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

_________________________

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**FORM10-K**

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

**OFTHE SECURITIES EXCHANGE ACT OF 1934Forthe fiscal year ended December 31, 2007OR**

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

**OFTHE SECURITIES EXCHANGE ACT OF 1934Forthe transition period from           to          Commission file number 1-11533**

**Parkway Properties, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

**One Jackson Place Suite 1000****188 East Capitol Street  Jackson, Mississippi 39201-2195**(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 the Act: **Common Stock, $.001 Par Value8.00% Series D Cumulative Redeemable Preferred Stock $.001 Par Value  New York Stock Exchange**Securities registered pursuant toSection 12(g) of the Act: **None**

        Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

o Yes  xNo

        Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act.

 oYes xNo

        Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter 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 ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.   o  

        Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of "largeaccelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

 

                                        Largeaccelerated filer  x                                               Acceleratedfiler                     o

 

                                        Non-acceleratedfiler    o                                              Smallerreporting company     o

 

        Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). 

 Yes x Noo

        The aggregate market value ofthe voting and non-voting common equity held by non-affiliates computed by referenceto the price at which the common equity was last sold, or the average bid andasked price of such common equity, as of June 30, 2007 was $728 million.

        The number of sharesoutstanding in the registrant's class of common stock as of February 22, 2008was 15,223,350.

**DOCUMENTS INCORPORATED BY REFERENCE**

        Portions of the Registrant'sProxy Statement for the 2008 Annual Meeting of Shareholders are incorporated byreference into Part III.

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

|                       |                                                                                                 | **Page** |
|-----------------------|-------------------------------------------------------------------------------------------------|----------|
|                       |                                                                                                 |          |
| **PART I.**           |                                                                                                 |          |
| Item 1.               | Business                                                                                        | 3        |
| Item 1A.              | Risk Factors                                                                                    | 7        |
| Item 1B.              | Unresolved Staff Comments                                                                       | 12       |
| 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                                                                         | 20       |
| Item 7.               | Management's Discussion and  Analysis of Financial Condition and Results of Operations          | 21       |
| 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           | 83       |
| Item 9A.              | Controls and Procedures                                                                         | 83       |
| Item 9B.              | Other Information                                                                               | 85       |
|                       |                                                                                                 |          |
|                  |                                                                                            |     |
| **PART III.**         |                                                                                                 |          |
| Item 10.              | Directors, Executive Officers and  Corporate Governance                                         | 85       |
| Item 11.              | Executive Compensation                                                                          | 85       |
| Item 12.              | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters | 85       |
| Item 13.              | Certain Relationships and  Related Transactions, and Director Independence                      | 86       |
| Item 14               | Principal Accounting Fees and  Services                                                         | 86       |
|                       |                                                                                                 |          |
|                  |                                                                                            |     |
| **PART IV.**          |                                                                                                 |          |
| Item 15.              | Exhibits and Financial  Statement Schedules                                                     | 86       |
|                       |                                                                                                 |          |
|                  |                                                                                            |
| **SIGNATURES**        |                                                                                                 |
| Authorized Signatures | 89                                                                                              |
|                       |                                                                                                 |          |

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**ITEM 1.  *Business*.**

*****Overview*

       Parkway Properties, Inc. is a realestate investment trust ("REIT") specializing in the operation,leasing, acquisition and ownership of office properties.  The Company performsthese services for its own account and for other institutional investorsthrough co-ownership structures such as discretionary funds and/orpartnerships.  The terms "we," "us," "our," "Parkway," or the "Company" referto Parkway Properties, Inc. individually or together with its subsidiaries.    TheCompany is geographically focused on the Southeastern and Southwestern UnitedStates and Chicago, primarily because these markets have experienced highpopulation and employment growth and are expected to continue to do so in theforeseeable future.  Parkway and its predecessors have been public companiesengaged in the real estate business since 1971, and the management team has hadexperience managing a public real estate company through all phases of the realestate business cycle.  As part of its strategy, the Company places an emphasison property 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.

       AtFebruary 15, 2008, Parkway owned or had an interest in 69 office propertieslocated in 11 states with an aggregate of approximately 14.1 million squarefeet of leasable space.  Included in the portfolio are one discretionary fundand several partnership arrangements which encompass 21 properties totaling 3.8million square feet, representing 27% of the portfolio.  With the discretionaryfund and/or partnerships, the Company receives fees for asset management,property management, leasing and construction management services andpotentially receives incentive fees upon sale if certain investment targets areachieved.  Increasing the number of co-investments, and consequently the relatedfee income, is part of the Company's strategy to transform itself to anoperator-owner versus an owner-operator.   The strategy highlights theCompany's strength in providing excellent service in the operation andacquisition of office properties for investment clients in addition to itsdirect ownership of real estate assets. Fee-based real estate services areoffered through the Company's wholly owned subsidiary, Parkway Realty ServicesLLC, which also manages and/or leases approximately 1.8 million square feet forthird party owners as of February 15, 2008. A significant phase of thetransformation to an operator-owner is currently under way through the Company'sGEAR UP Plan, which started January 1, 2006 and ends December 31, 2008.

*Strategic Planning*

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

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

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

*** ***

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

       Thesetwo goals, ***Equity Opportunities***and***Asset Recycling****,*are what combine to transform Parkway from being an owner-operator to being anoperator-owner.  Management strongly believes that these actions will result inParkway better leveraging its core strength of operating office properties andwill be advantageous for the Company's shareholders over the long term. Sowhether we are in an economy characterized by growth or recession, purchasingassets with a good partner and leveraging our operating expertise throughearning recurring fees allows us to increase our core portfolio in larger andmore institutional markets and increase our earnings potential from theservices provided.

