855 

Seenotes to consolidated financial statements.

Page 47 of 87
****
**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**(In thousands, except per share data)

**Year Ended December 31**

**2009**

**2008**

**2007**

**Revenues**

Income  from office and parking properties

 $

266,345 

 $

263,475 

 $

233,304 

Management company income

1,870 

1,936 

1,605 

      Total revenues

268,215 

265,411 

234,909 

** **

**Expenses**

Property  operating expense

128,084 

126,169 

107,990 

Depreciation  and amortization

92,726 

91,716 

74,379 

Impairment  loss on real estate

- 

2,542 

- 

Management  company expenses

2,299 

1,947 

1,188 

General  and administrative

6,108 

9,725 

6,602 

      Total expenses

229,217 

232,099 

190,159 

** **

**Operating  income**

38,998 

33,312 

44,750 

** **

**Other  income and expenses**

Interest  and other income

1,609 

1,332 

526 

Equity  in earnings of unconsolidated joint ventures

445 

894 

1,008 

Other-than-temporary  impairment loss on investment in 

      unconsolidated joint ventures

(8,817)

- 

- 

Gain  on involuntary conversion

823 

- 

- 

Gain  on sale of real estate

470 

- 

20,307 

Interest  expense

(55,693)

(59,426)

(52,546)

** **

**Income  (loss) on continuing operations**

(22,165)

(23,888)

14,045 

Discontinued  operations:

      Income (loss) from discontinued operations

- 

(795)

2,473 

**    **Gain on sale of real estate from  discontinued operations

- 

22,588 

- 

Total  discontinued operations

- 

21,793 

2,473 

**Net  income (loss)**

(22,165)

(2,095)

16,518 

      Net loss attributable to noncontrolling interest - real estate partnerships

10,562 

11,369 

3,174 

**Net  income (loss) for Parkway Properties, Inc.**

 (11,603)

 9,274 

 19,692 

Dividends  on preferred stock

(4,800)

(4,800)

(4,800)

**Net  income (loss) available to common stockholders**

 $

(16,403)

 $

4,474 

 $

14,892 

** **

**Net  income (loss) per common share attributable to Parkway Properties, Inc.**

Basic:

      Income (loss) from continuing operations attributable to Parkway Properties,  Inc.

 $

(0.85)

 $

(1.15)

 $

0.80 

      Discontinued operations

- 

1.45 

0.16 

      Net income (loss) attributable to Parkway Properties, Inc.

 $

(0.85)

 $

0.30 

 $

0.96 

Diluted:

      Income (loss) from continuing operations attributable to Parkway Properties,  Inc.

 $

(0.85)

 $

(1.15)

 $

0.79 

      Discontinued operations

- 

1.45 

0.16 

      Net income (loss) attributable to Parkway Properties, Inc.

 $

(0.85)

 $

0.30 

 $

0.95 

** **

**Dividends per common share**

 $

1.30 

 $

2.275 

 $

2.60 

** **

**Weighted  average shares outstanding:**

      Basic 

19,304 

15,023 

15,482 

      Diluted

19,304 

15,023 

15,648 

Seenotes to consolidated financial statements.

Page 48 of 87
********
**PARKWAYPROPERTIES, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY**

(In thousands, exceptshare and per share data)

** **

**Parkway Properties, Inc. Shareholders**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Accumulated**

** **

** **

** **

** **

** **

**Noncontrolling**

** **

** **

** **

** **

** **

** **

** **

**Common**

** **

**Additional**

** **

**Other**

** **

** **

** **

** **

**Interest -**

** **

** **

** **

**Preferred**

** **

**Common**

** **

**Stock Held**

** **

**Paid-In**

** **

**Comprehensive**

** **

**Accumulated**

** **

** **

**Real Estate**

** **

**Total**

** **

**Stock**

** **

**Stock**

** **

**in Trust**

** **

**Capital**

** **

**Loss**

** **

**Deficit**

** **

** **

**Partnerships**

** **

**Equity**

**Balance at December 31, 2006**

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

** **  **as  previously reported**

$

57,976 

	 

 $

16 

	 

$

	(3,894)

	 

$

449,141 

	 

$

828 

	 

$

	(13,761)

	 

	 

$

- 

	 

$

490,306 

	Reclassification upon the 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	   adoption of SFAS No. 160

- 

	 

- 

	 

	- 

	 

- 

	 

- 

	 

	- 

	 

	 

90,280 

	 

90,280 

**Balance at December 31, 2006 as presented**

	57,976 

	 

16 

	 

	(3,894)

	 

449,141 

	 

828 

	 

	(13,761)

	 

	 

90,280 

	 

580,586 

	Comprehensive income 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     Net income (loss)

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

19,692 

	 

	 

(3,174)

	 

16,518 

	     Change in unrealized gain on equity securities 

- 

	 

- 

	 

- 

	 

- 

	 

4 

	 

- 

	 

	 

- 

	 

4 

	     Change in fair value of interest rate swaps

- 

	 

- 

	 

- 

	 

- 

	 

	(1,190)

	 

- 

	 

	 

- 

	 

	(1,190)

	Total comprehensive income 

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	 

- 

	 

15,332 

	Common dividends declared - $2.60 per share

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	(40,537)

	 

	 

- 

	 

	(40,537)

	Preferred dividends declared - $2.00 per share

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	(4,800)

	 

	 

- 

	 

	(4,800)

	Share-based compensation

- 

	 

- 

	 

- 

	 

1,521 

	 

- 

	 

- 

	 

	 

- 

	 

1,521 

	Stock options and warrants exercised-98,356 shares

- 

	 

- 

	 

- 

	 

3,035 

	 

- 

	 

- 

	 

	 

- 

	 

3,035 

	4,800 shares issued in lieu of Directors' fees

- 

	 

- 

	 

- 

	 

251 

	 

- 

	 

- 

	 

	 

- 

	 

251 

	DRIP Plan-6,702 shares issued

- 

	 

- 

	 

- 

	 

363 

	 

- 

	 

- 

	 

	 

- 

	 

363 

	Issuance costs from stock offering

- 

	 

- 

	 

- 

	 

(28)

	 

- 

	 

- 

	 

	 

- 

	 

(28)

	Employee Stock Purchase Plan - 1,715 shares issued

- 

	 

- 

	 

- 

	 

75 

	 

- 

	 

- 

	 

	 

- 

	 

75 

	Purchase of Company stock - 687,806 shares 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	   of common stock

	-

	 

	(1)

	 

	- 

	 

	(29,137)

	 

	- 

	 

	- 

	 

	 

	- 

	 

	(29,138)

	Distribution of 10,500 shares of common stock,

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     deferred compensation plan 

- 

	 

- 

	 

354 

	 

- 

	 

- 

	 

- 

	 

	 

- 

	 

354 

	Contribution of capital by noncontrolling interests

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	 

42,184 

	 

42,184 

	Distribution of capital to noncontrolling interests

- 

	 

- 

	 

- 

	 

-

	 

- 

	 

- 

	 

	 

(48,784)

	 

(48,784)

**Balance at December 31, 2007**

57,976 

	 

15 

	 

	(3,540)

	 

425,221 

	 

	(358)

	 

	(39,406)

	 

	 

80,506 

	 

520,414 

	Comprehensive loss

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     Net income (loss)

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	9,274 

	 

	 

(11,369)

	 

(2,095)

	     Change in fair value of interest rate swaps

- 

	 

- 

	 

	- 

	 

- 

	 

	(7,370)

	 

	- 

	 

	 

- 

	 

(7,370)

	Total comprehensive loss

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	- 

	 

	 

- 

	 

(9,465)

	Common dividends declared - $2.275 per share

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	(34,555)

	 

	 

- 

	 

(34,555)

	Preferred dividends declared - $2.00 per share

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	(4,800)

	 

	 

- 

	 

(4,800)

	Share-based compensation

- 

	 

- 

	 

	- 

	 

2,276 

	 

	- 

	 

	- 

	 

	 

- 

	 

2,276 

	Stock options and warrants exercised - 25,436 shares

- 

	 

- 

	 

	- 

	 

792 

	 

	- 

	 

	- 

	 

	 

- 

	 

792 

	3,600 shares issued in lieu of Directors' fees

- 

	 

- 

	 

	- 

	 

140 

	 

	- 

	 

	- 

	 

	 

- 

	 

140 

	Issuance costs from shelf registration

- 

	 

- 

	 

	- 

	 

(52)

	 

	- 

	 

	- 

	 

	 

- 

	 

(52) 

	Purchase of Company stock - 447 shares withheld to

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     satisfy tax withholding obligation in connection  with the

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     vesting of deferred incentive share units

- 

	 

- 

	 

	- 

	 

(10)

	 

	- 

	 

	- 

	 

	 

- 

	 

(10)

	Distribution of 21,000 shares of common stock,  deferred

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     compensation plan

- 

	 

- 

	 

	715 

	 

- 

	 

	- 

	 

	- 

	 

	 

- 

	 

715 

	Contribution of 1,800 shares of common stock,  deferred

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	     compensation plan

- 

	 

- 

	 

	(70)

	 

- 

	 

	- 

	 

	- 

	 

	 

- 

	 

(70)

	Contribution of capital by noncontrolling interests

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	- 

	 

	 

60,596 

	 

60,596 

	Distribution of capital to noncontrolling interests

- 

	 

- 

	 

	- 

	 

- 

	 

	- 

	 

	- 

	 

	 

(2,541)

	 

(2,541)

**Balance at December 31, 2008**

57,976 

	 

15 

	 

	(2,895)

	 

428,367 

	 

	(7,728)

	 

	(69,487)

	 

	 

127,192 

	 

533,440 

	Comprehensive loss

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      Net loss

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	(11,603)

	 

	 

	(10,562)

	 

	(22,165)

	      Change in fair value of interest rate swaps

- 

	 

- 

	 

- 

	 

- 

	 

2,836 

	 

- 

	 

	 

- 

	 

2,836 

	Total comprehensive loss

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	 

	-  

	 

	(19,329)

	Common dividends declared - $1.30 per share

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	(26,070)

	 

	 

- 

	 

	(26,070)

	Preferred dividends declared - $2.00 per share

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	(4,800)

	 

	 

- 

	 

	(4,800)

	Share-based compensation 

- 

	 

- 

	 

- 

	 

2,581 

	 

- 

	 

- 

	 

	 

- 

	 

2,581 

	Stock offering - 6,250,000 shares of common stock

- 

	 

7 

	 

- 

	 

84,450 

	 

- 

	 

- 

	 

	 

- 

	 

84,457 

	3,921 shares issued in lieu of Directors' fees

- 

	 

- 

	 

- 

	 

58 

	 

- 

	 

- 

	 

	 

- 

	 

58 

	Purchase of Company stock - 3,594 and 860 shares 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      withheld to satisfy tax withholding obligation  in 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      connection with vesting of restricted stock and  

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      deferred incentive share units, respectively

- 

	 

- 

	 

- 

	 

	(58)

	 

- 

	 

- 

	 

	 

- 

	 

	(58)

	Distribution of 15,125 shares of common stock,  deferred

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      compensation plan

- 

	 

- 

	 

511 

	 

- 

	 

- 

	 

- 

	 

	 

- 

	 

511 

	Contribution of 1,080 shares of common stock,  deferred

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	      compensation plan

- 

	 

- 

	 

	(15)

	 

- 

	 

- 

	 

- 

	 

	 

- 

	 

	(15)

	Contribution of capital by noncontrolling interests

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

- 

	 

	 

57 

	 

57 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

**Balance at December 31, 2009**

 $

57,976 

	 

 $

22 

	 

 $

	(2,399)

	 

$

515,398 

	 

 $

	(4,892)

	 

 $

	(111,960)

	 

	 

 $

116,687 

	 

$

570,832 

** **

** **

** **

** **

** **

** **

** **

** **

See notes toconsolidated financial statements.

** **

Page 49 of 87
****
**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

**Year Ended December 31**

**2009**

**2008**

**2007**

**Operating  activities**

     Net income (loss)

 $

(11,603)

 $

9,274 

 $

19,692 

      Adjustments to reconcile net income (loss) to cash

           provided by operating activities:

           Depreciation and amortization

92,726 

91,716 

74,379 

           Depreciation and amortization - discontinued operations

- 

1,873 

3,196 

           Amortization of above market leases

51 

45 

788 

           Amortization of loan costs

2,319 

1,825 

1,202 

           Amortization of mortgage loan discount

(607)

(518)

(71)

           Share-based compensation expense

2,581 

2,276 

1,521 

           Operating distributions from unconsolidated 

                joint ventures

392 

1,042 

1,036 

           Loss allocated to noncontrolling interests

(10,562)

(11,369)

(3,172)

           Net (gain) loss on real estate investments, 

                involuntary conversion and other assets

7,524 

(20,046)

(20,307)

           Equity in earnings of unconsolidated joint ventures

(445)

(894)

(1,008)

           Increase in deferred leasing costs

(16,348)

(8,738)

(7,080)

           Changes in operating assets and liabilities:

                Change in receivables and other assets

3,678 

(1,474)

(5,736)

                Change in accounts payable and 

                     other liabilities

228 

(2,164)

11,491 

      **Cash provided by operating activities**

69,934 

62,848 

75,931 

** **

**Investing  activities**

      Investment in mortgage loan

- 

- 

(6,930)

      Distributions from unconsolidated joint ventures

- 

38 

89 

      Investments in unconsolidated joint ventures

- 

- 

(75)

      Reimbursements from (purchases of) real estate related investments

1,033 

(229,707)

(55,428)

      Proceeds from sales of real estate 

15,542 

84,464 

56,795 

      Proceeds from property insurance settlement

1,984 

1,200 

- 

      Real estate development

(5,329)

(28,981)

(11,615)

      Improvements to real estate related investments

(28,420)

(31,916)

(39,877)

      **Cash used in investing activities**

(15,190)

(204,902)

(57,041)

** **

**Financing  activities**

      Principal payments on mortgage notes payable

(35,381)

(76,620)

(41,011)

      Proceeds from long-term financing

18,500 

231,700 

59,500 

      Proceeds from bank borrowings

35,742 

189,452 

241,126 

      Payments on bank borrowings

(121,682)

(215,861)

(181,921)

      Redemption of subsidiary redeemable preferred membership interests

- 

- 

(10,741)

      Debt financing costs

(406)

(2,183)

(1,688)

      Stock options exercised

- 

792 

3,035 

      Purchase of Company stock

(58)

(10)

(29,138)

      Dividends paid on common stock

(25,794)

(34,410)

(40,222)

      Dividends paid on preferred stock

(4,800)

(4,800)

(4,800)

      Contributions from noncontrolling interest partners

57 

60,593 

42,182 

      Distributions to noncontrolling interest partners

- 

(2,541)

(48,784)

      Employee stock purchase plan

- 

- 

75 

      Proceeds from DRIP plan

- 

- 

363 

      Proceeds/(issuance costs) from stock offerings 

84,457 

(52)

(28)

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

(49,365)

146,060 

(12,052)

*    ***Change in cash and cash  equivalents**

5,379 

4,006 

6,838 

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

15,318 

11,312 

4,474 

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

 $

20,697 

 $

15,318 

 $

11,312 

Seenotes to consolidated financial statements.

Page 50 of 87
****
**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009**

** **

**NOTE A - Summary ofSignificant Accounting Policies**

**Basis of Presentation and Principlesof Consolidation**

      The accompanying financial statements are prepared following U.S.generally accepted accounting principles ("GAAP") and the requirements of theSecurities and Exchange Commission ("SEC").

       The consolidated financialstatements include the accounts of Parkway Properties, Inc.("Parkway" or "the Company"), its wholly-owned subsidiariesand joint ventures in which the Company has a controlling interest.  The otherpartners' equity interests in the consolidated joint ventures are reflected asnoncontrolling interests in the consolidated financial statements.  Parkwayalso consolidates subsidiaries where the entity is a variable interest entity("VIE") and Parkway is the primary beneficiary and is expected to absorb amajority of the VIE's anticipated losses, receive a majority of the VIE'santicipated residual returns, or both.  All significant intercompanytransactions and accounts have been eliminated in the accompanying financialstatements.