- *Retain Customers. * Customer     retention remains the cornerstone of the Company's business.  We believe     that our focus on the customer is why partners choose to partner with     Parkway.  The goal is a customer retention rate of 70% to 75%.  The     average customer retention rate since the inception of the GEAR UP Plan on     January 1, 2006 is 72.5% and we anticipate that the annual customer     retention rate for 2008 will be in the range of 70% to 75%.

-  ***Uncompromising Focus on     Operations. ***Parkway is reaffirming its commitment to do that     which it does best, and that is to operate office properties for maximum     returns.
*** ***
-  ***Performance. ***In     the planning process, management first decided what actions to take     strategically over the three years of the GEAR UP Plan and secondly,     modeled the economic impact of these actions.  Given the large component     of Asset Recycling in the Plan, management selected a financial metric     that would be most appropriate to measure the success of the Plan.   This     led to the adoption of Cumulative Adjusted Funds Available for     Distribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP     Plan, with a target of $7.18 per share cumulative over three years.  Actual     Cumulative Adjusted FAD for 2006 and 2007 exceeded the amount projected by     the Company at the beginning of the plan.  Management set an internal     target for fixed charge coverage before principal payments of 2.5 times as     a measure of leverage for the plan.  While not a requirement of the plan,     this self-imposed target serves to prevent the performance goals being met     by adopting an unhealthy over-leveraging of the Company.
       Forthe GEAR UP Plan Parkway is not abandoning the use of Funds from Operations asan operating metric, but rather carrying it a step further to includeaccountability for capital items and removing the accounting adjustments whichare not directly influenced by the operations of its properties.  Management believes an Adjusted FAD goal provides an effective alignment withthe shareholders by focusing the team on maximizing income from operationswhile being mindful of capital expenses and ultimately the funds available tocover the dividend.   Cumulative Adjusted FAD is calculated as thesum of Adjusted FAD for each of the three years of the plan.   The adjustments that will be made to FAD reported each quarterprincipally include charges for impairment of value and expenses related to theearly extinguishment of debt.

Parkway has made progress on its ***AssetRecycling*** and ***Equity Opportunities*** goals in 2006 and 2007as follows:
-  *Dispositions. * Parkway     sold ten office properties for a gross sales price totaling $153.8 million     and recorded a total gain on the sales for financial reporting purposes in     the amount of $43.1 million.
 
-  *Fund Acquisitions. *The     Fund with Ohio PERS purchased eight office properties at an aggregate contract     purchase price of $230.2 million.  -  *Fee Simple Purchases.*      Parkway purchased One Illinois Center in Chicago, Illinois at a contract     purchase price of $198 million.
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* *
-  *Other Purchases.*      Parkway purchased an additional interest in Moore Building Associates, LP,     which owns the Toyota Center in Memphis, Tennessee, for $1.4 million     raising Parkway's total ownership interest to 75.025%.
* *
-  *Equity Offering. *On     December 18, 2006, the Company sold 600,000 shares of common stock to Banc     of America Securities LLC at a gross offering price of $50.25 per share     and a net price of $49.37 per share. The Company used the net proceeds of     approximately $29.6 million to repay indebtedness outstanding under a     $19.3 million mezzanine loan incurred in connection with the purchase of One Illinois       Center and to purchase additional investments in office properties.-  *Stock Buyback.*  On     August 3, 2007, the Board of Directors authorized the repurchase of up to     1.7 million shares of Parkway's outstanding common stock through July 30,     2008.  During 2007, the Company purchased approximately 688,000 shares of     Parkway common stock for $29.1 million, at an average price of $42.36 per     share.
*Discretionary Funds andPartnerships*

* *

* *       Parkwayintends to continue raising discretionary funds and forming partnerships withselect investors.  Under the terms of these funds and partnerships, whereapplicable, Parkway will manage all phases of the investment cycle includingacquisition, financing, operations, leasing and dispositions.   The Companywill receive fees for providing these services.  As of December 31, 2007,Parkway had one discretionary fund and five partnership agreements of thisnature.

       On July 6, 2005, Parkway, throughaffiliated entities, entered into a limited partnership agreement forming a$500 million discretionary fund (the "Fund") with Ohio PERS for the purpose ofacquiring high-quality multi-tenant office properties.  Ohio PERS is a 75%investor and Parkway is a 25% investor in the Fund, which is capitalized withapproximately 40% of equity capital and 60% of non-recourse, fixed-rate firstmortgage debt.  The Fund targets acquisitions in the existing core Parkwaymarkets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville.  As of December 31, 2007,there was approximately $228 million remaining capacity for Fund officeinvestments.  Subsequent to December 31, 2007, the Company purchased threeoffice investments for a total purchase price of $236.6 million on behalf ofthe Fund.  Estimated closing costs, building improvements, tenant improvementsand leasing costs of $14.2 million are anticipated during the first two yearsof ownership for a total investment of $250.8 million. Of the total investment,$227.4 million will represent investments by the Fund and $23.4 million willrepresent an additional investment by Parkway.  Therefore, as of February 15,2008, the Fund was fully invested. With the Fund with Ohio PERS fully invested,management is now focused on establishing a second discretionary fund.

       The Fund targets properties with aleveraged internal rate of return of greater than 11%.  Parkway serves as thegeneral partner of the Fund and provides asset management, property management,leasing and construction management services to the Fund, for which it is paidmarket-based fees.  After each partner has received a 10% annual cumulativepreferred return and a return of invested capital, 20% of the excess cash flowwill be paid to the general partner and 80% will be paid to the limitedpartners.    Through its general partner and limited partner ownershipinterests, Parkway may receive a distribution of the cash flow equivalent to40%.  Parkway had three years to identify and acquire properties for the Fund(the "Commitment Period"), with funds contributed as needed to closeacquisitions.  Parkway exclusively represents the Fund in making acquisitionswithin the target markets and within 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 the fund's specific criteria or selling or jointventuring any currently owned properties.  The term of the Fund is seven yearsfrom the expiration of the Commitment Period, with provisions to extend theterm for two additional one-year periods. 