       The Company also consolidatescertain joint ventures where it exercises significant control over majoroperating and management decisions, or where the Company is the sole generalpartner and the limited partners do not possess kick-out rights or othersubstantive participating rights or where the entity is a variable interestentity and Parkway is the primary beneficiary.  The equity method of accountingis used for those joint ventures that do not meet the criteria for consolidationand where Parkway exercises significant influence but does not control thesejoint ventures.

** **

**Business**

       The Company's operationsare exclusively in the real estate industry, principally the operation, leasing,acquisition and ownership of office buildings. 

**Use of Estimates**

       The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Although the Company believes the assumptions andestimates made are reasonable and appropriate, as discussed in the applicablesections throughout these consolidated financial statements, differentassumptions and estimates could materially impact reported results.  Thecurrent economic environment has increased the degree of uncertainty inherentin these estimates and assumptions, therefore, changes in market conditionscould impact the Company's future operating results.  The Company's mostsignificant estimates relate to impairments on real estate and allowance fordoubtful accounts.

**Real Estate Properties**

       Real estate properties arecarried at cost less accumulated depreciation.  Cost includes the carryingamount of the Company's investment plus any additional consideration paid,liabilities assumed, costs of securing title and improvements made subsequentto acquisition.  Depreciation of buildings and building improvements iscomputed using the straight-line method over the estimated useful lives of theassets.  Depreciation of tenant improvements, including personal property, iscomputed using the straight-line method over the lesser of useful life or theterm of the lease involved.  Maintenance and repair expenses are charged toexpense as incurred.  

Page 51 of 87
****
Balances of major classes ofdepreciable assets (in thousands) and their respective estimated useful livesare:

** **

** **

**December  31**

**December  31**

**Asset  Category**

**Estimated  Useful Life**

**2009**

**2008**

Land

Non-depreciable

$        170,106

$     171,367

Buildings and  garages

40 years

1,280,779

1,292,415

Building  improvements

7 to 40 years

116,471

108,704

Tenant  improvements

Lesser of useful life or term of  lease

170,684

165,063

$     1,738,040

$  1,737,549

       Depreciation expenserelated to these assets of $67.3 million was recognized in 2009 and 2008 and $59.7million in 2007.

       The Company evaluates its realestate assets upon occurrence of significant adverse changes in theiroperations to assess whether any impairment indicators are present that affectthe recovery of the carrying amount.  The carrying amount includes the net bookvalue of tangible and intangible assets.  Real estate assets are classified asheld for sale or held and used.  Parkway records assets held for sale at thelower of carrying amount or fair value less cost to sell.  With respect toassets classified as held and used, Parkway recognizes an impairment loss tothe extent the carrying amount is not recoverable and exceeds its fair value.  Fairvalue is based on the estimated and realizable contract sales price (ifavailable) for the asset less estimated costs to sell.  If a sales price is notavailable, the estimated undiscounted cash flows of the asset for the remaininguseful life are used to determine if the carrying value is recoverable.  Thecash flow estimates are based on assumptions about employing the asset for itsremaining useful life.  Factors considered in projecting future cash flowsinclude but are not limited to:  existing leases, future leasing andterminations, market rental rates, capital improvements, tenant improvements,leasing commissions, inflation and other known variables.  This marketinformation is considered a Level 3 input as defined by ASC 820, "Fair ValueMeasurements and Disclosures," ("ASC 820").  Upon impairment, Parkway recognizesan impairment loss to reduce the carrying value of the real estate asset to theestimate of its fair value.

       The Company recognizesgains from sales of real estate upon the realization at closing of the transferof rights of ownership to the purchaser, receipt from the purchaser of anadequate cash down payment and adequate continuing investment by the purchaser. If the requirements for recognizing gains have not been met, the sale andrelated costs are recorded, but the gain is deferred and recognized generallyon the installment method of accounting as collections are received.

       Land available for sale(see Note E) is carried at the lower of cost or fair value less estimated costto sell.

** **

**Purchase Price Allocation**

** **

       Parkway allocates thepurchase price of real estate to tangible and intangible assets and liabilitiesbased on fair values.  Tangible assets consist of land, building, garage,building improvements and tenant improvements.  Intangible assets andliabilities consist of the value of above and below market leases, lease costs,the value of in-place leases, customer relationships and any value attributableto above or below market debt assumed with the acquisition.

       The Company may engageindependent third-party appraisers to perform the valuations used to determinethe fair value of these identifiable tangible and intangible assets.  These valuationsand appraisals use commonly employed valuation techniques, such as discountedcash flow analyses. Factors considered in these analyses include an estimate ofcarrying costs during hypothetical expected lease-up periods consideringcurrent market conditions, and costs to execute similar leases. Parkway alsoconsiders information obtained about each property as a result of itspre-acquisition due diligence, marketing and leasing activities in estimatingthe fair value of the tangible and intangible assets acquired. In estimatingcarrying costs, the Company includes real estate taxes, insurance and otheroperating expenses and estimates of lost rentals at market rates during theexpected lease-up periods depending on specific local market conditions anddepending on the type of property acquired. Additionally, Parkway estimatescosts to execute similar leases including leasing commissions, legal and otherrelated expenses to the extent that such costs are not already incurred inconnection with a new lease origination as part of the transaction.

Page 52 of 87
****
        The fair value of aboveor below market in-place lease values is the present value of the differencebetween the contractual amount to be paid pursuant to the in-place lease andthe estimated current market lease rate expected over the remainingnon-cancelable life of the lease.  The capitalized above market lease valuesare amortized as a reduction of rental income over the remaining term of therespective leases. The capitalized below market lease values are amortized asan increase to rental income over the remaining term of the respective leases.   Totalamortization for above and below market leases was a net reduction of rentalincome of $51,000, $45,000 and $788,000 for the years ending December 31, 2009,2008 and 2007, respectively.

       Amortization of above andbelow market leases is projected as a net increase to rental income as followsfor the next five years (in thousands):

Amount

2010

 $

304 

2011

378 

2012

518 

2013

215 

2014

77

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

       The fair value of atmarket in-place leases is the present value associated with re-leasing thein-place lease as if the property was vacant.  Factors to be considered includeestimates of carrying costs during hypothetical expected lease-up periodsconsidering current market conditions and costs to execute similar leases.  Inestimating carrying costs, the Company includes real estate taxes, insuranceand other operating expenses and estimates of lost rentals at market ratesduring the expected lease-up periods.  The value of at market in-place leasesis amortized as a lease cost amortization expense over the expected life of thelease, including expected renewals.  Total amortization expense for the valueof in-place leases was $14.0 million, $15.0 million and $9.0 million for theyears ending December 31, 2009, 2008 and 2007, respectively.

       Amortization expense forthe value of in-place leases is projected as follows for the next five years(in thousands):

Amount

2010

 $

9,381 

2011

8,452 

2012

6,205 

2013

5,314   

2014

4,210 

       A separate component ofthe fair value of in-place leases is identified for the lease costs.  The fairvalue of lease costs represents the estimated commissions and legal fees paidin connection with the current leases in place.  Lease costs are amortized overthe non-cancelable terms of the respective leases as lease cost amortizationexpense.

       In no event does theamortization period for intangible assets exceed the remaining depreciable lifeof the building. Should a customer terminate its lease, the unamortized portionof the tenant improvement, in-place lease value, lease cost and customerrelationship intangibles would be charged to expense.  Additionally, theunamortized portion of above market in-place leases would be recorded as areduction to rental income and the below market in-place lease value would berecorded as an increase to rental income.

** **

Page 53 of 87
******Mortgage Loan Receivable**
       Parkway records itsmortgage loan receivable at the stated principal amount net any premium ordiscount.  At December 31, 2009 the carrying amount of the mortgage loanreceivable was $8.1 million.  The Company recognizes the premium or discountover the life of the mortgage loan using the effective interest method. Parkway evaluates the collectability of principal and interest on its mortgageloans, if circumstances warrant, to determine whether it is impaired.  A loanis impaired when based on current information and events; it is probable that theCompany will be unable to collect all amounts due according to the existingcontractual terms.  When a loan is impaired, the amount of the loss accrual iscalculated by comparing the recorded investment to the value determined bydiscounting the expected future cash flow at the loan's effective interestrate.  No impairment loss has been recognized in connection with the mortgageloan receivable.

** **

**Investment in Unconsolidated Joint Ventures**

       At December 31, 2009 and2008, Parkway had a non-controlling interest in four unconsolidated jointventures, which are accounted for using the equity method of accounting. Therefore, Parkway reports its share of income and losses based on its economicinterest in these entities, as measured by its ownership interest or expectedcash distributions if materially different than distributions based onownership interest.  Parkway classifies its interests as non-controlling whenit holds less than a majority voting interest in the entity and does not havethe sole ability, based on the terms of the joint venture agreements, to makedecisions about the entities' activities regarding items such as major leases,encumbering the entities with debt, major capital expenditures and whether todispose of the entities.

** **

       When circumstancesindicate there may have been a loss in value of an equity investment, theCompany evaluates the investment for impairment by estimating its ability torecover its investment from future cash flows.  If Parkway determines the lossin value is other than temporary, the Company recognizes an impairment chargeto reflect the investment at fair value.  The use of projected future cashflows and other estimates of fair value, the determination of when a loss isother than temporary, and the calculation of the amount of the loss are complexand subjective.  Use of other estimates and assumptions may result in differentconclusions.  Changes in economic and operating conditions that occursubsequent to the Company's review could impact these assumptions and result infuture impairment charges of our equity investments.

       In the fourth quarter of2009, Parkway recorded non-cash other-than-temporary impairment losses totaling$8.8 million in connection with the valuation of two investments inunconsolidated joint ventures, RubiconPark I, LLC and RubiconPark II, LLC. Theimpairment is principally due to two customers totaling over 120,000 squarefeet in the office properties that are unable to meet their rent obligationsdue to financial difficulty.  Of the total square footage, 90,000 square feethas been vacated and another 30,000 square feet is expected to be vacated during2010.  Additionally, on January 20, 2010, the Company's joint venture partner,Rubicon U.S. REIT, filed for Chapter 11 bankruptcy protection, rendering our partnerunable to support their continuing share of the joint venture obligations.

** **

**Allowance for Doubtful Accounts**

** **

       Accounts receivable arereduced by an allowance for amounts that the Company estimates to beuncollectible.  The receivable balance is comprised primarily of rent andexpense reimbursement income due from the customers.  Management evaluates theadequacy of the allowance for doubtful accounts considering such factors as thecredit quality of our customers, delinquency of payment, historical trends andcurrent economic conditions.  The Company provides an allowance for doubtfulaccounts for customer balances that are over 90 days past due and for specificcustomer receivables for which collection is considered doubtful.

** **

**Cash Equivalents**

       The Company considers allhighly liquid investments with a maturity of three months or less whenpurchased to be cash equivalents.

** **

**Noncontrolling Interest**

* *

*Noncontrolling Interest - RealEstate Partnerships*

       The Company has aninterest in three joint ventures that are included in its consolidatedfinancial statements. Parkway has a 75.025% interest in Parkway Moore, LLC,which owns an interest in Moore Buildings Associates, LP.  The Company alsoowns a 25% and 30% interest in Parkway Properties Office Fund, LP and ParkwayProperties Office Fund II, LP, respectively.

Page 54 of 87
****
       Moore Building Associates,LP ("MBALP") was established for the purpose of owning a commercial officebuilding (the Toyota Center in Memphis, Tennessee).  In acting as the generalpartner, Parkway is committed to providing additional funding to meetpartnership operating deficits up to an aggregate amount of $1.0 million. Parkway receives income from MBALP in the form of interest from a constructionnote 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 accountsbetween Parkway and MBALP and PMLLC have been eliminated.

       Parkway serves as thegeneral partner of Parkway Properties Office Fund, LP ("Ohio PERS Fund I") andprovides asset management, property management, leasing and constructionmanagement services to the fund, for which it is paid market-based fees.  Cashdistributions from the fund are made to each joint venture partner based ontheir percentage of ownership in the fund.  Since Parkway is the sole generalpartner and has the authority to make major decisions on behalf of the fund,Parkway is considered to have a controlling interest.  Accordingly, Parkway isrequired to consolidate the fund in its consolidated financial statements.  AtFebruary 15, 2008, Ohio PERS Fund I was fully invested.

       On May 14, 2008, Parkway formedParkway Properties Office Fund II, LP ("Texas Teachers Fund II"), a $750.0million discretionary fund with the Teacher Retirement System of Texas ("TRS"),for the purpose of acquiring high-quality multi-tenant office properties.   TRSwill be a 70% investor, and Parkway will be a 30% investor in the fund, whichwill be capitalized with approximately $375.0 million of equity capital and$375.0 million of non-recourse, fixed-rate first mortgage debt.  Parkway'sshare of the equity contribution for the fund will be $112.5 million.  TheCompany intends to fund its share of equity contributions with proceeds from assetsales, line of credit advances and/or sales of equity securities.  The fundwill target investments in office buildings in Houston, Austin, San Antonio,Chicago, Atlanta, Phoenix, Charlotte, Memphis, Nashville, Jacksonville,Orlando, Tampa/St. Petersburg, Ft. Lauderdale, as well as other growth marketsto be determined at Parkway's discretion.

       Parkway serves as thegeneral partner of Texas Teachers Fund II and provides asset management,property management, leasing and construction management services for the fund,for which it will be paid market-based fees.  Cash distributions from the fundwill be made to each joint venture partner based on the percentage of ownershipin the fund.  Since Parkway is the sole general partner and has the authorityto make major decisions on behalf of the fund, Parkway is considered to have acontrolling interest.  Accordingly, Parkway is required to consolidate the fundin its consolidated financial statements.  At December 31, 2009, no investmentshad been made on behalf of Texas Teachers Fund II.

       Noncontrolling interest inreal estate partnerships represents the other partners' proportionate share ofequity in the partnerships discussed above at December 31, 2009.  Income isallocated to noncontrolling interest based on the weighted average percentageownership during the year.

**Revenue Recognition**

       Revenue from real estaterentals is recognized on a straight-line basis over the terms of the respectiveleases.  The cumulative difference between lease revenue recognized under thismethod and contractual lease payment terms is recorded as straight-line rent receivableon the accompanying balance sheets.  The straight-line rent adjustment increasedrevenue by $6.7 million, $3.8 million and $3.2 million in 2009, 2008 and 2007,respectively.

       When the Company is theowner of the tenant improvements, the leased space is ready for its intendeduse when the tenant improvements are substantially completed. In limitedinstances, when the tenant is the owner of the tenant improvements,straight-line rent is recognized when the tenant takes possession of theunimproved space.

       The leases also typicallyprovide for tenant reimbursement of a portion of common area maintenance andother operating expenses.  Property operating cost recoveries from customers("expense reimbursements") are recognized as revenue in the period in which theexpenses are incurred.  The computation of expense reimbursements is dependenton the provisions of individual customer leases.  Most customers make monthlyfixed payments of estimated expense reimbursements.  The Company makesadjustments, positive or negative, to expense reimbursement income quarterly toadjust the recorded amounts to the Company's best estimate of the finalproperty operating costs based on the most recent quarterly budget.  After theend of the calendar year, the Company computes each customer's final expense reimbursementsand issues a bill or credit for the difference between the actual amount andthe amounts billed monthly during the year.  

Page 55 of 87
****
    

      Management company incomerepresents market-based fees earned from providing management, construction,leasing, brokerage and acquisition services to third parties. Management feeincome is computed and recorded monthly in accordance with the terms set forthin the stand alone management service agreements. Leasing and brokeragecommissions are recognized pursuant to the terms of the stand alone agreementsat the time underlying leases are signed, which is the point at which theearnings process is complete and collection of the fees is reasonably assured.Fees relating to the purchase or sale of property are recognized when theearnings process is complete and collection of the fees is reasonably assured,which usually occurs at closing. All fees on Company-owned properties andconsolidated joint ventures are eliminated in consolidation.  The Companyrecognizes its share of fees earned from unconsolidated joint ventures inmanagement company income.