* Third Party Management*

       The Company benefits from a fullyintegrated management infrastructure, provided by its wholly-owned managementsubsidiary, Parkway Realty Services LLC ("Parkway Realty").  Inaddition to the Company's owned properties, Parkway Realty currently managesand/or leases approximately 5.6 million net rentable square feet forthird-party owners, joint venture interests and Fund properties.  The Companyintends to expand its third party fee business through funds or similarventures.

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*Financing Strategy*

**       The Company expects to continueseeking fixed rate, non-recourse mortgage financing with maturities from fiveto ten years typically amortizing over 25 to 30 years on select office buildinginvestments as additional capital is needed.  The Company targets a debt tototal market capitalization ratio at a percentage in the range of 45% to 50%.   This ratio may vary at times pending the timing of acquisitions, sales and/or salesof equity securities.  In addition, volatility in the price of the Company'scommon stock may affect the debt to total market capitalization ratio.  However,over time the Company plans to maintain a percentage in the range of 45% to50%. The Company calculates this ratio by including its proportionate share ofany debt on assets held in funds and partnerships.   In addition to this debtratio, the Company monitors interest, fixed charge and modified fixed charge coverageratios.  In connection with the GEAR UP Plan, management set an internal targetfor the modified fixed charge coverage ratio of 2.5 times as a measure ofleverage for the plan.  While not a requirement of the plan, this self-imposedtarget serves to prevent the performance goals being met by adopting anunhealthy over-leveraging of the Company. Management believes the debt tomarket capitalization, interest coverage, fixed charge coverage and modifiedfixed charge coverage ratios provide useful information on total debt levels aswell as the Company's ability to cover interest, principal and/or preferreddividend payments with current income. As of December 31, 2007, Parkway's debtto total market capitalization rate was 56.8%, which is higher than theCompany's target range of 45% to 50%.  The increase in the rate was dueprimarily to a stock price decrease.

       Parkwaymay, in appropriate circumstances, acquire one or more properties in exchangefor Parkway'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.  Parkway has no present intentions of underwritingsecurities of other issuers.  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.  Parkway provides annualreports to its stockholders that contain financial statements audited byParkway's independent public accountants.

* Capital Allocation*

       The***Equity Opportunities***goal of the GEAR UP Plan speaks to capitalallocation and the Company's long standing approach to this very importantmatter.  Capital allocation receives constant review by management and theBoard of Directors considering many factors including the capital markets, ourweighted average cost or capital, buying criteria (written and published), thereal estate market and management of the risk associated with the rate ofreturn.  We examine all aspects of each type of investment whether it is aFund asset, Parkway common stock, a mortgage loan receivable or a fee simple purchase.Each carries a relationship to replacement cost which is still an importantunderwriting discipline for us. Each has a current yield and a leveraged andunleveraged internal rate of return that can be measured on a relative andabsolute basis.  Currently, management views the Fund and similar venturesas the highest priority of our capital allocation because it produces thehighest risk adjusted return as measured by internal Rate of Return and currentcash 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.

*Industry Segments*

****       Parkway's primary business is theoperation and ownership of office properties. The Company accounts for eachoffice 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.   

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

*Management Team*

**       Parkway'smanagement team consists of experienced office property specialists with provencapabilities in office property (i) operations; (ii) leasing; (iii) management;(iv) acquisition/disposition; (v) financing; (vi) capital allocation; and (vii)accounting and financial reporting.  Parkway's fourteen senior officers have anaverage of 22 years of real estate industry experience, and have workedtogether at Parkway for an average of 17 years.  Effective March 1, 2008, J.Mitchell Collins will join the Company as Executive Vice President, ChiefFinancial Officer and Secretary.  Mr. Collins joins the Company with eightyears of Chief Financial Officer experience with two public real estatecompanies and ten years of public accounting experience.  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 continue to translate into enhanced stockholder value.

* Administration*       The Company is self-administeredand self-managed and maintains its principal executive offices in Jackson,Mississippi.  As of January 1, 2008, the Company had 298 employees.  Theoperations of the Company are conducted from approximately 20,000 square feetof office space located at 188 East Capitol Street, One Jackson Place, Suite  1000, Jackson, Mississippi.  The building is owned by Parkway and is leasedby Parkway at market rental rates.

*Available Information*

**       **Parkway makes available freeof charge on the "Investor Relations" page of its web site, www.pky.com, itsfiled 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.

**       **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 39201-2195.

**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.*

**        **Ourinvestments are generally made in office properties.  We are, therefore,generally subject to risks incidental to the ownership of real estate.  Theserisks 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

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-  civil unrest, acts of war, acts     of God, including earthquakes 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.

*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 economic andother conditions may therefore be limited.  In addition, the Internal RevenueCode limits our ability to sell our properties by imposing a penalty tax of100% on the gain derived from prohibited transactions, which are defined assales of property held primarily for sale to customers in the ordinary courseof a trade or business.  The frequency of sales and the holding period of theproperty sold are two primary factors in determining whether the property soldfits within this definition.  These considerations may limit our opportunitiesto sell our properties.  If we must sell an investment, we cannot assure youthat we will be able to dispose of the investment in the time period we desireor that the sales price of the investment will recoup or exceed our cost forthe investment, or that the penalty tax would not be assessed.

*Ourcurrent and future joint venture investments could be adversely affected by ourlack of sole decision-making authority, our reliance on joint venture partners'financial condition and any disputes that may arise between us and our jointventure 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.  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.

*We areexposed to potential environmental liability. *

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**       **Undervarious federal, state, and local laws, ordinances and regulations, we may beconsidered an owner or operator of real property and may be responsible forpaying for the disposal or treatment of hazardous or toxic substances releasedon or in our property or disposed of by us, as well as certain other potential costswhich could relate to hazardous or toxic substances (including governmentalfines and injuries to persons and property).  This liability may be imposedwhether or not we knew about, or were responsible for, the presence ofhazardous or toxic substances.