** **

**Amortization**

       Debt origination costs aredeferred and amortized using a method that approximates the effective interestmethod over the term of the loan.  Leasing costs are deferred andamortized using the straight-line method over the term of the respectivelease.

**Early Extinguishment of Debt**

       When outstanding debt isextinguished, the Company records any prepayment premium and unamortized loancosts to interest expense.

**Derivative FinancialInstruments**

       The Company recognizes allderivative instruments on the balance sheet at their fair value.  Changes inthe fair value of derivatives are recorded each period in current earnings orother comprehensive income (loss), depending on whether a derivative isdesignated as part of a hedge transaction and, if it is, the type of hedgetransaction.  The ineffective portion of the hedge, if any, is immediatelyrecognized in earnings.

**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-basedawards to employees of the Company.  At present, it is Parkway's intention togrant restricted shares and/or deferred incentive share units instead of stockoptions.  Restricted shares and deferred incentive share units are valued basedon 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 vestingperiod, which is four to seven years from grant date for restricted sharessubject to service conditions and four years from grant date for deferredincentive share units.  Compensation expense for restricted shares subject toperformance conditions is recognized over the expected vesting period when theCompany determines that it is probable that the performance condition will beachieved.

       Restricted shares anddeferred incentive share units are forfeited if an employee leaves the Companybefore the vesting date.  Shares and/or units that are forfeited becomeavailable for future grant under the 2003 Plan.

** **

**Income Taxes**

       Effective January 1, 1997, the Company elected to be taxed as a realestate investment trust ("REIT") under the Internal Revenue Code of 1986, asamended.  The Company completed its reorganization into the UPREIT ("UmbrellaPartnership REIT") structure effective January 1, 1998. The Company anticipatesthat the UPREIT structure will enable it to pursue additional investmentopportunities by having the ability to offer tax-advantaged operatingpartnership units to property owners in exchange for properties.

       A corporate REIT is alegal entity that holds real estate assets, and through distributions tostockholders, is exempt from the payment of Federal income taxes at thecorporate level.  To maintain qualification as a REIT, the Company is subjectto a number of organizational and operational requirements, including arequirement that it currently distribute to stockholders at least 90% of itsannual taxable income.

** **

** **

** **

Page 56 of 87
****
**Net Income (Loss) Per CommonShare**

** **

       Basic earnings per share("EPS") are computed by dividing income (loss) available to common stockholdersby the weighted-average number of common shares outstanding for the year.  Inarriving at net income (loss) available to common stockholders, preferred stockdividends are deducted.  Diluted EPS reflects the potential dilution that couldoccur if share equivalents such as employee stock options, restricted sharesand deferred incentive share units were exercised or converted into commonstock that then shared in the earnings of Parkway.

      The computation of diluted EPS is as follows:

**Year Ended  December 31**

**2009**

**2008**

**2007**

(in thousands,  except per share data)

Numerator:

    Basic  and diluted net income (loss)

        available  to common stockholders

 $

(16,403)

 $

4,474 

 $

14,892  

Denominator:

    Basic  weighted average shares

19,304 

15,023 

15,482  

    Effect  of employee stock options, deferred

        incentive  share units and restricted shares

- 

- 

166

    Diluted  weighted average shares

19,304 

15,023 

15,648  

Diluted  net income (loss) per share attributable to 

      Parkway Properties, Inc.

 $

(0.85)

 $

0.30 

 $

0.95  

       The computation of dilutedEPS for 2008 and 2009 did not include the effect of employee stock options,deferred incentive share units and restricted shares because their inclusionwould have been anti-dilutive.  

**Reclassifications**

       Certain reclassificationshave been made in the 2008 and 2007 consolidated financial statements toconform to the 2009 classifications with no impact on previously reported netincome or equity.  In 2008, the Company reported a total impairment loss of$2.5 million in other income and expenses.  In 2009, the Company reclassifiedthis impairment loss to expenses (included in operating income).

**Subsequent Events**

       The Company has evaluatedall subsequent events through the issuance date of the consolidated financialstatements.

**Recent Accounting Pronouncements**

       Effective January 1, 2009,the Company adopted Financial Accounting Standards Board ("FASB") AccountingStandard Codification ("ASC") 805, "Business Combinations" ("FASB ASC 805"),which expands the scope of previous accounting guidance regarding businesscombinations to include all transactions and other events in which one entityobtains control over one or more other businesses.  FASB ASC 805 appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or afterDecember 15, 2008, requires that the acquisition related transaction costs beexpensed as incurred and also includes new disclosure requirements.  The impactof FASB ASC 805 on the Company's overall financial position and results ofoperations will be determined by the markets in which the Company invests.  AtDecember 31, 2009 the application of FASB ASC 805 had not impacted theCompany's overall financial position or results of operations.

Page 57 of 87
****
       Effective January 1, 2009,the Company adopted FASB ASC 810-10-65, "Noncontrolling Interests inConsolidated Financial Statements" ("FASB ASC 810-10-65"). FASB ASC 810-10-65establishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  FASB ASC810-10-65 also amends certain consolidation procedures for consistency with therequirements of FASB ASC 805.  FASB ASC 810-10-65 is effective for fiscal yearsand interim periods within those fiscal years, beginning on or after December15, 2008.  Upon adoption of FASB ASC 810-10-65 the Company reclassified itsnoncontolling interest in real estate partnerships from noncontrolling interestto equity in the accompanying December 31, 2009 and December 31, 2008consolidated balance sheets.  In addition, the Company has separately disclosedthe amount of consolidated net loss attributable to the Company and its noncontrollinginterest in consolidated real estate partnerships in the accompanying December31, 2009, 2008 and 2007 consolidated statements of income.

       Effective January 1, 2009,the company adopted FASB ASC 815-10-65, "Disclosures about DerivativeInstruments and Hedging Activities" ("FASB ASC 815-10-65").  FASB ASC 815-10-65requires all entities with derivative instruments to disclose informationregarding how and why the entity uses derivative instruments and how derivativeinstruments and related hedged items affect the entity's financial position,financial performance, and cash flows.  The Statement is effective prospectivelyfor periods beginning on or after November 15, 2008.  The application of FASBASC 815-10-65 did not have a material impact on the Company's overall financialposition and results of operations upon adoption.

       Effective January 1, 2009,the Company adopted FASB ASC 323-10, "Equity Method Investment AccountingConsiderations ("FASB ASC 323-10"), which applies to all investments accountedfor under the equity method and clarifies the accounting for certaintransactions and impairment considerations involving those investments.  FASBASC 323-10 is effective for financial statements issued for fiscal yearsbeginning on or after December 15, 2008, and interim periods within thosefiscal years.  The application of FASB ASC 323-10 did not have a material impacton the Company's overall financial position and results of operations upon itsadoption.

       During the second quarterof 2009, the Company adopted FASB ASC 825-10-65, "Interim Disclosures aboutFair Value of Financial Instruments ("FASB ASC 825-10-65"), which requires fairvalue disclosures for financial instruments that are not reflected in theconsolidated balance sheets at fair value.  Prior to the issuance of FASB ASC825-10-65, the fair values of those assets and liabilities were disclosed annually. Upon adoption of FASB ASC 825-10-65, the Company is now required to disclosethis information on a quarterly basis, providing quantitative and qualitativeinformation about fair value estimates for all financial instruments notmeasured in the consolidated balance sheets at fair value.

       During the second quarterof 2009, the Company adopted FASB ASC 855, "Subsequent Events" ("FASB ASC855"), which establishes the accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued.  FASB ASC 855 requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate, that is, whether that date represents the date the financial statementswere issued or were available to be issued.  The adoption of FASB ASC 855 didnot have a material impact on the Company's overall financial position andresults of operations.

       In June 2009, the FASBissued Statement of Financial Accounting Standards ("SFAS") No. 166,"Accounting for Transfers of Financial Assets, an Amendment of FASB StatementNo. 140" ("SFAS No. 166") which amends SFAS No. 140, "Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities," by:eliminating the concept of a qualifying special-purpose entity ("QSPE");clarifying and amending the derecognition criteria for a transfer to be accountedfor as a sale; amending and clarifying the unit of account eligible for saleaccounting; and requiring that a transferor initially measure at fair value andrecognize all assets obtained (for example beneficial interests) andliabilities incurred as a result of a transfer of an entire financial asset orgroup of financial assets accounted for as a sale.  Additionally, on and afterthe effective date, existing QSPEs (as defined under previous accountingstandards) must be evaluated for consolidation by reporting entities inaccordance with the applicable consolidation guidance.  SFAS No. 166 requiresenhanced disclosures about, among other things, a transferor's continuinginvolvement with transfers of financial assets accounted for as sales, therisks inherent in the transferred financial assets that have been retained, andthe nature of financial effect of restrictions on the transferor's assets that continueto be reported in the consolidated balance sheets.  SFAS No. 166 will beeffective as of the beginning of interim and annual reporting periods thatbegin after November 15, 2009.  The application of SFAS No. 166 in 2010 did nothave a material impact on the Company's overall financial position and resultsof operations upon adoption.  In December 2009, the FASB issued Accounting StandardsUpdate ("ASU") 2009-16, "Topic 860 - Transfers and Servicing", which formallycodifies SFAS No. 166.

Page 58 of 87
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        In June 2009, the FASBissued SFAS No. 167, "Amendments of FASB Interpretation No. 46(R)"  ("SFAS No.167").  SFAS No. 167 amends FIN 46(R), "Consolidation of Variable InterestEntities," and charges the consolidation guidance applicable to a variableinterest entity ("VIE").  It also amends the guidance governing the determinationof whether an enterprise is the primary beneficiary of a VIE, and is,therefore, required to consolidate an entity, by requiring a qualitativeanalysis rather than a quantitative analysis.  The qualitative analysis willinclude, among other things, consideration of who has the power to direct theactivities of the entity that most significantly impact the entity's economicperformance and who has the obligation to absorb losses or the right to receivebenefits of the VIE that could potentially be significant to the VIE.  Thestandard also requires continuous reassessments of whether an enterprise is theprimary beneficiary of a VIE.  Previously, FIN 46(R) required reconsiderationof whether an enterprise was the primary beneficiary of a VIE only whenspecific events had occurred.  QSPEs, which were previously exempt from theapplication of this standard, will be subject to the provisions of thisstandard when it becomes effective.  SFAS No. 167 also requires enhanceddisclosures about an enterprise's involvement with a VIE, SFAS No. 167 will beeffective as of the beginning of interim and annual reporting periods that beginafter November 15, 2009.  The application of SFAS No. 167 in 2010 did not havea material impact on the Company's overall financial position and results ofoperations upon adoption as the Company will continue to account for itsunconsolidated joint ventures under the equity method of accounting.  InDecember 2009, the FASB issued ASU 2009-17, "Topic 810 - Consolidations", whichformally codifies SFAS No. 167.

       In June 2009, the FASBissued ASU 2009-01, "Topic 105-Generally Accepted Accounting Principles -amendments based on Statement of Financial Accounting Standards No. 168 - TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles" ("ASU 2009-01"), which will become the source ofauthoritative United States GAAP recognized by the FASB to be applied by nongovernmentalentities.  ASU 2009-01 brings together in one place all authoritative GAAPpreviously in levels A through D of the GAAP hierarchy that has been issued bya standard setter, for example, FASB Statements, FASB Interpretations, EITFAbstracts, FASB Staff Positions and AICPA Accounting and Auditing Guides.  ASU2009-01 is effective as of the beginning of interim and annual reportingperiods that begin after September 15, 2009.  At December 31, 2009, the Companyhas adopted ASU 2009-01.

**Unaudited StatisticalInformation**

       The square feet andpercentage leased statistics presented in Notes B, D and G are unaudited.

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

** **

       Included in investment inoffice and parking properties at December 31, 2009 are 59 office and parkingproperties located in nine states with an aggregate of 12.4 million square feet of leasable space.  This excludesoffice properties in unconsolidated joint ventures, which are outlined in Note D- Investment in Unconsolidated Joint Ventures. 

*Summary of Dispositions*

* *

       During 2009, the Companysold two non-strategic office properties described below.  The Company receivedgross proceeds of $16.5 million and recorded a net gain on sale of $470,000.  ParkwayRealty Services, LLC, a subsidiary of the Company was retained to providemanagement and leasing services for the properties.  Therefore, all revenue andexpenses for these properties are included as a component of continuingoperations.  

•        On February 20, 2009, the Company sold Lynnwood Plaza, an 82,000square foot office building in Hampton Roads, Virginia, to an unrelated thirdparty for a gross sales price of $7.8 million.  Parkway recorded a loss on thesale of $70,000 in 2009.

•        On June 1, 2009, the Company sold 1717 St. James Place, a 110,000square foot office building in Houston, Texas to an unrelated third party for agross sales price of $8.7 million.  Parkway recorded a gain on the sale of$540,000 in 2009.

*Hurricane Ike Impact*

       The Company has 13wholly-owned properties and one jointly-owned property totaling 2.3 millionsquare feet in Houston, Texas, which sustained some property damage fromHurricane Ike on September 13, 2008.  The total damages for the 14 propertieswas $6.3 million.  The Company's insurance deductible related to these claims wasapproximately $2.2 million. Approximately $365,000 represents repair and cleanup costs with the remainder representing capitalized costs.  The Companyrecorded a net gain of $823,000 related to an involuntary conversion of thedamaged assets in 2009.

* *

* *

* *

Page 59 of 87
****
* *

*Contractual Obligations andMinimum Rental Receipts*

       Obligations for tenantimprovement allowances and lease inducement costs for leases in place andcommitments for building improvements and development costs at December 31, 2009are as follows (in thousands):

2010

 $

18,297

2011

5,639

2012

481

2013

481

2014

1,861

Thereafter

2,991

Total

 $

29,750

       Minimum future operatinglease payments for various equipment leased at the office properties is asfollows for operating leases in place at December 31, 2009 (in thousands):

2010

 $

499 

2011

288 

2012

9 

Total

 $

796 

       The following is aschedule by year of future approximate minimum rental receipts undernoncancelable leases for office buildings owned at December 31, 2009 (inthousands):

2010

 $

192,694 

2011

169,291 

2012

137,704 

2013

116,352 

2014

89,763 

Thereafter

245,368 

 $

951,172 

       The following is aschedule by year of future approximate minimum ground lease payments atDecember 31, 2009 (in thousands):

2010

 $

187 

2011

187 

2012

187 

2013

187 

2014

187 

Thereafter

14,648 

 $

15,583 

       At December 31, 2009, OhioPERS Fund I owned Desert Ridge Corporate Center in Phoenix, Arizona that issubject to a ground lease.  The lease has a remaining term of approximately 82years with an expiration date of July 2092.  Payments through July 13, 2013 arebased on a rental constant applied to a per acre value.  The rental constant isestablished for the duration of the ground lease and adjusts each five years. Starting July 2013, the rental payment is the higher of the amount previouslydescribed, or 0.35% of the valuation of the improvements of the previous year.

**Note C - Mortgage Loan**

* *

       The Company owns the Bparticipation piece (the "B piece") of a first mortgage secured by an 844,000square foot office building in Dallas, Texas known as 2100 Ross for $6.9million.  The B piece was originated by Wachovia Bank, N.A., a Wells FargoCompany, and has a face value of $10.0 million and a stated coupon rate of6.065%.  Upon maturity in May 2012, the Company will receive a principalpayment of $10.0 million, which produces a yield to maturity of 15.6%.  Thebalance of the mortgage loan was $8.1 million at December 31, 2009.

** **

Page 60 of 87
****
**Note D - Investment inUnconsolidated Joint Ventures**

** **

       In addition to the 59office and parking properties included in the consolidated financialstatements, the Company is also invested in four unconsolidated joint ventureswith unrelated investors.  These investments are accounted for using the equitymethod of accounting, as Parkway does not control any of these joint ventures. Accordingly, the assets and liabilities of the joint ventures are not includedon Parkway's consolidated balance sheets at December 31, 2009 and 2008. Information relating to these unconsolidated joint ventures is detailed below(in thousands):

** **

** **

** **

**Parkway's**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership%**

**Feet**

**Leased**

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

 32

 7.6%

Parkway Joint Venture, LLC  ("Jackson JV")

UBS/River Oaks

Jackson, MS

20.0%

167

92.9%

RubiconPark I, LLC ("Rubicon  JV")

Lakewood/Falls Pointe

Atlanta, GA

20.0%

551

85.1%

Carmel Crossing

Charlotte, NC

   

RubiconPark II, LLC  ("Maitland JV")

Maitland 200

Orlando, FL

20.0%

205

100%

955

87.1%

       Cash distributions fromunconsolidated joint ventures are made to each partner based on theirpercentage of ownership in each entity.  Cash distributions made to partners injoint ventures where the percentage of debt assumed is disproportionate to theownership percentage in the venture is distributed based on each partner's shareof cash available for distribution before debt service, based on theirownership percentage, less the partner's share of debt service based on thepercentage of debt assumed by each partner.

       Parkway providesmanagement, construction and leasing service for all of the unconsolidatedjoint ventures except for the Wink-Parkway Partnership, and receivesmarket-based fees for these services.  The Company recognizes its share of feesearned from unconsolidated joint ventures in management company income.

       At December 31, 2009 and 2008, the Company'sinvestment in unconsolidated joint ventures was $2.5 million, or 0.2% of totalassets and $11.1 million, or 0.7% of total assets, respectively.

       During the years endedDecember 31, 2009, 2008 and 2007, the Company recorded equity in earnings fromunconsolidated joint ventures of $445,000, $894,000 and $1.0 million,respectively.  Additionally, during the fourth quarter of 2009, Parkwayrecognized a $8.8 million non-cash other-than-temporary impairment loss on itsinvestment in the Rubicon JV and Maitland JV. The impairment is principally dueto two customers totaling over 120,000 square feet in the office propertiesthat are unable to meet their rent obligations due to financial difficulty.  Ofthe total square footage, 90,000 square feet has been vacated and another30,000 square feet is expected to be vacated during 2010.  Additionally, onJanuary 20, 2010, the Company's joint venture partner, Rubicon U.S. REIT, filedfor Chapter 11 bankruptcy protection, rendering our partner unable to supporttheir continuing share of the joint venture obligations.

In most casesthe Company's share of debt related to its unconsolidated joint ventures is thesame as its ownership percentage in the venture.  However, in the case ofthe Rubicon Joint Venture and Maitland Joint Venture, the Company's share ofdebt is disproportionate to its ownership percentage.  Thedisproportionate debt structure was created to meet the Company's partner'sfinancing criteria.  In the Rubicon Joint Venture, Parkway owns a 20%interest in the venture but assumed 13.85% of the debt.  In the MaitlandJoint Venture, the Company owns a 20% interest in the venture and assumed noneof the debt. The terms related to Parkway's share of unconsolidated jointventure mortgage debt are summarized below for December 31, 2009 and 2008 (inthousands):

                                                                   

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

** **

** **

** **

** **

**Parkway's**

**Monthly**

**Loan**

**Loan**

** **

**Type of**

** **

** **

**Share**

**Debt**

**Balance**

**Balance**

**Description**

**Debt Service**

**Interest Rate**

**Maturity**

**of Debt**

**Service**

**12/31/09**

**12/31/08**

Wink Partnership

Amortizing

8.625%

07/01/09

50.00%

 $

- 

 $

- 

 $

34 

Maitland JV (1)

Amortizing

4.390%

06/01/11

0.00%

- 

- 

- 

Rubicon JV (1)

Amortizing

4.865%

01/01/12

13.85%

- 

- 

7,200 

Jackson JV

Amortizing

5.840%

07/01/15

20.00%

15 

2,507 

2,520 

 $

15 

2,507 

 $

9,754 

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

5.840%

5.130%

    

Page 61 of 87
****
        Parkway's share of thescheduled principal payments on mortgage debt for the unconsolidated jointventures for each of the next five years and thereafter through maturity atDecember 31, 2009 are as follows (in thousands):

	 

** **

** **

** **

** **

	 

**Schedule  of Mortgage Maturities by Year:**

**Wink**

**Partnership**

**Maitland JV (1)**

**Rubicon**

**JV (1)**

**Jackson**

**JV**

**Total**

	2010

 $

- 

 $

- 

 $

- 

 $

32 

 $

32 

	2011

- 

- 

- 

35 

35 

	2012

- 

- 

- 

37 

37 

	2013

- 

- 

- 

39 

39 

	2014

- 

- 

- 

41 

41 

	Thereafter

- 

- 

- 

2,323 

2,323 

	 

 $

- 

 $

- 

 $

- 

 $

2,507 

 $

2,507 

 (1)  During the fourthquarter of 2009, Parkway recognized a $8.8 million non-cash other-than-temporaryimpairment loss on its investment in the Rubicon JV and Maitland JV. Therefore, the Company has excluded its share of debt in the Rubicon JV of $7.1million at December 31, 2009 in the schedule above.  The impairment isprincipally due to two customers totaling over 120,000 square feet in theoffice properties that are unable to meet their rent obligations due to financialdifficulty.  Of the total square footage, 90,000 square feet has been vacatedand another 30,000 square feet is expected to be vacated during 2010.  Additionally,on January 20, 2010, the Company's joint venture partner, Rubicon U.S. REIT,filed for Chapter 11 bankruptcy protection, rendering our partner unable tosupport their continuing share of the joint venture obligations.

**Note E - Land Available forSale**

** **

       At December 31, 2009 and2008, Parkway's investment in land available for sale consisted of 12 acres ofland in New Orleans, Louisiana with a book value of $750,000.  

** **

**Note F - Notes Payable**

** **

**Notes Payable to Banks**

       At December 31, 2009, theCompany had a total of $100 million outstanding under the following lines of credit(collectively, the "Company's line of credit") (in thousands):

 
** **

** **

** **

**Outstanding**

**Line of Credit**

**Lender**

**Interest Rate**

**Maturity**

**Balance**

$15.0 Million Unsecured Line of  Credit (1)

PNC Bank

	      -

	04/27/11

 $

	-  

$236.0 Million Unsecured Line  of Credit (2)

Wells Fargo

	4.8%

	04/27/11

	40,000 

$60.0 Million Unsecured Term  Loan (3)

Wells Fargo

	4.8%

	04/27/11

	60,000 

	4.8%

 $

	100,000 

(1)     Theinterest rate on the $15.0 million unsecured line of credit with PNC Bank iscurrently LIBOR plus 200 basis points.  The Company pays fees on the unusedportion of the line of 25 basis points.

 

(2)     The $236.0million unsecured line of credit is led by Wells Fargo and syndicated to eightother banks.  The interest rate on the line of credit interest rate iscurrently LIBOR plus 115 basis points or the Prime interest rate plus 25 basispoints.  At December 31, 2009, all amounts outstanding under this line ofcredit are fixed by an interest rate swap agreement.  The Company pays anannual administration fee of $35,000 and fees on the unused portion of therevolver ranging between 12.5 and 20 basis points based upon overall Companyleverage, with the rate set at 20 basis points at December 31, 2009.  

(3)     The $60.0million unsecured term loan is led by Wells Fargo and syndicated to eight otherbanks.  The interest rate on the term loan is fixed by an interest rate swapagreement.  Excluding the interest rate swaps, the interest rate on the termloan is LIBOR plus 115 basis points.

       TheCompany's $311.0 million unsecured credit facility requires compliance with anumber of restrictive financial covenants, including tangible net worth, fixedcharge coverage ratio, unencumbered interest coverage ratio, total debt tototal asset ratio, secured debt to total asset value ratio, secured recoursedebt to total asset value ratio and unencumbered pool restrictions.  At December31, 2009 the Company was in compliance with these financial covenants.

Page 62 of 87
****
       To protect against thepotential for rapidly rising interest rates, the Company entered into interestrate swap agreements in 2008.  The Company designated the swaps as cash flow hedgesof the variable interest rates on the Company's borrowings under the WellsFargo unsecured revolving credit facility and a portion of the debt secured bythe Pinnacle at Jackson Place.  These swaps are considered to be fully effectiveand changes in the fair value of the swaps are recognized in accumulated othercomprehensive income (loss).  The Company's interest rate hedgecontracts at December 31, 2009 and 2008 are summarized as follows (inthousands):

** **

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

** **

**Market  Value**

** **

**Balance**

** **

** **

** **

** **

**Liability**

**Type of**

**Sheet**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Location**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2009**

**2008**

Swap

Accounts Payable  and Other Liabilities

$100,000

03/31/11

1  - Month LIBOR

4.785%

 $

(3,585)

 $

(5,262)

Swap

Accounts Payable  and Other Liabilities

$23,500

12/01/14

1  - Month LIBOR

5.800%

(1,307)

(2,466)

 $

(4,892)

 $

(7,728)

 
Page 63 of 87
****
**Mortgage Notes Payable**

       A summary of mortgagenotes payable at December 31, 2009 and 2008 is as follows (in thousands):

** **

** **

** **

** **

** **

**Net Book**

** **

** **

** **

** **

** **

** **

** **

**Value**

**Note Balance**

** **

**Variable Rate**

**Fixed**

**Monthly**

**Maturity**

**of**

**December 31**

**Office Property**

**12/31/09**

**Rate**

**Payment**

**Date**

**Collateral**

**2009**

**2008**

**Wholly-Owned**

John Hancock Facility (3 properties)  (1)

-

4.830%

 $

- 

03/01/09

 $

- 

 $

- 

 $

21,866 

John Hancock Facility (3 properties)

-

5.270%

112 

05/01/10

20,976 

17,346 

17,779 

Capital City Plaza (2)

1.890%

-

95 

05/01/10

54,888 

60,000 

60,000 

One Jackson Place

-

7.850%

152 

10/10/10

15,135 

8,526 

9,635 

Squaw Peak 

-

4.920%

261 

12/15/10

39,500 

32,423 

33,917 

Forum I

-

5.250%

91 

06/01/11

17,094 

10,734 

11,246 

Wells Fargo

-

4.390%

53 

06/01/11

11,473 

8,869 

9,112 

233 N. Michigan

-

4.940%

763 

07/11/11

145,049 

91,459 

95,978 

Bank of America Plaza

-

7.100%

146 

05/10/12

31,267 

17,466 

17,957 

One Park 10 Plaza

-

7.100%

64 

06/01/12

5,839 

8,714 

8,850 

Teachers Insurance and

-

    Annuity Association (5  properties)

-

6.210%

565 

01/01/16

99,251 

79,626 

81,403 

John Hancock Facility (2 properties) (3)

-

7.580%

130 

06/01/16

20,714 

18,418 

- 

111 East Wacker, LLC

-

6.290%

804 

07/11/16

164,926 

148,500 

148,500 

Morgan Keegan Tower

-

7.620%

163 

10/01/19

27,622 

13,540 

14,432 

Pinnacle at Jackson Place - Subordinate NMTC Loan (4)

-

3.000%

15 

12/27/47

- 

6,000 

6,000 

Pinnacle at Jackson Place - Sr NMTC Loan (4)

5.800%

-

114 

12/27/47

44,214 

23,501 

23,501 

**    Total Wholly-Owned**

3,528 

697,948 

545,122 

560,176 

** **

** **

** **

** **

** **

** **

** **

**Consolidated Joint Ventures**

** **

** **

** **

** **

** **

** **

Moore Building Associates LP

-

7.895%

124 

06/01/10

18,152 

10,858 

11,456 

Parkway Properties Office Fund, LP:

Renaissance Center

-

5.469%

97 

06/01/12

32,707 

16,280 

16,545 

Maitland 100

-

4.920%

36 

10/07/12

12,798 

8.820 

8,820 

555 Winderley Place

-

4.920%

34 

10/07/12

11,284 

8,340 

8,340 

1401 Enclave

-

5.760%

134 

07/10/15

39,638 

28,000 

28,000 

100 Ashford Center/Peachtree Ridge

-

5.606%

151 

01/08/16

43,858 

30,679 

31,044 

Gateway Center

-

5.920%

163 

02/10/16

49,572 

33,000 

33,000 

Desert Ridge Corporate Center

-

5.770%

237 

02/10/16

60,682 

49,200 

49,200 

Citicorp Plaza

-

5.530%

277 

03/10/16

83,300 

59,401 

60,000 

BellSouth Building/Centurion Centre

-

5.900%

71 

06/10/16

19,575 

14,400 

14,400 

Chatham Centre

-

5.560%

79 

01/10/17

23,839 

17,100 

17,100 

Overlook II

-

5.610%

152 

03/01/17

37,986 

31,500 

31,500 

**    Total  Consolidated Joint Ventures**

1,555 

433,391 

307,578 

309,405 

** **

**    Total  Secured Debt**

 $

5,083 

 $

1,131,339 

 $

852,700 

 $

869,581 

(1)     On February 27, 2009, the Company paid off the mortgagenote payable secured by the 1717 St. James, 5300 Memorial and Town and Countryoffice buildings in Houston, Texas, with a total principal balance of $21.8million with advances under the Company's line of credit.  The mortgage had aninterest rate of 4.83% and was scheduled to mature March 1, 2009.

(2)     On February 8, 2010, the Company completed a $35.0million non-recourse, fixed-rate first mortgage loan related to the refinanceof a $60.0 million recourse mortgage that was scheduled to mature in May 2010. The loan bears interest at 7.25% and is secured by the Company's Capital CityPlaza building in Atlanta, Georgia.  The loan will mature in March 2017 andincludes the option to be prepaid at the end of five years at a cost of 1% of theoutstanding loan balance.

(3)     On May 4, 2009, the Company placed a $18.5 millionseven-year non-recourse first mortgage with a fixed interest rate of 7.6% perannum, and the proceeds were used to reduce borrowings under the line ofcredit.  The mortgage is secured by two office buildings in Houston, Texas.

(4)     The New Markets Tax Credit loans have a stated maturityof December 27, 2047, but contain an early repayment option whereby the lendermay call the loans in December 2014.  In the event the lender exercises thisoption, the outstanding principal balance of the loans will be reduced by $3.0million.  Additionally, the Company has entered into an interest rate swapagreement with US Bank for a $23.5 million notional amount that fixes the30-day LIBOR interest rate at 4.05%, which equates to a total current interestrate of 5.8%, for the period January 1, 2009, through December 1, 2014.  Theswap agreement serves as a hedge of the variable interest rates on theborrowings under the Pinnacle at Jackson Place Senior New Market Tax Creditsmortgage loan.  The weighted average interest rate for the total New MarketsTax Credits loans is 5.2%.

Page 64 of 87
****
      Theaggregate annual maturities of mortgage notes payable at December 31, 2009 areas follows (in thousands):

**Total**

**Recurring**

**Mortgage**

**Balloon**

**Principal**

**Maturities**

**Payments**

**Amortization**

2010

 $

139,968   

 $

126,411   

$

13,557 

2011

112,942   

102,694   

10,248 

2012

65,242 

56,738   

8,504 

2013

8,651 

- 

8,651 

2014

9,211 

- 

9,211 

Thereafter

516,686 

486,127 

30,559 

 $

852,700 

 $

771,970   

 $

80,730 

**Note G - DiscontinuedOperations**

      All current and prior period income from the following office propertydispositions are included in discontinued operations for the years endedDecember 31, 2009, 2008 and 2007 (in thousands).