*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 a substantialproperty loss, the insurance coverage may not be sufficient to pay the fullcurrent market value or current replacement cost of the property.   In theevent 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.  

*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 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.*

Page 9 of 89

**       **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.

*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 Code applicable to REITs, 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.

**       **Ifwe fail to qualify as a REIT, we will be subject to federal income tax(including any applicable alternative minimum tax) on our taxable income atcorporate rates.  In addition, unless entitled to relief under certainstatutory provisions, we will be disqualified from treatment as a REIT for thefour taxable 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. 

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

*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 predictwhether, when or to what extent new federal tax laws, regulations,interpretations or rulings will be adopted.  Any of such legislative action mayprospectively or retroactively modify our tax treatment and, therefore, mayadversely affect taxation of us and/or our investors.

*Limitationson the ownership of our common stock may preclude the acquisition or change ofcontrol of our company. *

Page 10 of 89

**       **Certainprovisions contained in our charter and bylaws and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisitionproposal for us and may thereby inhibit a change of control.  Provisions of ourcharter are designed to assist us in maintaining our qualification as a REITunder the Code by preventing concentrated ownership of our capital stock thatmight jeopardize REIT qualification.  Among other things, these provisionsprovide that, if a transfer of our stock or a change in our capital structurewould result in (1) any person (as defined in the charter) directly orindirectly acquiring beneficial ownership of more than 9.8% (in value or innumber, whichever is more restrictive) of our outstanding equity stockexcluding Excess Stock, (2) our outstanding shares being constructively orbeneficially owned by fewer than 100 persons, or (3) our being "closelyheld" within the meaning of Section 856(h) of the Code, 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 ofdirectors has 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 ofdirectors may determine. The authorization and issuance of a new class ofcapital stock could have the effect of delaying or preventing someone fromtaking control of us, even if a change in control were in our stockholders'best interests.

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

**       **Maryland law provides protection for Maryland corporations against unsolicited takeovers bylimiting, 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 of a Maryland corporation satisfies the applicable standards of conduct for directors 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. 

Page 11 of 89

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

****       **None.

**ITEM 2.  *Properties*.**

**General**

       The Company operates and investsprincipally in office properties in the Southeastern and Southwestern United Statesand Chicago, but is not limited to any specific geographical region or propertytype.  As of January 1, 2008, the Company owned or had an interest in 66 officeproperties comprising approximately 13.0 million square feet of office spacelocated in 11 states.

       Property acquisitions in 2007, 2006 and2005 were funded through a variety of sources, including:

a.         Cash reserves and cash generated from operating activities,

b.         Sales of non-core assets,

c.         Sales of office properties,

d.         Sales of joint venture interests,

e.         Contributionsfrom partners,

f.          Fixed rate, non-recourse mortgage financing with maturities rangingfrom five to ten years,

g.         Assumption of existing fixed rate, non-recourse mortgages onproperties purchased,

h.         Sales of Parkway preferred and common stock, and

i.          Advances on bank lines of credit.

** **

**Office Buildings**

       Other than as discussed under"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, 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 banklines of credit or contributions from partners.

       On February 28, 2007, the Companypurchased 2.5 acres of land in Jackson, Mississippi for $1.8 million.  Thisland was purchased as part of the Company's plan to develop the 194,000 squarefoot Class A+ office building known as The Pinnacle at Jackson Place ("ThePinnacle"), adjacent to the Company's headquarters building.  The estimatedcost of the development is $48.5 million with expected completion in the fallof 2008.  The Company has received commitments to lease approximately 70% ofthe new office space from four major customers.  Parkway is considering a jointventure structure for the development whereby Parkway will retain an ownershipinterest of approximately 20%. The development is designed to utilize benefitsavailable under the Gulf Opportunity Zone Act for new developments in areasaffected by Hurricane Katrina.  During the year ending December 31, 2007, theCompany incurred $13.4 million in development costs for The Pinnacle.

       We believe that our insurancecoverage contains policy specifications and insured limits that are customary forsimilar properties, business activities and markets, and we believe ourproperties are adequately insured.  However, an uninsured loss could result inloss of capital investment and anticipated profits. 

       All office building investmentscompete for customers with similar properties located within the same marketprimarily on the basis of location, rent charged, services provided and thedesign and condition of the improvements.  The Company also competes with otherREITs, financial institutions, pension funds, partnerships, individualinvestors and others when attempting to acquire office properties.

Page 12 of 89

       The following table sets forthcertain information about office properties the Company owned or had aninterest in as of January 1, 2008:

** **

** **

** **

** **

** **

**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**

**As of**

**Location**

**Properties(1)**

**(in thousands)**

**Feet**

**Foot (2)**

**Foot (3)**

**2008 (4)**

**1/1/2008**

Houston, TX

14

2,302

17.7%

$19.68

$22.49

23.4%

97.0%

Chicago, IL

3

2,289

17.6%

30.22

30.43

4.0%

92.8%

Atlanta, GA

9

1,776

13.7%

21.59

21.76

13.8%

92.8%

Memphis, TN

6

1,199

9.2%

20.82

21.50

9.8%

90.9%

Jackson, MS

6

919

7.1%

17.36

18.92

11.0%

89.1%

Columbia, SC

3

867

6.7%

16.22

17.94

6.4%

90.2%

Orlando, FL

4

695

5.3%

21.69

22.42

6.5%

96.0%

Richmond, VA

6

500

3.8%

17.51

17.16

17.2%

69.5%

Jacksonville, FL

4

482

3.7%

18.77

19.22

4.4%

88.4%

Nashville, TN

1

434

3.3%

14.64

19.25

2.4%

85.8%

Phoenix, AZ

2

393

3.0%

25.32

26.13

11.6%

96.1%

Hampton Roads, VA

3

385

3.0%

17.92

19.00

16.8%

92.8%

Charlotte, NC

1

325

2.5%

18.64

20.00

7.3%

95.8%

Ft. Lauderdale, FL

2

215

1.7%

22.52

24.15

12.4%

86.3%

St. Petersburg, FL

1

186

1.4%

20.77

23.00

29.7%

100.0%

Other Markets

1

32

0.3%

8.00

8.00

0.0%

100.0%

** **

66

12,999

100.0%

$21.52

$22.73

11.7%

92.0%

(1)    Includes 48 office properties owned directly and 18office properties owned through joint ventures.

 

(2)    Averagerent per square foot is defined as the weighted average current gross rentalrate including expense escalations for leased office space in the building asof January 1, 2008.

(3)    Estimated average gross market rent per square footis based upon information obtained from (i) the Company's own experience inleasing space at the properties; (ii) leasing agents in the relevant marketswith respect to quoted rental rates and completed leasing transactions forcomparable properties in the relevant markets; and (iii) publicly available datawith respect thereto.  Estimated average market rent is weighted by the netrentable square feet expiring in each property.

(4)    The percentage of leases expiring in 2008 representsthe ratio of square feet under leases expiring in 2008 divided by total netrentable square feet.

Page 13 of 89

       Thefollowing table sets forth scheduled lease expirations for properties owned asof January 1, 2008 on leases executed as of January 1, 2008, assuming no customerexercises renewal options:

** **

** **

**Net**

**Annualized**

**Weighted**

**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)**

2008

330

1,525

11.7%

$    31,229

$  20.48

$  21.60

2009

288

1,864

14.3%

40,177

21.55

22.55

2010

288

1,658

12.8%

33,495

20.20

20.95

2011

201

1,879

14.5%

41,906

22.30

23.47

2012

158

1,528

11.8%

32,426

21.22

22.53

2013

60

585

4.5%

12,737

21.79

22.52

Thereafter

127

2,919

22.4%

65,387

22.40

24.13

1,452

11,958

92.0%

$  257,357

$  21.52

$  22.73

(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 average rental rate including expense escalations for office space.

(3)    Estimated average gross market rent per square footis based upon information obtained from (i) the Company's own experience inleasing space at the properties: (ii) leasing agents in the relevant marketswith respect to quoted rental rates and completed leasing transactions forcomparable properties in the relevant markets; and (iii) publicly availabledata with respect thereto as of January 1, 2008.  Estimated average market rentis weighted by the net rentable square feet expiring in each property.

Page 14 of 89

**Customers**

       Theoffice properties are leased to 1,452 customers, which are in a wide variety ofindustries including banking, insurance, professional services (includinglegal, accounting, and consulting), energy, financial services andtelecommunications.  Our largest customer and 25 largest customers accountedfor 4.3% and 38.9% respectively, of our annualized rental revenue.  Thefollowing table sets forth information concerning the 25 largest customers ofthe properties owned directly or through joint ventures as of January 1, 2008(in thousands, except square foot data):

** **

**Leased**

**Annualized**

** **

**Lease**

** **

**Square**

**Rental**

** **

**Expiration**

**Customer**

**Feet (1)**

**Revenue (1)**

**Office Property**

**Date**

General Services Administration (GSA)

417,892

$  9,446 

(2)

(2)

Blue Cross Blue Shield of Georgia, Inc.

271,712

6,843 

Capital City Plaza

(3)

Health Care Service Corporation

263,181

6,374

111 East Wacker

(4)

Cox Enterprises, Inc.

302,432

6,055 

(5)

(5)

Regions Financial Corporation

255,495

4,752

(6)

(6)

Young & Rubicam

123,878

4,385

233 North Michigan

(7)

Federal Home Loan Bank of Chicago

135,932

4,152

111 East Wacker

(8)

Nabors Industries/Nabors Corporate Services

204,645

3,993

One Commerce Green

(9)

South Carolina State Government

233,687

3,542 

(10)

(10)

United Healthcare Services

60,944

2,992 

233 North Michigan

11/12

Forman, Perry, Watkins, Krutz & Tardy

173,355

2,696

(11)

(11)

Clear Channel Communications

73,628

2,624

233 North Michigan

(12)

Schlumberger Technology

155,324

2,561

Schlumberger

(13)

Honeywell

111,686

2,447

Honeywell Building

07/09

DHL Airways

101,330

2,344

One Commerce Green

11/08

Golin-Harris Communications, Inc.

66,864

2,246

111 East Wacker

07/12

Federal Express

100,410

2,111

(14)

(14)

Bank of America, NA

193,107

2,094

(15)

(15)

Extra Space Storage

91,200

2,067

Moore Building

04/15

Louisiana-Pacific Corporation

104,807

1,997

Bank of America Plaza

12/15

Motorola, Inc.

68,473  

1,882

233 North Michigan

03/11

Stein Mart, Inc.

100,685

1,872

Stein Mart Building

02/11

Shefsky & Froelich, Ltd.

68,936

1,751

111 East Wacker

05/15

The Meridian Resource Corporation

78,001  

1,716

1401 Enclave

09/11

URS Corporation

59,512

1,696

(16)

(16)

3,817,116

$84,638 

Total Rentable Square Footage (1)

12,998,550

Total Annualized Rental Revenue (1)

$217,488  

Page 15 of 89

(1)

Annualized Rental Revenue  represents the gross rental rate (including escalations) per square foot as  of January 1, 2008, 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)

GSA occupies 417,892 square  feet in 15 properties under separate leases that expire as follows:  189,316 square  feet in November 2009, 30,909 square feet in July 2010, 26,856 square feet in  December 2008, 23,687 square feet in March 2013, 22,973 square feet in  January 2013,  21,384 square feet in May 2010, 21,143 square feet in  September 2012, 17,112 square feet in January 2010, 13,427 square feet in  November 2017, 11,059 square feet in June 2017, 10,164 square feet in June  2008, 8,603 square feet in June 2013, 5,471 square feet in October 2012,  5,155 square feet in November 2011, 4,830 square feet in March 2008, 3,043 square  feet in April 2014, 1,848 square feet in December 2015, and 912 square feet  in January 2009.