** **

** **

**Square**

**Date of**

**Net Sales**

**Net Book Value**

**Gain**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**of Real Estate**

**on Sale**

Town Point Center

 Norfolk, Virginia 

131

07/15/08

$  12,180

$  10,621

$    1,559 

Wachovia Plaza

 St. Petersburg, Florida 

186

08/18/08

25,492

16,154

9,338 

Capitol Center

 Columbia, South Carolina 

460

09/05/08

46,792

35,101

11,691 

2008 Dispositions

777

$  84,464

$  61,876

$  22,588 

       The amount of revenue andexpense for these three office properties reported in discontinued operationsfor the years ended December 31, 2009, 2008 and 2007 is as follows (inthousands):

** **

** **

**Year Ended  December 31**

** **

**2009**

** **

**2008**

** **

**2007**

Revenues

Revenue from office and parking properties

 $

- 

 $

9,049 

 $

13,440 

** **

- 

9,049 

13,440 

Expenses

Office and parking properties:

        Operating expense

- 

4,803 

6,218 

        Interest expense

- 

3,168 

1,553 

        Depreciation and amortization

- 

1,873 

3,196 

** **

- 

9,844 

10,967 

Income (loss) from discontinued operations

- 

(795)

2,473 

Gain on sale of real estate from discontinued operations

- 

22,588      

- 

Total discontinued operations

 $

- 

 $

21,793 

 $

2,473 

** **

**Note H - Income Taxes**

       The Company elected to betaxed as a REIT under the Internal Revenue Code, commencing with its taxableyear ended December 31, 1997.  To qualify as a REIT, the Company must meet anumber of organizational and operational requirements, including a requirementthat it currently distribute at least 90% of its adjusted taxable income to itsstockholders.  It is management's current intention to adhere to theserequirements and maintain the Company's REIT status, and the Company was incompliance with all REIT requirements at December 31, 2009.  As a REIT, theCompany generally will not be subject to corporate level federal income tax ontaxable income it distributes currently to its stockholders.  If the Companyfails to qualify as a REIT in any taxable year, it will be subject to federalincome taxes at regular corporate rates (including any applicable alternativeminimum tax) and may not be able to qualify as a REIT for four subsequenttaxable years.  Even if the Company qualifies for taxation as a REIT, theCompany may be subject to certain state and local taxes on its income andproperty, and to federal income and excise taxes on its undistributed taxableincome. In addition, taxable income from non-REIT activities managed throughtaxable REIT subsidiaries is subject to federal, state and local income taxes.

Page 65 of 87
****
       In January 1998, theCompany completed its reorganization into an UPREIT structure under whichsubstantially all of the Company's real estate assets are owned by an operatingpartnership, Parkway Properties LP.  Presently, substantially all interests inthe Operating Partnership are owned by the Company and a wholly-ownedsubsidiary.

       At December 31, 2009, theCompany had net operating loss ("NOL") carryforwards for federalincome tax purposes of $3.8 million which expire at various dates beginning in2010 through 2018. The utilization of these NOLs can cause the Company to incura small alternative minimum tax liability.

       The Company's incomediffers for income tax and financial reporting purposes principallybecause real estate owned has a different basis for tax and financialreporting purposes, producing different gains upon disposition anddifferent amounts of annual depreciation.  The following reconciles GAAP netincome to taxable income for the years ending December 31, 2009, 2008 and 2007(in thousands):

**2009**

**2008**

**2007**

**Estimate**

**Actual**

**Actual**

GAAP net income (loss) from  REIT operations (1) 

 $

(11,603)

 $

9,274 

 $

19,692 

GAAP to tax adjustments:

     Depreciation and  amortization

19,069 

19,485 

19,489 

     Gains and losses from  capital transactions

5,487 

342 

(2,104)

     Share-based compensation expense

2,581 

2,276 

1,521 

     Stock options exercised

- 

(88)

(2,096)

     Deferred compensation  distributions

(446)

(1,107)

(712)

     Amortization of mortgage  loan discount

(607)

(519)

(103)

     Other differences

215 

(140)

(40)

Taxable income before  adjustments

14,696 

29,523 

35,647 

Less:  NOL carryforward

- 

- 

- 

Adjusted taxable income subject  to 90% dividend requirement

 $

14,696 

 $

29,523 

 $

35,647 

(1)  GAAP net incomefrom REIT operations is net of amounts attributable to noncontrolling interest.

       The following reconcilescash dividends paid with the dividends paid deduction for the years endingDecember 31, 2009, 2008 and 2007 (in thousands):

**2009**

**2008**

**2007**

**Estimate**

**Actual**

**Actual**

Cash dividends paid

 $

30,475 

 $

38,977 

 $

44,849 

Less:  Dividends on deferred  compensation plan shares

(94)

(194)

(276)

Less:  Dividends absorbed by  current earnings and profits

(4,098)

(4,163)

(5,970)

Less:  Return of capital

(11,587)

(5,097)

(2,956)

Dividends paid deduction

 $

14,696 

 $

29,523 

 $

35,647 

       The followingcharacterizes distributions paid per common share for the years ending December31, 2009, 2008 and 2007:

**2009**

**2008**

**2007**

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$0.71

54.7%

$0.844

37.1%

$1.38

53.1%

Post May 5, 2003 capital gain

0.00

0.0%

0.197

8.7%

0.38

14.6%

Unrecaptured Section 1250 gain

0.00

0.0%

0.893

39.2%

0.65

25.0%

Return of capital

0.59

45.3%

0.341

15.0%

0.19

7.3%

$1.30

100.0%

$2.275

100.0%

$2.60

100.0%

** **

** **

** **

** **

** **

** **

Page 66 of 87
****
**Note I - Stock Option andLong-Term Compensation Plans**

       Effective January 1, 2003,the stockholders of the Company approved the 2003 Plan that authorized thegrant of up to 200,000 equity-based awards to employees of the Company.  Atpresent, it is Parkway's intention to grant restricted shares and/or deferredincentive share units instead of stock options to employees of the Company,although the 2003 Plan authorizes various forms of incentive awards, includingoptions.  On each July 1 beginning with July, 2004, the number of sharesavailable under the plan will increase automatically by 0.25% of the number ofshares of common stock outstanding on that date (increase of 54,053 and 38,225 sharesin 2009 and 2008, respectively), provided that the number of shares availablefor grant under this plan and the 2001 Directors' Plan shall not exceed 11.5%of the shares outstanding (less the restricted shares issued and outstanding)plus shares issuable on the conversion of outstanding convertible debt andequity securities or the exercise of warrants or other rights to purchasecommon shares.  The 2003 Plan has a ten-year term.

       During the year endedDecember 31, 2009, a total of 30,416 restricted shares vested and were issuedto officers of the Company.  These shares vested upon the achievement of thegoals of the GEAR UP Plan.  The compensation expense relating to the vesting ofthe GEAR UP performance-based restricted shares of $1.4 million was recognizedin 2008.

      During the year ended December 31, 2009, the Board of Directors approvedthe grant of 120,500 restricted shares to officers of the Company.  Excludingforfeitures, there are 119,750 restricted shares outstanding that are  valuedat $1.9 million.  The shares vest at a rate of 29,938 shares per year over thefour years following the grant date and were subject to certain performance-basedgoals that were established and achieved in 2009.  Due to the achievement ofthe 2009 performance goals, 29,938 restricted shares vested and were issued toofficers of the Company on February 10, 2010.

       On January 4, 2010, 91,000restricted shares vested and were issued to officers of the Company.  Theseshares were granted to the officers of the Company in January 2003 and vestedseven years from the grant date.

       At December 31, 2009, atotal of 308,975 shares of restricted stock have been granted to officers ofthe Company.  The shares are valued at $9.2 million, which equates to an averageprice per share of $29.94, with 99,000 shares vesting seven years from thegrant date and 90,225 shares vesting four years from grant date.  The remaining119,750 shares will vest subject to certain performance-based goals achieved in2009 at a rate of 29,938 per year over the four years following the grantdate.  The value, including estimated forfeitures, of restricted shares thatvest based on service conditions will be amortized to compensation expenseratably over the vesting period for each grant of stock.  At December 31, 2009,a total of 18,055 deferred incentive share units have been granted to employeesof the Company.  The deferred incentive share units are valued at $615,000,which equates to an average price per share of $34.08, and the units vest four yearsfrom grant date.  Total compensation expense related to the restricted stockand deferred incentive units of $2.6 million, $2.3 million and $1.5 million wasrecognized in 2009, 2008 and 2007, respectively.  Total compensation expenserelated to nonvested  awards not yet recognized was $2.2 million at December31, 2009.  The weighted average period over which this expense is expected tobe recognized is approximately 1.8 years.  

      

Page 67 of 87
****
 A summary of the Company'srestricted stock and deferred incentive share unit activity under the 2003Equity Incentive Plan is as follows:

** **

**Weighted**

**Deferred**

**Weighted**

**Restricted**

**Average**

**Incentive**

**Average**

**Shares**

**Price**

**Share Units**

**Price**

**Outstanding at December  31, 2006**

188,500 

 $

38.60 

18,806 

 $

46.33 

Granted

35,874 

52.36 

9,800 

45.09 

Vested

- 

- 

(2,285)

44.84 

Forfeited

(3,375)

46.14 

(4,486)

46.15 

**Outstanding at December  31, 2007**

220,999 

40.72 

21,835 

45.96 

Granted

38,017 

32.39 

6,385 

15.69 

Vested

- 

- 

(1,815)

46.72 

Forfeited

(38,375)

39.54 

(3,600)

44.73 

**Outstanding at December  31, 2008**

220,641 

39.49 

22,805 

37.62 

Granted

120,500 

15.77 

1,500 

12.69 

Vested

(30,416)

43.08 

(2,615)

44.61 

Forfeited

(1,750)

30.85 

(3,635)

39.93 

**Outstanding at December  31, 2009**

308,975 

 $

29.94 

18,055 

 $

34.08 

 
       A summary of the Company'sstock option activity and related information is as follows:

** **

**1994  Stock**

**1991  Directors**

**2001  Directors**

** **

**Option  Plan**

**Stock  Option Plan**

**Stock  Option Plan**

** **

** **

**Weighted**

** **

**Weighted**

** **

**Weighted**

** **

** **

**Average**

** **

**Average**

** **

**Average**

** **

**Shares**

**Price**

**Shares**

**Price**

**Shares**

**Price**

**Outstanding at December  31, 2006**

191,471 

 $

30.99 

33,000 

 $

30.90 

39,300 

 $

37.28 

Exercised                              

(69,856)

30.31 

(19,500)

30.76 

(9,000)

35.26 

**Outstanding at December  31, 2007**

121,615 

31.38 

13,500 

 31.10 

30,300 

37.88 

Exercised

(25,436)

31.15 

- 

- 

- 

- 

Forfeited

(500)

33.65 

(7,500)

29.94 

(8,800)

35.24 

**Outstanding at December  31, 2008**

95,679 

 31.43 

6,000 

 32.56 

21,500 

38.96 

Forfeited

(9,399)

31.10 

(6,000)

32.56 

(9,000)

35.26 

**Outstanding at December  31, 2009**

86,280 

 $

31.46 

- 

 $

- 

12,500 

 $

41.63 

**Vested and Exercisable at**

**     December 31, 2009**

86,280 

 $

31.46 

- 

 $

- 

12,500 

 $

41.63 

       There were no stock option exercises for the yearended December 31, 2009. The total intrinsic value of stock options exercisedfor the years ended December 31, 2008, and 2007 was $22,000 and $1.7 million,respectively.

       Following is a summary of the status of optionsoutstanding at December 31, 2009:

**Outstanding and  Exercisable Options**

** **

**Weighted**

** **

** **

** **

**Average**

**Weighted**

**Aggregate**

** **

** **

**Remaining**

**Average**

**Intrinsic**

** **

** **

**Contractual**

**Exercise**

**Value**

**Exercise****Price Range**

**Number**

**Life**

**Price**

**(in thousands)**

**1994 Stock Option Plan**

$26.18 - $31.42

53,485

0.4  years

 $

29.98 

 $

- 

$31.43 - $36.65

32,795

1.6  years

33.88 

- 

** **

86,280

0.9  years

 $

31.46 

 $

- 

**2001 Directors  Stock Option Plan**

$36.53 - $41.89

6,000

3.4  years

 $

38.95 

 $

- 

$41.90 - $47.12

6,500

3.8  years

44.10 

- 

12,500

3.6  years

 $

41.63 

 $

- 

** **

**Defined Contribution Plan**

** **

       Parkway maintains a 401(k)plan for its employees.  The Company makes matching contributions of 50% of theemployee's contribution (limited to 10% of compensation as defined by the plan)and may also make annual discretionary contributions.  The Company's total expensefor this plan was $443,000, $952,000 and $1.1 million for the years endingDecember 31, 2009, 2008 and 2007, respectively.

** **

**Note J - Commitments andContingencies**

** **

**Legal Matters**

       Parkway is subject to variouslegal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance.  The Company believes thatthe final outcome of such matters will not have a material effect on ourfinancial statements.

** **

Page 68 of 87
******Commitments**
       Parkway has an investmentin Moore Building Associates LP ("MBALP") established for the purpose of owninga commercial office building (the Toyota Center in Memphis, Tennessee). Parkway has a 75% ownership interest in MBALP and acts as the managing generalpartner of this partnership.  In acting as the general partner, the Company iscommitted to providing additional funding to meet partnership operatingdeficits up to an aggregate of $1.0 million.

** **

**Note K - Other Matters**

** **

**Supplemental Profit and LossInformation**

       Included in operatingexpenses are taxes, principally property taxes, of $40.6 million, $39.7 millionand $32.8 million for the years ended December 31, 2009, 2008 and 2007,respectively.

** **

**Supplemental Cash FlowInformation and Schedule of Non-Cash Investing and Financing Activity**

** **

** **

**Year Ended  December 31**

** **

**2009**

**2008**

**2007**

(In thousands)

**Supplemental cash flow  information:**

         Interest  paid, net of amount capitalized

 $

53,728 

 $

60,919 

 $

52,779 

**Supplemental schedule of  non-cash investing    **

**         and  financing activity:**

         Restricted  shares and deferred incentive

               share  units issued (forfeited)

3,030 

(201)

1,954 

         Shares  issued in lieu of Directors' fees

58 

140 

251 

         Capital  lease obligation

- 

- 

4,040 

** **

**Rents Receivable and OtherAssets**

** **

**December 31**

** **

**2009**

**2008**

** **

(In thousands)

Rents receivable 

 $

4,990 

 $

3,858 

Allowance for doubtful accounts

(2,951)

(1,122)

Straight line rent receivable

31,556 

25,277 

Other receivables

8,713 

13,629 

Lease costs (net of accumulated  amortization of

     $38,323 and $32,746,  respectively)

42,518 

37,680 

Loan costs (net of accumulated  amortization of

     $5,966 and $4,607,  respectively)

4,212 

5,690 

Escrow and other deposits

23,166 

29,597 

Prepaid items

2,034 

1,479 

Other assets

2,199 

2,424 

 $

116,437 

 $

118,512 

** **

**Intangible Assets**

       The following tablereflects the portion of the purchase price of office properties allocated tointangible assets, as discussed in "Note A".  The portion of purchase priceallocated to below market lease value and the related accumulated amortizationis reflected in the Schedule of Accounts Payable and Other Liabilities withinthis note.

** **

**December 31**

** **

**2009**

**2008**

** **

(In thousands)

Lease in place value

 $

82,684 

 $

89,364 

    Accumulated  amortization

(35,510)

(28,172)

Above market lease value

30,982 

32,983 

    Accumulated  amortization

(16,422)

(14,715)

 $

61,734 

 $

79,460 

** **

** **

Page 69 of 87
****
**Accounts Payable and OtherLiabilities**

** **

** **

**December 31**

** **

**2009**

**2008**

** **

(In thousands)

Office property payables:

     Accrued  expenses and accounts payable

 $

13,222 

 $

15,175 

     Accrued  property taxes

30,636 

29,447 

     Prepaid rents

10,807 

11,226 

     Security  deposits

4,677 

4,492 

     Below  market lease value

23,116 

24,093 

     Accumulated  amortization - below market

          lease  value

(14,585)

(11,906)

Capital lease obligations

3,850 

3,834 

Corporate payables

7,462 

11,506 

Deferred compensation plan  liability

3,623 

4,067 

Dividends payable

1,200 

1,200 

Accrued payroll

1,489 

2,395 

Interest payable

3,117 

3,365 

 $

88,614 

 $

98,894 

** **

**Common Stock**

** **

       On April 28, 2009, theCompany sold 6.25 million shares of common stock to UBS Investment Bank at agross offering price of $13.71 per share and a net price of $13.56 per share. The Company used the net proceeds of $84.5 million to reduce outstandingborrowings under the Company's line of credit and for general corporate purposes.