(3)

Blue Cross Blue Shield of  Georgia, Inc. occupies 271,712 square feet expiring in June 2014 with a  cancellation option in June 2012.

(4)

Health Care Service Corporation  occupies 263,181 square feet in one property under two leases expiring as  follows: 202,086 square feet in March 2017 and 61,095 square feet in March  2012.

(5)

Cox Enterprises, Inc. occupies  302,432 square feet in two properties under separate leases that expire as  follows:  193,043 square feet in August 2010, 79,790 square feet in December  2008, 19,209 square feet in June 2010 and 10,390 square feet in April 2009.

(6)

Regions Financial Corporation  occupies 255,495 square feet in three properties under separate leases that  expire as follows: 227,738 square feet in March 2016, 16,538 square feet in  October 2011, 3,916 square feet in November 2010, 3,197 square feet in July  2010, 2,123 square feet in November 2009 and 1,983 square feet in September  2009.

(7)

Young & Rubicam occupies  123,878 square feet expiring in November 2011 with a cancellation option on  November 30, 2009.

(8)

Federal Home Loan Bank of  Chicago occupies 135,932 square feet expiring in July 2011 with a cancellation  option on December 31, 2008.

(9)

Nabors Industries occupies  204,645 square feet expiring as follows: 189,757 square feet expiring in  December 2008, 12,519 square feet expiring in December 2009, and 2,369 square  feet expiring in February 2010.

(10)

South Carolina Government  Agencies occupy 233,687 square feet in three properties under separate leases  that expire as follows:  133,436 square feet in June 2010, 45,962 square feet  in September 2009, 28,165 square feet in February 2014, 15,711 square feet in  June 2011, 7,007 square feet in December 2008, 2,608 square feet in June  2009, 448 square feet in August 2008 and 350 square feet on a month-to-month  lease.  The Budget and Control Board's 119,383 square foot lease contains a  cancellation option available every June 30th, and the SC Dept. of Commerce's  44,587 square foot lease contains a cancellation option available every  August 1st.

(11)

Forman, Perry, Watkins, Krutz  & Tardy occupy 173,355 square feet in two properties and the leases  expire as follows:  162,731 square feet in December 2011 and 10,624 square  feet in July 2009 with certain cancellation rights which began July 2007.  Customer also has certain cancellation rights pending changes in litigation  legislation.

(12)

Clear Channel Communications occupies  73,628 square feet expiring as follows:  73,353 square feet in July 2014 and  275 square feet on a month-to-month lease.

(13)

Schlumberger Technology  occupies 155,324 square feet expiring in February 2012 with a cancellation  option on December 31, 2008.

(14)

Federal Express occupies  100,410 square feet in four properties under separate leases that expire as  follows: 44,494 square feet in October 2015, 43,738 square feet in September  2015, 10,036 square feet in September 2008, 1,380 square feet in August 2008  and 762 square feet in December 2009.

(15)

Bank of America, NA occupies  193,107 square feet in two properties under separate leases that expire as  follows: 180,530 square feet in March 2012 and 12,577 square feet in June 2014.

(16)

URS Corporation occupies 59,512  square feet in two properties under separate leases that expire as follows:  56,164 square feet in April 2016 and 3,348 square feet in February 2011.

Non-CoreAssets

       Since January 1, 1996, Parkway has pursueda strategy of liquidating its non-core assets and using the proceeds from suchsales to acquire office properties, pay down short-term debt and repurchase itsown stock.  The Company defines non-core assets as all assets other than officeand parking properties, which at December 31, 2007 consisted of undevelopedland.  The book value of the land, which is available for sale, was $1.5million as of December 31, 2007 with a carrying cost of approximately $5,000annually.  

 

Page 16 of 89

**ITEM 3.  *LegalProceedings.***

       The Company and its subsidiaries are,from time to time, parties to litigation arising from the ordinary course oftheir business.  Management of Parkway does not believe that any suchlitigation will materially affect the financial position or operations ofParkway.

**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 parvalue) is listed and trades on the New York Stock Exchange under the symbol "PKY". The number of record holders of the Company's common stock at January 1, 2008,was 2,476.

       As of February 22, 2008, the lastreported sales price per common share on the New York Stock Exchange was $35.14. 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,  2007**

** **

**December 31,  2006**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**    High**

**Low**

**Distributions**

March 31

$57.70

$51.00

$0.65

$45.89

$40.66

$0.65

June 30

$54.09

$47.10

0.65

45.50

38.70

0.65

September 30

$49.12

$40.58

0.65

49.02

44.85

0.65

December 31

$48.51

$34.85

0.65

53.20

46.26

0.65

$2.60

$2.60

       Common stock distributions during 2007and 2006 ($2.60 per share) were taxable as follows for federal income taxpurposes:

** **

**Year  Ended**

** **

**December  31**

** **

**2007**

**2006**

Ordinary income

$1.38

$0.99

Post May 5, 2003  capital gain

0.38

1.17

Unrecaptured Section  1250 gain

0.65

0.44

Return of capital

0.19

-

       

$2.60

$2.60

       The following table shows the highand low Series D preferred share prices and per share distributions paid foreach quarter of 2007 and 2006 reported by the New York Stock Exchange.