       On December 23, 2009, theCompany entered into agreements under which it may issue up to $75.0 million incommon stock in an at the market ("ATM") offering with Wells Fargo Securities,Bank of America/Merrill Lynch, J.P. Morgan and Morgan Keegan and Company, Inc. Any proceeds from the ATM offering will be utilized for general corporatepurposes, including acquisitions.  There were no shares issued under the ATMoffering at December 31, 2009.

** **

**Preferred Stock**

** **

       In June 2003, the Companysold 2.4 million shares of 8.0% Series D Cumulative Redeemable Preferred Stockwith net proceeds to the Company of approximately $58.0 million.  The Series DPreferred Stock has a $25 liquidation value per share and will be redeemable atthe option of the Company on or after June 27, 2008.  The preferred stock hasno stated maturity, sinking fund or mandatory redemption and is not convertibleinto any other securities of the Company.  

       The Company declareddividends of $2.00 per share for the Series D Preferred stock for each of thethree years 2009, 2008 and 2007.

       The Company's shares ofSeries D preferred stock are listed on the New York Stock Exchange and tradeunder the symbol "PKY PrD".  

** **

**Note L - Fair Values ofFinancial Instruments**

** **

        ASC820 defines fair value as the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. ASC 820 also provides guidance for usingfair value to measure financial assets and liabilities. The Codificationrequires disclosure of the level within the fair value hierarchy in which thefair value measurements fall, including measurements using quoted prices inactive markets for identical assets or liabilities (Level 1), quoted prices forsimilar instruments in active markets or quoted prices for identical or similarinstruments in markets that are not active (Level 2), and significant valuationassumptions that are not readily observable in the market (Level 3).

** **

** **

** **

Page 70 of 87
****
**Cashand cash equivalents**

       The carrying amounts forcash and cash equivalents approximated fair value at December 31, 2009 and2008.

** **

**Mortgage loan receivable**

** **

       The Company owns the Bparticipation piece (the "B piece") of a first mortgage secured by an 844,000square foot office building in Dallas, Texas known as 2100 Ross, and thecarrying amount of the mortgage loan was approximately $8.1 million at December31, 2009.  The carrying amount for the mortgage loan approximated fair value atDecember 31, 2009.

**Mortgage notes payable**

       The fair value of themortgage notes payable are estimated using discounted cash flow analysis, basedon the Company's current incremental borrowing rates for similartypes of borrowing arrangements.  The aggregate fair value of the mortgagenotes payable at December 31, 2009 was $795.9 million as compared to itscarrying amount of $852.7 million.  The aggregate fair value of the mortgagenotes payable at December 31, 2008 was $778.9 million as compared to its carryingamount of $869.6 million.

**Notes payable to banks**
The fair value of the Company's notes payable to banks is estimated bydiscounting expected cash flows at current market rates. The aggregate fairvalue of the notes payable to banks at December 31, 2009 was $95.8 millionas compared to its carrying amount of $100.0 million. The aggregate fair valueof the notes payable to banks at December 31, 2008 was $168.9 million ascompared to its carrying amount of $185.9 million.
** **

**Interestrate swap agreements**

** **

      The fair value of the interest rate swaps is determined by estimating theexpected cash flows over the life of the swap using the mid-market rate andprice environment as of the last trading day of the reporting period.  Thisinformation is considered a Level 2 input as defined by ASC 820.  The aggregatefair value liability of the interest rate swaps at December 31, 2009 and 2008was $4.9 million and $7.7 million, respectively.

** **

**Note M - Segment Information**

       Parkway's primary businessis the ownership and operation of office properties. The Company accounts foreach office property or groups of related office properties as an individualoperating segment.  Parkway has aggregated its individual operating segmentsinto a single reporting segment due to the fact that the individual operatingsegments have similar operating and economic characteristics.   

       The Company believes thatthe individual operating segments exhibit similar economic characteristics suchas being leased by the square foot, sharing the same primary operating expensesand ancillary revenue opportunities and being cyclical in the economicperformance based on current supply and demand conditions.  The individualoperating segments are also similar in that revenues are derived from theleasing of office space to customers and each office property is managed andoperated consistently in accordance with Parkway's standard operatingprocedures.  The range and type of customer uses of our properties is similar throughoutour portfolio regardless of location or class of building and the needs andpriorities of our customers do not vary from building to building.  Therefore,Parkway's management responsibilities do not vary from location to locationbased on the size of the building, geographic location or class.

Page 71 of 87
****
       The management of theCompany evaluates the performance of the reportable office segment based on fundsfrom operations available to common shareholders ("FFO").  Management believesthat FFO is an appropriate measure of performance for equity REITs and computesthis measure in accordance with the National Association of Real EstateInvestment Trusts ("NAREIT") definition of FFO.  Funds from operations isdefined by NAREIT as net income (computed in accordance with GAAP), excludinggains or losses from sales of property and extraordinary items under GAAP, plusdepreciation and amortization, and after adjustments to derive the Company'spro rata share of FFO of consolidated and unconsolidated joint ventures. Further, the Company does not adjust FFO to eliminate the effects ofnon-recurring charges.  The Company believes that FFO is a meaningfulsupplemental measure of its operating performance because historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate assets diminishes predictably over time, asreflected through depreciation and amortization expenses.  However, since realestate values have historically risen or fallen with market and otherconditions, many industry investors and analysts have considered presentationof operating results for real estate companies that use historical costaccounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of cashavailable to fund cash needs.  Funds from operations should not be consideredan alternative to net income as an indicator of the Company's operatingperformance or as an alternative to cash flow as a measure of liquidity.

       The following is areconciliation of FFO and net income available to common stockholders foroffice properties and total consolidated entities for the years ending December31, 2009, 2008 and 2007.  Amounts presented as "Unallocated and Other"represent primarily income and expense associated with providing managementservices, corporate general and administration expense, interest expense onunsecured lines of credit and preferred dividends.

** **

**At or for the year ended December 31, 2009**

** Office**

** Unallocated **

** Properties**

** and Other**

** Consolidated**

 (in thousands) 

Property operating revenues  (a)

 $

266,345 

 $

- 

 $

266,345 

Property operating expenses  (b)

(128,084)

- 

(128,084)

Property net operating  income from continuing operations

138,261 

- 

138,261 

Management company income

- 

1,870 

1,870 

Other income

- 

1,609 

1,609 

Interest expense (c) 

(49,123)

(6,570)

(55,693)

Management company expenses

- 

(2,299)

(2,299)

General and administrative  expenses

- 

(6,108)

(6,108)

Equity in earnings of  unconsolidated joint ventures

445 

-

445 

Adjustment for depreciation  and amortization - unconsolidated joint ventures

848 

-

848 

Adjustment for  noncontrolling interest - real estate partnerships

(9,576)

-

(9,576)

Other-than-temporary  impairment loss on investment in 

   unconsolidated joint  ventures

(8,817)

-

(8,817)

Gain on involuntary  conversion

823 

-

823 

Dividends on preferred stock

- 

(4,800)

(4,800)

Funds from operations  available to common stockholders (d)

72,861 

(16,298)

56,563 

Depreciation and  amortization

(92,726)

- 

(92,726)

Depreciation and  amortization - unconsolidated joint ventures

(848)

- 

(848)

Depreciation and  amortization - noncontrolling interest - real estate partnerships

20,138 

- 

20,138 

Gain on sale of real estate 

470 

- 

470 

Net loss available to common  stockholders

 $

(105)

 $

(16,298)

 $

(16,403)

Total assets

 $

1,597,316 

 $

14,830 

 $

1,612,146 

Office and parking  properties

 $

1,401,890 

 $

- 

 $

1,401,890 

Investment in unconsolidated  joint ventures

 $

2,512 

 $

- 

 $

2,512 

Capital expenditures (e)

 $

44,768 

$

- 

 $

44,768 

(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.  It does not include interest expense on the unsecured lines  of credit, which is included in "Unallocated and Other".

(d)   For  2009, FFO includes $8.8 million of other-than-temporary losses on investments  in unconsolidated joint ventures offset by lease termination fee income of  $1.2 million and a non-cash gain on involuntary conversion of $823,000.

(e)    Capital expenditures  include building improvements, tenant improvements and deferred leasing  costs.

** **

Page 72 of 87
****
** **

** At or for the year ended December 31, 2008**

** Office**

** Unallocated **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands) 

Property operating revenues  (a)

 $

263,475 

 $

- 

 $

263,475 

Property operating expenses  (b)

(126,169)

- 

(126,169)

Property net operating  income from continuing operations

137,306 

- 

137,306 

Management company income

- 

1,936 

1,936 

Interest and other income

- 

1,332 

1,332 

Interest expense (c) 

(48,534)

(10,892)

(59,426)

Management company expenses

- 

(1,947)

(1,947)

General and administrative  expenses

- 

(9,725)

(9,725)

Equity in earnings of  unconsolidated joint ventures

894 

- 

894 

Adjustment for depreciation  and amortization - unconsolidated joint ventures

750 

- 

750 

Adjustment for depreciation  and amortization - discontinued operations

1,873 

- 

1,873 

Adjustment for  noncontrolling interest - real estate partnerships

(9,275)

- 

(9,275)

Loss from discontinued  operations

(795)

- 

 (795)

Impairment loss on real  estate

(2,542)

- 

(2,542)

Dividends on preferred stock

- 

(4,800)

(4,800)

Funds from operations available  to common stockholders (d)

79,677 

(24,096)

55,581

 

 

 

Depreciation and  amortization

(91,716)

- 

(91,716)

Depreciation and  amortization - unconsolidated joint ventures

(750)

- 

(750)

Depreciation and  amortization - discontinued operations

(1,873)

- 

(1,873)

Depreciation and  amortization - noncontrolling interest - real estate partnerships

20,644 

- 

20,644 

Gain on sale of real estate  from discontinued operations

22,588 

- 

22,588 

Net income (loss) available  to common stockholders

 $

28,570 

 $

(24,096)

 $

4,474 

 

 

 

Total assets

 $

1,671,459 

 $

16,396 

 $

1,687,855 

 

 

 

Office and parking  properties

 $

1,455,239 

 $

- 

 $

1,455,239 

 

 

 

Investment in unconsolidated  joint ventures

 $

11,057 

 $

- 

 $

11,057 

 

 

 

Capital expenditures (e)

 $

40,654 

 $

- 

 $

40,654 

(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 other property operating expenses.

(c)   Interest  expense for office properties represents interest expense on property secured  mortgage debt and interest on subsidiary redeemable preferred membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in "Unallocated and Other".

(d)   For  2008, FFO includes lease termination fee income of $3.7 million, offset by a  reduction for a non-cash purchase accounting adjustment in the amount of  $657,000, a non-cash impairment loss on real estate of $2.5 million,  restricted stock expense of $1.4 million recognized upon the Company's  achievement of the GEAR UP Plan, a loss on the extinguishment of debt of $2.2  million, included as a component of discontinued operations in the  accompanying consolidated statement of income, and Hurricane Ike expenses in  the amount of $377,000.

(e)   Capital  expenditures include building improvements, tenant improvements and deferred  leasing costs.

 
Page 73 of 87
****
** At or for the year ended December 31, 2007**

** Office**

** Unallocated **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands) 

Property operating revenues  (a)

 $

233,304 

 $

- 

 $

233,304   

Property operating expenses  (b)

(107,990)

- 

(107,990)

Property net operating  income from continuing operations

125,314 

- 

125,314 

Management company income

- 

1,605 

1,605  

Interest and other income

-  

526 

526 

Interest expense (c) 

(41,564)

(10,982)

(52,546)

Management company expenses

-  

(1,188)

(1,188)

General and administrative  expenses

-  

(6,602)

(6,602)

Equity in earnings of  unconsolidated joint ventures

1,008  

- 

1,008  

Adjustment for depreciation  and amortization - unconsolidated joint ventures

732  

- 

732  

Adjustment for depreciation  and amortization - discontinued operations

3,196  

- 

3,196  

Adjustment for  noncontrolling interest - real estate partnerships

(7,240)

- 

(7,240)

Income from discontinued  operations

2,473  

- 

2,473  

Gain on non depreciable  assets

47 

- 

47 

Dividends on preferred stock

-  

(4,800)

(4,800)

Funds from operations  available to common stockholders (d)

83,966  

(21,441)

62,525  

 

 

 

Depreciation and  amortization

(74,379)

- 

(74,379)

Depreciation and  amortization - unconsolidated joint ventures

(732)

- 

(732)

Depreciation and  amortization - discontinued operations

(3,196)

- 

(3,196)

Depreciation and  amortization - noncontrolling interest - real estate partnerships

10,414  

- 

10,414  

Gain on sale of real estate

20,260  

- 

20,260  

Net income (loss) available  to common stockholders

 $

36,333 

$

(21,441)

 $

14,892  

 

 

 

Total assets

 $

1,520,326  

 $

15,468 

 $

1,535,794 

 

 

 

Office and parking  properties

 $

1,314,602  

 $

- 

$

1,314,602 

 

 

 

Investment in unconsolidated  joint ventures

 $

11,236  

 $

- 

 $

11,236 

 

 

 

Capital expenditures (e)

 $

46,957  

 $

- 

 $

46,957 

(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 other property operating expenses.

(c)   Interest  expense for office properties represents interest expense on property secured  mortgage debt and interest on subsidiary redeemable preferred membership  interests.  It does not include interest expense on the unsecured lines of  credit, which is included in "Unallocated and Other".

(d)   For  2007, FFO includes lease termination fee income of $1.4 million, offset by a  reduction for a $370,000 loss on extinguishment of debt, included as  component of interest expense in the accompanying consolidated statement of  income.

(e)   Capital  expenditures include building improvements, tenant improvements and deferred  leasing costs.

Page 74 of 87
****
**Note N - Selected QuarterlyFinancial Data (Unaudited):**

       Summarized quarterly financial data for the years endedDecember 31, 2009 and 2008 are as follows (in thousands, except per sharedata):

2009

First

Second

Third

Fourth

Revenues (other than gains)

 $

68,176 

 $

67,247

 $

66,814 

 $

65,978 

Expenses

(59,573)

(55,269)

(57,361)

(57,014)

Operating income

8,603 

11,978 

9,453 

8,964 

Interest and other income

302 

309 

672 

326 

Interest expense

(14,051)

(14,050)

(13,835)

(13,757)

Equity in earnings of  unconsolidated joint ventures

200 

227 

48 

(30)

Gain (loss) on sale of joint  venture interests and real estate

(70)

540 

- 

- 

Gain on involuntary  conversion

463 

279 

- 

81 

Other-than-temporary  impairment loss on investment in 

     unconsolidated joint  ventures

- 

- 

- 

(8,817)

Net loss

(4,553)

(717)

(3,662)

(13,233)

Noncontrolling interest -  real estate partnerships

3,764 

1,637 

2,107 

3,054 

Net income (loss)  attributable to Parkway Properties, Inc.

(789)

920 

(1,555)

(10,179)

Dividends on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Net loss available to common  stockholders

 $

(1,989)

 $

(280)

 $

(2,755)

 $

(11,379)

Net loss per common share:

Basic

 $

(0.13)

 $

(0.01)

 $

(0.13)

 $

(0.53)

Diluted

 $

(0.13)

 $

(0.01)

 $

(0.13)

 $

(0.53)

Dividends per common share

 $

0.325 

 $

0.325 

 $

0.325 

 $

0.325 

Weighted average shares  outstanding:

Basic

15,043 

19,457 

21,313 

21,315 

Diluted

15,043 

19,457 

21,313 

21,315 

2008

First

Second

Third

Fourth

Revenues (other than gains)

 $

63,038 

 $

66,156 

 $

70,306 

 $

65,911 

Expenses

(54,148)

(56,478)

(59,537)

(61,936)

Operating income

8,890 

9,678 

10,769 

3,975 

Interest and other income

368 

306 

346 

312 

Interest expense

(15,139)

(14,972)

(14,843)

(14,472)

Equity in earnings of  unconsolidated joint ventures

258 

289 

255 

92 

Loss from continuing  operations

(5,623)

(4,699)

(3,473)

(10,093)

Income (loss) from  discontinued operations

541 

700 

(2,001)

(35)

Gain on sale of real estate  from discontinued operations

- 

- 

22,588 

- 

Net income (loss) 

(5,082)

(3,999)

17,114 

(10,128)

Noncontrolling interest -  real estate partnerships

2,487 

2,063 

2,584 

4,235 

Net income (loss) for  Parkway Properties, Inc.

(2,595)

(1,936)

19,698 

(5,893)

Dividends on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Net income (loss) available  to common stockholders

 $

(3,795)

 $

(3,136)

 $

18,498 

 $

(7,093)

Net income (loss) per common  share:

Basic

 $

(0.25)

 $

(0.21)

 $

1.23 

 $

(0.47)

Diluted

 $

(0.25)

 $

(0.21)

 $

1.23 

 $

(0.47)

Dividends per common share

 $

0.65 

 $

0.65 

 $

0.65 

 $

0.325 

Weighted average shares  outstanding:

Basic

15,003 

15,024 

15,031 

15,033 

Diluted

15,003 

15,024 

15,031 

15,033 

Page 75 of 87
****
**SCHEDULE II -VALUATIONS AND QUALIFYING ACCOUNTS**

(In thousands)

** **

**Balance**

**Additions**

**Deductions**

**Balance**

** **

**Beginning**

**Charged to**

**Written Off as**

**End**

**Description**

**of Year**

**Cost &  Expenses**

**Uncollectible**

**of Year**

Allowance for Doubtful Accounts:

Year Ended:

December 31, 2009

 $

1,122 

 $

2,957 

 $

(1,128)

 $

2,951 

December 31, 2008

1,004 

1,871 

(1,753)

1,122 

December 31, 2007

356 

1,024 

(376)

1,004 

Page 76 of 87
****
** **

**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION**

**DECEMBER 31, 2009**

(In thousands)

** **

** **

** **

** **

**Initial Cost to the Company**

**Subsequent**

** **

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

**Arizona**

Desert  Ridge Corporate Center 

$                   49,200

$              -

$                   60,672

$              4,794

$             65,466

Squaw  Peak Corp Center 

32,423

5,800

35,144

5,813

46,757

Mesa  Corporate Center

-

3,353

15,243

898

19,494

**Florida**

Hillsboro  Center V

10,185

1,325

12,249

3,174

16,748

Hillsboro  Center I-IV

6,944

1,129

7,734

1,947

10,810

Bellsouth  Building

8,027

3,477

7,836

1,678

12,991

Centurion  Centre

6,373

2,951

6,022

1,112

10,085

Stein  Mart Building

-

1,653

16,636

4,276

22,565

Riverplace  South

-

2,316

5,412

2,379

10,107

Maitland  100

8,820

2,667

10,176

2,320

15,163

555  Winderley Place

8,340

2,100

9,470

1,431

13,001

Gateway  Center

33,000

14,281

35,059

3,019

52,359

Citrus  Center

-

4,000

26,712

6,813

37,525

**Georgia**

100  Ashford Center

15,302

6,258

15,615

2,682

24,555

Peachtree  Ridge

15,377

2,203

19,551

2,099

23,853

Overlook  II

31,500

5,393

33,878

2,506

41,777

Waterstone

5,905

859

7,207

2,367

10,433

Meridian

-

994

9,547

2,786

13,327

Peachtree  Dunwoody Pavilion

29,165

9,373

24,579

6,109

40,061

Capital  City Plaza

60,000

3,625

57,218

3,693

64,536

**Illinois**

Chatham  Centre

17,100

3,358

20,086

4,161

27,605

Citicorp  Plaza

59,401

10,010

66,452

15,148

91,610

233  North Michigan

91,459

18,181

133,554

26,323

178,058

111  East Wacker

148,500

23,286

123,804

47,704

194,794

**Mississippi**

One  Jackson Place

8,526

1,799

19,730

10,675

32,204

City  Centre

-

1,707

19,935

10,628

32,270

111  Capitol Building

-

915

10,830

6,780

18,525

The  Pinnacle at Jackson Place

29,501

1,275

36,990

6,998

45,263

Parking  at Jackson Place

-

-

4,129

3,537

7,666

**South  Carolina**

Tower  at 1301 Gervais

-

316

20,350

7,052

27,718

Atrium  at Stoneridge

-

506

5,041

1,895

7,442

**Tennessee**

Renaissance  Center

16,280

4,255

29,747

2,127

36,129

Forum  II & III

-

2,634

13,886

3,512

20,032

Morgan  Keegan Tower

13,540

-

36,549

4,258

40,807

Falls  Building

-

-

7,628

2,968

10,596

Toyota  Center

10,858

190

22,716

88

22,994

Toyota  Garage

-

727

7,939

221

8,887

Forum  I

10,734

4,737

12,484

2,440

19,661

Bank  of America Plaza

17,466

1,464

28,712

10,353

40,529

**Texas**

1401  Enclave

28,000

5,160

36,038

1,916

43,114

One  Park Ten Plaza

8,714

606

6,149

3,907

10,662

400  North Belt

-

419

9,988

3,866

14,273

Woodbranch

-

303

3,805

2,944

7,052

Sugar  Grove

6,459

364

7,515

3,726

11,605

Honeywell

-

856

15,235

2,697

18,788

Schlumberger

-

1,013

11,102

4,105

16,220

One  Commerce Green

19,444

489

37,307

5,284

43,080

Comerica  Bank Building

13,888

1,921

21,222

3,117

26,260

550  Greens Parkway

4,982

1,006

8,061

293

9,360

5300  Memorial Building

11,748

682

11,744

2,559

14,985

Town  and Country

6,670

436

8,205

3,034

11,675

Wells  Fargo

8,869

2,600

8,264

2,832

13,696

Page 77 of 87
****
**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2009**

(In thousands)

** **

** **

** **

** **

**Initial Cost to the Company**

**Subsequent**

** **

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

**Virginia**

Greenbrier  Towers I & II

-

1,157

14,857

5,478

21,492

Glen  Forest

-

537

8,503

2,494

11,534

Moorefield  II

-

469

4,752

991

6,212

Moorefield  III

-

490

5,135

1,432

7,057

Boulders  Center

-

1,265

11,825

3,469

16,559

Winchester  Building

-

956

10,852

3,228

15,036

Moorefield  I

-

260

3,698

1,019

4,977

** **

852,700

170,106

1,280,779

287,155

1,738,040

**Real  Estate Development:**

**Mississippi**

Land  Held for Development

-

609

-

-

609

**Total  Real Estate Owned**

$                852,700

$        170,715

$             1,280,779

$         287,155

$        1,738,649

** **

 Page 78 of 87
********
**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2009**

(In thousands)

** **

** **

** **

**Gross Amount at Which**

** **

**Carried at Close of Period**

**Bldg. and**

** **

**Accum.**

**Net Book Value**

**Year**

**Year**

**Depreciable**

**Description**

**Land**

**Imprv.**

**Total**

**Depr.**

**of Real Estate**

**Acquired**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

**Arizona**

Desert Ridge Corporate  Center 

$            -

$      65,466

$        65,466

$     4,652

$                60,814

2008

2006/2007

(3)

Squaw Peak Corp Center 

5,800

40,957

46,757

7,256

39,501

2004

1999/2000

(3)

Mesa Corporate Center

3,353

16,141

19,494

2,162

17,332

2005

2000

(3)

**Florida**

Hillsboro Center V

1,325

15,423

16,748

5,281

11,467

1998

1985

(3)

Hillsboro Center I-IV

1,129

9,681

10,810

3,203

7,607

1998

1985

(3)

Bellsouth Building

3,477

9,514

12,991

2,034

10,957

2006

1996

(3)

Centurion Centre

2,951

7,134

10,085

1,378

8,707

2006

1993

(3)

Stein Mart Building

1,653

20,912

22,565

4,126

18,439

2005

1985

(3)

Riverplace South

2,316

7,791

10,107

1,915

8,192

2005

1981

(3)

Maitland 100

2,667

12,496

15,163

2,302

12,861

2005

1981

(3)

555 Winderley Place

2,100

10,901

13,001

1,667

11,334

2005

1985

(3)

Gateway Center

14,281

38,078

52,359

2,677

49,682

2008

1989

(3)

Citrus Center

4,000

33,525

37,525

7,363

30,162

2003

1971

(3)

**Georgia**

100 Ashford Center

6,258

18,297

24,555

2,152

22,403

2006

1987

(3)

Peachtree Ridge

2,203

21,650

23,853

2,244

21,609

2006

1986

(3)

Overlook II

5,393

36,384

41,777

3,668

38,109

2006

1985

(3)

Waterstone

859

9,574

10,433

4,052

6,381

1995

1987

(3)

Meridian

994

12,333

13,327

4,518

8,809

1997

1985

(3)

Peachtree Dunwoody Pavilion

9,373

30,688

40,061

7,497

32,564

2003

1976/1980

(3)

Capital City Plaza

3,625

60,911

64,536

9,645

54,891

2004

1989

(3)

**Illinois**

Chatham Centre

3,358

24,247

27,605

3,668

23,937

2006

1989

(3)

Citicorp Plaza

10,010

81,600

91,610

8,257

83,353

2008

(2)1980/1982/2006

(3)

233 North Michigan

18,181

159,877

178,058

33,007

145,051

2005

1972

(3)

111 East Wacker

23,286

171,508

194,794

29,865

164,929

2006

1970

(3)

**Mississippi**

One Jackson Place

1,799

30,405

32,204

17,068

15,136

1986

1986

(3)

City Centre

1,707

30,563

32,270

11,699

20,571

1995

(2)1987/2005

(3)

111 Capitol Building

915

17,610

18,525

7,120

11,405

1998

1983

(3)

The Pinnacle at Jackson  Place

1,275

43,988

45,263

1,685

43,578

2008

2008

(3)

Parking at Jackson Place

-

7,666

7,666

484

7,182

2007

1980

(3)

**South Carolina**

Tower at 1301 Gervais

316

27,402

27,718

9,257

18,461

1997

1973

(3)

Atrium at Stoneridge

506

6,936

7,442

1,107

6,335

1998

1986

(3)

**Tennessee**

Renaissance Center

4,255

31,874

36,129

3,330

32,799

2006

2000

(3)

Forum II & III

2,634

17,398

20,032

6,325

13,707

1997

1985

(3)

Morgan Keegan Tower

-

40,807

40,807

13,183

27,624

1997

1985

(3)

Falls Building

-

10,596

10,596

3,357

7,239

1998

(2) 1982/84/90

(3)

Toyota Center

190

22,804

22,994

5,732

17,262

2000

2000

(3)

Toyota Garage

727

8,160

8,887

2,056

6,831

2000

2000

(3)

Forum I

4,737

14,924

19,661

2,566

17,095

2005

1982

(3)

Bank of America Plaza

1,464

39,065

40,529

9,260

31,269

2001

1977

(3)

**Texas**

** **

** **

** **

** **

** **

** **

** **

** **

1401 Enclave

5,160

37,954

43,114

3,376

39,738

2007

1999

(3)

One Park Ten Plaza

606

10,056

10,662

4,821

5,841

1996

1982

(3)

400 North Belt

419

13,854

14,273

3,851

10,422

1996

1982

(3)

Woodbranch

303

6,749

7,052

3,105

3,947

1996

1982

(3)

Sugar Grove

364

11,241

11,605

4,432

7,173

1997

1982

(3)

Honeywell

856

17,932

18,788

5,667

13,121

1997

1983

(3)

Schlumberger

1,013

15,207

16,220

5,959

10,261

1998

1983

(3)

One Commerce Green

489

42,591

43,080

13,587

29,493

1998

1983

(3)

Comerica Bank Building

1,921

24,339

26,260

8,130

18,130

1998

1983

(3)

550 Greens Parkway

1,006

8,354

9,360

1,933

7,427

2001

1999

(3)

5300 Memorial Building

682

14,303

14,985

3,582

11,403

2002

1982

(3)

Town and Country

436

11,239

11,675

2,362

9,313

2002

1982

(3)

Wells Fargo

2,600

11,096

13,696

2,222

11,474

2003

1978

(3)

** **

Page 79 of 87
****
**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2009**

(In thousands)

** **

** **

** **

**Gross Amount at Which**

** **

**Carried at Close of Period**

**Bldg. and**

** **

**Accum.**

**Net Book Value**

**Year**

**Year**

**Depreciable**

**Description**

**Land**

**Imprv.**

**Total**

**Depr.**

**of Real Estate**

**Acquired**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

**Virginia**

Greenbrier Towers I & II

1,157

20,335

21,492

7,001

14,491

1997

1985/87

(3)

Glen Forest

537

10,997

11,534

3,419

8,115

1998

1985

(3)

Moorefield II

469

5,743

6,212

1,789

4,423

1998

1985

(3)

Moorefield III

490

6,567

7,057

2,145

4,912

1998

1985

(3)

Boulders Center

1,265

15,294

16,559

4,412

12,147

1998

1986

(3)

Winchester Building

956

14,080

15,036

4,648

10,388

1998

1987

(3)

Moorefield I

260

4,717

4,977

1,500

3,477

1999

1984

(3)

** **

170,106

1,567,934

1,738,040

336,759

1,401,281

**Real Estate Development:**

**Mississippi**

Land Held for Development

609

-

609

-

609

2007

-

**Total Real Estate Owned**

$ 170,715

1,567,934

$   1,738,649

$ 336,759

$          1,401,890

** **

(1)   The aggregate cost for  federal income tax purposes was approximately $1.9 billion.

(2)   The dates of major  renovations.

(3)   Depreciation of  buildings and improvements is calculated over lives ranging from the life of  the lease to 40 years.

** **

**NOTE TO SCHEDULEIII**

**At December 31,2009, 2008 and 2007**

(In thousands)

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

**December 31**

**2009**

** **

**2008**

** **

**2007**

**Real Estate:**

* *

**Office and Parking Properties:**

* *

Balance at beginning of year

 $

1,738,158 

 $

1,566,393 

 $

1,512,104 

Additions:

Acquisitions and improvements

27,370 

241,851 

91,261 

Office property development

1,498 

29,686 

14,686 

Cost of real estate sold or  disposed

(28,377)

(99,772)

(51,658)

Balance at close of year

 $

1,738,649 

 $

1,738,158 

 $

1,566,393 

**Accumulated Depreciation:**

Balance at beginning of year

 $

282,919 

 $

251,791 

 $

208,891 

Depreciation expense

67,552 

65,618 

56,882 

Depreciation expense -  discontinued operations

- 

1,653 

2,072 

Real estate sold or disposed

(13,712)

(36,143)

(16,054)

Balance at close of year

 $

336,759 

 $

282,919 

 $

251,791 

80 of 87
****
**SCHEDULE IV - MORTGAGE LOAN ON REAL ESTATE**

**DECEMBER 31, 2009**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

**Principal**

** **

** **

** **

** **

** **

** **

** **

**Amount of**

** **

** **

**Final**

**Periodic**

** **

**Face**

**Carrying**

**Loan Subject to**

** **

**Interest**

**Maturity**

**Payment**

**Prior**

**Amount of**

**Amount of**

**Delinquent Principal**

**Description**

**Rate**

**Date**

**Term**

**Liens**

**Mortgage**

**Mortgage (3)**

**and Interest**

2100 Ross Avenue (1)

6.065%

May 2012

Interest only (2)

None

$    10,000

$       8,126

$               -

(1)  This is a B participation piece of first mortgage secured by an 844,000  square foot office building in Dallas, Texas.

(2)  The note requires interest only payments until maturity, at which time a  principal payment of $10.0 million will be due.

(3)  The cost for federal tax purposes is $6.9 million.

**NOTE TO SCHEDULE  IV**

**At December 31,  2009, 2008 and 2007**

(In thousands)

** **

**December 31**

**2009**

** **

**2008**

** **

**2007**

Balance at beginning of year

 $

7,519 

 $

7,001 

 $

- 

Additions:

         New Mortgage Loan

-

-

6,930 

Amortization of discount

607 

518 

71 

Balance at end of year

 $

8,126 

 $

7,519 

 $

7,001 

** **

**Item 9.  *Changesin and Disagreements with Accountants on Accounting and Financial Disclosure*.**

       None. 