** **

**Year  Ended**

** **

**Year  Ended**

** **

**December  31, 2007**

** **

**December  31, 2006**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**High**

**Low**

**Distributions**

March 31

$26.60

$25.36

$0.50

$26.20

$25.00

$0.50

June 30

26.50

25.44

0.50

26.00

25.00

0.50

September 30

25.40

23.65

0.50

26.60

25.30

0.50

December 31

25.16

22.75

0.50

26.40

25.42

0.50

$2.00

$2.00

Page 17 of 89

       Asof January 1, 2008, there were six holders of record of the Company's 2.4million outstanding shares of Series D preferred stock.  Series D preferredstock distributions during 2007 and 2006 were taxable as follows for federalincome tax purposes:

**Year  Ended December 31**

**2007**

**2006**

Ordinary  income

$1.21

$0.76

Post  May 5, 2003 capital gain

0.29

0.90

Unrecaptured  Section 1250 gain

0.50

0.34

$2.00

$2.00

**Purchases of Equity Securities by 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**

10/01/07 to 10/31/07

561(1)

$45.90

-

1,245,962   

11/01/07 to 11/30/07

176,997   

39.50

176,997

1,068,965   

12/01/07 to 12/31/07

56,210   

38.86

56,210

1,012,755(2)

Total

233,768   

$39.36

233,207

                                                                  

(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 remaining sharesavailable for repurchase under the Company's common stock repurchase plan.

(2)   On August 3, 2007, the Board of Directors authorized therepurchase of up to 1.7 million shares of Parkway's outstanding common stockthrough July 30, 2008.  The shares may be purchased in the open market or inprivately negotiated transactions, and at times and in amounts the Companydeems appropriate.  In 2007, the Company purchased 687,245 shares of Parkwaycommon stock for $29.1 million, which equates to an average price of $42.36 pershare, with 1,012,755 shares still authorized for repurchase.

**Securities Authorized for Issuance Under Equity Compensation Plans**

      See Item 12 of this Annual Report on Form10-K, "Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters," for certain information regarding the Company'sequity compensation plans.

Page 18 of 89

**Performance Graph**

       Thefollowing graph provides a comparison of cumulative stockholder return for theperiod from December 31, 2002 through December 31, 2007 among Parkway, theStandard & Poor's 500 Index ("S & P 500") and the NAREIT Equity REITTotal Return Index ("NAREIT Equity").  The stock performance graph assumes aninvestment of $100 in the shares of Parkway common stock and each index and thereinvestment of any dividends.  The historical information set forth below isnot necessarily indicative of future performance.

       Theperformance graph and related information shall not be deemed "solicitingmaterial" or deemed to be "filed" with the SEC, nor shall such information beincorporated by reference into any future filing, except to the extent that theCompany specifically incorporates it by reference into such filing.  

**Years Ended  December 31**

**2002**

**2003**

**2004**

**2005**

**2006**

**2007**

Parkway

$  100.00

$  126.26

$  162.74

$  136.13

$  182.86

$  140.31

NAREIT Equity

$  100.00

$  137.13

$  180.44

$  202.38

$  273.33

$  230.44

S & P 500

$  100.00

$  128.69

$  142.68

$  149.69

$  173.32

$  182.84

Page 19 of 89

**ITEM6.  *Selected Financial Data.***

**Year  Ended  12/31/07**

**Year  Ended  12/31/06**

**Year  Ended  12/31/05**

**Year  Ended  12/31/04**

**Year  Ended  12/31/03**

(In thousands, except per share data)

**Operating  Data**:

Revenues

     Income  from office and parking properties

$    246,677 

$    210,007 

$    188,486 

$  152,829 

$  134,906 

     Management  company income

1,605 

5,329 

2,997 

3,832 

2,136 

Total revenues

248,282 

215,336 

191,483 

156,661 

137,042 

Expenses

     Property  operating expenses

114,312 

99,130 

88,254 

70,450 

60,370 

     Depreciation  and amortization

77,574 

64,655 

51,046 

35,666 

27,116 

     Operating  expense for other real estate properties

5 

5 

5 

22 

37 

     Management  company expense

1,188 

1,141 

607 

359 

391 

     General  and administrative and other

6,597 

4,651 

4,468 

4,464 

4,201 

Operating income

48,606 

45,754 

47,103 

45,700 

44,927 

Other income and expense

     Interest  and other income

528 

40 

255 

37 

1,718 

     Equity in  earnings of unconsolidated joint ventures

1,008 

751  

1,496 

1,697 

2,212 

     Gain on real  estate, joint venture interests and other assets

20,307 

17,646 

1,039 

4,309 

10,661 

     Interest  expense

(54,099)

(44,632)

(35,444)

(25,817)

(19,718)

Income before minority interest and  discontinued operations

16,350 

19,559 

14,449 

25,926 

39,800 

Minority interest - unit holders

(2)

(1)

(2)

(2)

(3)

Minority interest - real estate  partnerships

3,174 

485 

(187)

127 

- 

Income from continuing operations

19,522 

20,043 

14,260 

26,051 

39,797 

     Income  from discontinued operations

170 

556 

2,366 

3,464 

3,384 

     Gain on  sale of real estate from discontinued operations

- 

5,083 

4,181 

- 

- 

Net income

19,692 

25,682 

20,807 

29,515 

43,181 

Change in market value of interest rate  swaps

(1,190)

(73)

1,131 

(226)

170 

Change in unrealized gain (loss) on  equity securities

4 

75  

(79)

- 

- 

Comprehensive income

$    18,506 

$     25,684 

$     21,859 

$    29,289 

$    43,351 

Net income available to common  stockholders:

Net Income

$    19,692 

$     25,682 

$     20,807 

$    29,515 

$    43,181 

Original issue costs associated with  redemption of   preferred stock

- 

- 

- 

- 

(2,619)

Dividends on preferred stock

(4,800)

(4,800)