** **

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

       The Company's management,with the participation of the Company's Chief Executive Officer and Interim ChiefFinancial Officer, has evaluated the effectiveness of Parkway's disclosurecontrols and procedures at December 31, 2009.  Based on that evaluation, theCompany's Chief Executive Officer and Interim Chief Financial Officer concludedthat Parkway's disclosure controls and procedures were effective at December31, 2009.  There were no changes in the Company's internal control overfinancial reporting during the fourth quarter of 2009 that has materiallyaffected, or is reasonably likely to affect, the Company's internal controlover financial reporting.

       The Company's internalcontrol system was designed to provide reasonable assurance to the Company'smanagement and Board of Directors regarding the preparation and fairpresentation of published financial statements. All internal control systems,no matter how well designed, have inherent limitations.  Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to the financial statement preparation and presentation.

** **

**Management's Report onInternal Control Over Financial Reporting**

       The Company's management,with the participation of the Company's Chief Executive Officer and Interim ChiefFinancial Officer, is responsible for establishing and maintaining adequateinternal control over financial reporting.  The Company's management hasassessed the effectiveness of the Company's internal control over financial reportingat December 31, 2009.  In making this assessment, we used the criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in *Internal Control - Integrated Framework*.  Based on our assessment we haveconcluded that, at December 31, 2009, the Company's internal control overfinancial reporting is effective based on those criteria.  Our independentregistered public accounting firm, KPMG LLP, has provided an audit report onthe Company's internal control over financial reporting at December 31, 2009.

Page 81 of 87
****
**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

**THE BOARD OF DIRECTORS AND SHAREHOLDERS**

**PARKWAY PROPERTIES, INC.:**

We haveaudited Parkway Properties, Inc.'s internal control over financial reporting asof December 31, 2009, based on the criteria established in *Internal Control- Integrated Framework*issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO).  Parkway Properties, Inc.'s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying *Management's Report on InternalControl over Financial Reporting.*Our responsibility is to express anopinion on the Company's internal control over financial**reporting basedon our audit.

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion. 

A company'sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements. 

Because ofits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. 

In ouropinion, Parkway Properties, Inc. maintained, in all material respects,effective internal control over financial reporting as of December 31, 2009,based on the criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission. 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of ParkwayProperties, Inc. and subsidiaries as of December 31, 2009 and 2008, and therelated consolidated statements of income, changes in equity, and cash flowsfor each of the years in the two-year period ended December 31, 2009, and ourreport dated March 5, 2010, expressed an unqualified opinion on thoseconsolidated financial statements.

/s/ KPMG LLP

Jackson, Mississippi 

March 5, 2010

** **

** **

** **

Page 82 of 87
****
**Item 9B.  *OtherInformation*.**

       None.

** **

**PART III**

** **

**Item 10.  *Directors,Executive Officers and Corporate Governance.***

       The information regardingdirectors is incorporated herein by reference from the section entitled"Proposal One: Election of Director  − Nominees" in theCompany's definitive Proxy Statement ("2010 Proxy Statement") to be filedpursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,for the Company's Annual Meeting of Stockholders to be held on May 13, 2010. The 2010 Proxy Statement will be filed within 120 days after the end of theCompany's fiscal year ended December 31, 2009. 

       The information regardingexecutive officers is incorporated herein by reference from the sectionentitled "Proposal 1: Election of Directors − ExecutiveOfficers" in the Company's 2010 Proxy Statement.

       The information regardingcompliance with Section 16(a) of the Securities Exchange Act of 1934 isincorporated herein by reference from the section entitled "Proposal 1:Election of Directors − Section 16(a) Beneficial Ownership Reporting Compliance"in the Company's 2010 Proxy Statement. 

       Information regarding theCompany's code of business conduct and ethics found in the subsection captioned"Available Information" in Item 1 of Part I hereof is alsoincorporated herein by reference into this Item 10.

       The information regardingthe Company's audit committee, its members and the audit committee financialexperts is incorporated by reference herein from the second paragraph in thesection entitled "Proposal 1: Election of Directors − BoardCommittees and Meetings; Director Education" in the Company's 2010 ProxyStatement. 

** **

**Item 11.  *ExecutiveCompensation*.**

       The information includedunder the following captions in the Company's 2010 Proxy Statement is incorporatedherein by reference: "Proposal 1: Election of Directors − CompensationDiscussion and Analysis, − Summary Compensation Table, − 2009 Grantsof Plan-Based Awards, − Outstanding Equity Awards at 2009 Fiscal Year-End, −2009 Option Exercises and Stock Vested, − Potential Payments upon Changein Control, − Compensation of Directors and − CompensationCommittee Interlocks."  The information included under the heading"Proposal 1: Election of Directors − Compensation CommitteeReport" in the Company's 2010 Proxy Statement is incorporated herein byreference; however, this information shall not be deemed to be "solicitingmaterial" or to be "filed" with the SEC or subject to Regulation14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Actof 1934, as amended.

** **

**Item 12.  *SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters.***

        Information regarding security ownership of certain beneficial ownersand management is incorporated herein by reference from the sections entitled"Security Ownership of Certain Beneficial Owners," "Proposal 1:Election of Directors − Security Ownership of Management andDirectors" in the Company's 2010 Proxy Statement.

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**Equity Compensation Plans**

       The following table sets forth the securitiesauthorized for issuance under Parkway's equity compensation plans at December31, 2009:

** **

** **

** **

**(c)**

** **

** **

** **

**Number of  securities**

** **

** **

** **

**remaining  available for**

** **

**(a)**

**(b)**

**future issuance  under**

** **

**Number of  securities to**

**Weighted-average**

**equity  compensation**

** **

**be issued upon  exercise**

**exercise price  of**

**plans (excluding**

** **

**of outstanding  options,**

**outstanding  options,**

**securities  reflected in**

**Plan category**

**warrants and  rights**

**warrants and  rights**

**column (a))**

Equity compensation plans 

approved by security

holders

116,835

$27.69

337,820

Equity compensation plans 

not approved by security

holders

-

-

-

Total

116,835

$27.69

337,820

**Item 13.  *Certain Relationships and RelatedTransactions, and Director Independence.***

       The information regarding transactionswith related persons and director independence is incorporated herein byreference from the sections entitled "Independence" and "Certain Transactionsand Relationships" in the Company's 2010 Proxy Statement.

**Item 14.  *Principal AccountantFees and Services*.**

** **

       The information regardingprincipal auditor fees and services is incorporated herein by reference fromthe section entitled "Proposal 2: Ratification of Independent Accountants" in theCompany's 2010 Proxy Statement.

**PART IV**

** **

**Item 15.  *Exhibitsand Financial Statement Schedules*.**

(a)   1            ConsolidatedFinancial Statements 

                      Report ofIndependent Registered Public Accounting Firm

                      ConsolidatedBalance Sheets at December 31, 2009 and 2008

                      ConsolidatedStatements of Income for the years ended December 31, 2009, 2008 and 2007

                      Consolidated Statementsof Changes in Equity for the years ended December 31, 2009, 2008 and 2007

                      ConsolidatedStatements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

                      Notes toConsolidated Financial Statements

2                 ConsolidatedFinancial Statement Schedules

Schedule II - Valuations and QualifyingAccounts

                      Schedule III - RealEstate and Accumulated Depreciation

                      Note to ScheduleIII

                      Schedule IV -Mortgage Loan on Real Estate

                      Note to ScheduleIV

                  Allother schedules for which provision is made in the applicable accountingregulation of the Securities and Exchange Commission are not required under therelated instructions or are inapplicable and therefore have been omitted.

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

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**                      Exhibit                              **

**        No.        Description**

        3.1        Articles of Incorporation, as amended, of theCompany (incorporated by reference to Exhibit B to the Company's proxy materialfor its July 18, 1996 Annual Meeting).

        3.2        Bylaws, as amended, of the Company (incorporated byreference to Exhibit 3.2 to the Company's Form 10-K for the year ended December31, 2006).

        3.3        Amendment to Bylaws of the Company (incorporated byreference to Exhibit 3.1 to the Company's Form 8-K filed on July 13, 2007).

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

        10         Material Contracts (*Denotes management contract orcompensatory plan or arrangement):

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

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

        10.3*    Parkway Properties, Inc. 2001 Non-employee DirectorsEquity Compensation Plan, as amended (incorporated by reference to Exhibit 10.5to the Company's Form 10-K for the year ended December 31, 2006).

        10.4*    Parkway Properties, Inc. 2003 Equity Incentive Plan,as amended (incorporated by reference to Exhibit 10.6 to the Company's Form10-K for the year ended December 31, 2006).

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

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

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

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

        10.9      Indenture of Mortgage, Security Agreement FinancingStatement Fixture Filing and Assignment of Leases, Rents and Security Depositsdated June 22, 2001 made by Parkway 233 North Michigan, LLC to German AmericanCapital Corporation (incorporated by reference to Exhibit 4(a) to the Company'sForm 8-K filed July 3, 2001).

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

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

        10.12    First Amendment to Limited Partnership Agreement ofParkway Properties Office Fund, L. P. by and among, PKY Fund, LLC, ParkwayProperties LP and PERS Holding Company Limited, L.L.C. (incorporated by reference to Exhibit10.14 to the Company's Form 10-K for the year ended December 31, 2007).

        10.13    Second Amendment to Limited Partnership Agreement ofParkway Properties Office Fund, L. P. by and among, PKY Fund, LLC, ParkwayProperties LP and PERS Holding Company Limited, L.L.C. (incorporated byreference to Exhibit 10.15 to the Company's Form 10-K for the year endedDecember 31, 2007).

        10.14    Limited Partnership Agreement of Parkway PropertiesOffice Fund II, L.P. by and among PPOF II, LLC, Parkway Properties, LP andTeacher Retirement System of Texas (incorporated by reference to Exhibit 10 tothe Company's Form 8-K filed May 19, 2008).

        10.15* Performance measures for the Company's 2010 non-equityincentive awards for executive officers of the Company (a written descriptionthereof is set forth in Item 5.02 of the Company's Form 8-K filed February 16,2010).

        10.16    First Amended and Restated Credit Agreement by andamong Parkway Properties LP, a Delaware limited partnership; Wachovia Bank,National Association, as Agent; PNC Bank, National Association, as SyndicationAgent; Bank of America, N.A., JPMorgan Chase Bank, N.A., and Wells Fargo Bank,National Association, as Co-Documentation Agents and the Lenders dated April27, 2006 (incorporated by reference to Exhibit 10 to the Company's Form 8-Kfiled April 28, 2006).

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        10.17    First Amendment to Credit Agreement among ParkwayProperties, LP as Borrower; 111 Capitol Building Limited Partnership, ParkwayJackson, LLC, Parkway Lamar LLC, Parkway Properties, Inc. and ParkwayProperties General Partners, Inc. collectively as Guarantors; Wachovia Bank,National Association as Agent; Wachovia Capital Markets, LLC as Sole LeadArranger and Sole Book Runner; and the Lenders dated as of December 19, 2006 (incorporated by reference to Exhibit 10 to the Company's Form 8-K filedDecember 20, 2006).

        10.18    Second Amendment to Credit Agreement among ParkwayProperties, LP as Borrower; 111 Capitol Building Limited Partnership, ParkwayJackson, LLC, Parkway Lamar LLC, Parkway Properties, Inc. and ParkwayProperties General Partners, Inc. collectively as Guarantors; Wachovia Bank,National Association as Agent; Wachovia Capital Markets, LLC as Sole LeadArranger and Sole Book Runner; and the Lenders identified therein dated as ofMay 31, 2007 (incorporated by reference to Exhibit 10.3 to the Company's Form8-K filed on May 31, 2007).

        10.19* Parkway Properties, Inc. 2006 Employee Stock PurchasePlan, as amended (incorporated by reference to Exhibit 10.1 to the Company'sForm 8-K filed August 24, 2006).

        10.20    Mortgage, Security Agreement, Assignment of Rents andFixture Filing by 111 East Wacker LLC to Wachovia Bank, National Association(incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed July14, 2006).

        10.21    Promissory Note by 111 East Wacker LLC to WachoviaBank, National Association (incorporated by reference to Exhibit 10.5 to theCompany's Form 8-K filed July 14, 2006).

        10.22* Adoption Agreement for the Executive Nonqualifed ExcessPlan (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K forthe year ended December 31, 2006).

        10.23* Appendix to Adoption Agreement for Parkway Properties,Inc Deferred Compensation Plan, as amended (incorporated by reference toExhibit 10.26 to the Company's Form 10-K for the year ended December 31, 2006).

        10.24* Amendment to Change-in-Control Agreement that theCompany has entered into with the individuals listed in Exhibits 10.1 and 10.2above (incorporated by reference to Exhibit 10.27 to the Company's Form 10-Kfor the year ended December 31, 2006).

        10.25* Form of Change in Control Agreement with each of theCompany's Executive Officers (the Change in Control Agreements are identical insubstance for each of the Executive Officers, except that the Change in ControlAgreements for Steven G. Rogers, William R. Flatt, James M. Ingram provide fora multiple of "2.99" in calculating the severance payment under each officer'sAgreement and the Change in Control Agreement for Mandy M. Pope provides for amultiple of "2.5") (incorporated by reference to Exhibit 10 to the Company'sForm 8-K filed May 8, 2008).

        10.26* Form of Incentive Restricted Share Agreement forPerformance-Based Awards (incorporated by reference to Exhibit 10.1 to theCompany's Form 8-K filed June 29, 2006).

        10.27* Form of Incentive Restricted Share Agreement forTime-Based Awards (incorporated by reference to Exhibit 10.2 to the Company'sForm 8-K filed June 29, 2006).

        10.28* Form of Incentive Restricted Share Agreement for 2009Long-Term Equity Compensation Program (incorporated by reference to Exhibit 10to the Company's Form 8-K filed February 4, 2009).

10.29   Equity Distribution Agreement, dated as of December 23, 2009,among the Company, Parkway Properties LP and Wells Fargo Securities, LLC(incorporated by reference to Exhibit 1.1 to the Company's Form 8-K filedDecember 28, 2009).

        10.30   Equity Distribution Agreement, dated as of December23, 2009, among the Company, Parkway Properties     LP and Merrill Lynch, Pierce,Fenner & Smith Incorporated (incorporated by reference to Exhibit 1.2 tothe Company's Form 8-K filed December 28, 2009).

       10.31     Equity Distribution Agreement, dated as of December23, 2009, among the Company, Parkway Properties LP and J.P. Morgan SecuritiesInc (incorporated by reference to Exhibit 1.3 to the Company's Form 8-K filedDecember 28, 2009).

       10.32     Equity Distribution Agreement, dated as of December23, 2009, among the Company, Parkway Properties LP and Morgan Keegan &Company, Inc (incorporated by reference to Exhibit 1.4 to the Company's Form8-K filed December 28, 2009).

        21         Subsidiaries of the Company (filed herewith).

        23.1      Consent of KPMP LLP (filed herewith).

        23.2      Consent of Ernst & Young LLP (filed herewith).

        23.3      Consent of KPMG LLP (filed herewith).

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

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

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

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

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**SIGNATURES**

       Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

PARKWAY  PROPERTIES, INC.

Registrant

/s/ Steven G. Rogers

Steven G. Rogers

President, Chief Executive

Officer and Director

March 5, 2010

/s/ Mandy M. Pope

Mandy M. Pope

Executive Vice President, Chief Accounting Officer

and Interim Chief Financial Officer

March 5, 2010

     Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.  

/s/ Daniel P. Friedman

/s/ Steven G. Rogers

Daniel P. Friedman, Director

Steven G. Rogers

March 5, 2010

President, Chief Executive  Officer and Director

March 5, 2010

/s/ Roger P. Friou

Roger P. Friou, Director

/s/ Leland R. Speed

March 5, 2010

Leland R. Speed

Chairman of the Board and  Director

March 5, 2010

/s/ Michael J. Lipsey

Michael J. Lipsey, Director

March 5, 2010

/s/ Troy A. Stovall

Troy A. Stovall, Director

March 5, 2010

/s/ Brenda J. Mixson

Brenda J. Mixson, Director

March 5, 2010

/s/  Lenore M. Sullivan

Lenore M. Sullivan, Director

March 5, 2010

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