(4,800)

(4,800)

(5,352)

Dividends on convertible preferred stock

- 

(1,773)

(2,346)

(5,186)

(6,091)

Net  income available to common stockholders

$    14,892 

$     19,109 

$     13,661 

$    19,529 

$    29,119 

Net  income per common share:

     Basic:

     Income  from continuing operations 

$        0.95 

$         0.95 

$         0.50 

$        1.42 

$        2.52 

     Discontinued  operations

0.01 

0.39 

0.47 

0.31 

0.33 

     Net income

$        0.96 

$         1.34 

$         0.97 

$        1.73 

$        2.85 

     Diluted:

**     **Income from continuing operations

$        0.94 

$         0.93 

$         0.50 

$        1.40 

$        2.46 

     Discontinued  operations

0.01 

0.39 

0.46 

0.30 

0.33 

     Net income

$        0.95 

$         1.32 

$         0.96 

$        1.70 

$        2.79 

Book value per common share (at end of  year)

$       25.09 

$       27.42 

$       27.42 

$      26.44 

$      26.09 

Dividends per common share

$         2.60 

$         2.60 

$         2.60 

$        2.60 

$        2.60 

Weighted average shares outstanding:

     Basic

15,482 

14,306 

14,065 

11,270 

10,224 

     Diluted

15,648 

14,487 

14,233 

11,478 

10,453 

**Balance Sheet Data**:

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

$1,314,602 

$1,303,213 

$1,040,929 

$  820,807 

$  728,695 

**     **Investment in  unconsolidated joint ventures

11,236 

11,179 

12,942 

25,294 

20,026 

**     **Total assets

1,535,794 

1,512,346 

1,188,342 

931,188 

802,308 

     Notes  payable to banks

212,349 

152,312 

150,371 

104,618 

110,075 

     Mortgage  notes payable

714,501 

696,012 

483,270 

353,975 

247,190 

     Total  liabilities

1,015,346 

931,724 

701,010 

511,802 

394,287 

     Preferred  stock

57,976 

57,976 

57,976 

57,976 

57,976 

     Convertible  preferred stock

- 

- 

28,122 

28,122 

68,000 

     Stockholders'  equity

439,908 

490,306 

474,516 

415,648 

407,980 

** **

Page 20 of 89

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

**Overview**

       Parkway is a self-administered andself-managed REIT specializing in the acquisition, operations, leasing andownership of office properties.  The Company is geographically focused on theSoutheastern and Southwestern United States and Chicago.  As of February 15,2008 Parkway owned or had an interest in 69 office properties located in 11 stateswith an aggregate of approximately 14.1 million square feet of leasable space. Included in the portfolio are 21 properties totaling 3.8 million square feetthat are owned jointly with other investors, representing 27% of theportfolio.  Under the Company's GEAR UP Plan, which started January 1, 2006 andends December 31, 2008, it is the Company's goal to transform its strategy frombeing an owner-operator to being an operator-owner. The strategy highlights theCompany's strength in providing excellent service in the operation of officeproperties in addition to its direct ownership of real estate assets. Fee-basedreal estate services are offered through the Company's wholly owned subsidiary,Parkway Realty Services LLC, which also manages and/or leases approximately 1.8million square feet for third party owners as of February 15, 2008.  TheCompany generates revenue primarily by leasing office space to its customersand providing management and leasing services to third-party office propertyowners (including joint venture interests).  The primary drivers behind Parkway'srevenues are occupancy, rental rates and customer retention.  

       *Occupancy.*  Parkway's revenuesare dependent on the occupancy of its office buildings. With supply of newoffice buildings remaining in check and the economy continuing to create newoffice jobs, 2007 was a solid operating year for Parkway.  America created 1.1 million new jobs in 2007, on top of 1.8 million in 2006.  For Parkway,this translated into improved occupancy to an average of 91.6% during 2007 andanother large increase in embedded rental rate growth.  Embedded growth isdefined as the difference between our weighted average in place cash rents andthe weighted average market rental rate. As of January 1, 2008, occupancy ofParkway's office portfolio was 92.0% compared to 92.3% as of October 1, 2007and 90.8% as of January 1, 2007.  Not included in the January 1, 2008 occupancyrate are 14 signed leases totaling 76,000 square feet, which commence duringthe first and second quarters of 2008 and will raise Parkway's percentageleased to 92.6%.  To combat rising vacancy, Parkway utilizes innovativeapproaches to produce new leases.  These include the Broker Bill of Rights, a short-formservice agreement and customer advocacy programs which are models in theindustry and have helped the Company maintain occupancy around 92% during atime when the national occupancy rate is approximately 87%.  Parkway projects averageannual occupancy of approximately 93% during 2008 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.

**       *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 73.7% customer retention rate.  Parkway'scustomer retention for the year ending December 31, 2007 was 72% compared to 73%for the year ending December 31, 2006.  

* *

       *StrategicPlanning.*   Parkway is a focused office REIT with a hands-on,service-oriented approach, a disciplined capital allocation program and awillingness to recycle assets.  However, we see the future transformationtaking Parkway from being an owner-operator to being an operator-owner.  OnJanuary 1, 2006, the Company initiated a new three-year operating plan referredto as the "GEAR UP" Plan that will serve as the spring board to transformParkway from being first an owner of real estate and secondarily an operator ofreal estate for others to being first an operator of real estate for othersthat also owns an interest in the real estate.  The goals of the GEAR UP Planare as follows:
- *Great People* .      Great customer service starts with hiring great people, training them well     and retaining them.  It will take great people to accomplish the ambitious     goals of the Plan.

Page 21 of 89
- *Equity Opportunities. * Over     the last several years management has created a broad array of equity     opportunities for Parkway.  On the private equity side this includes the     use of discretionary funds, such as the fund with Ohio PERS, and     partnerships.  The judicious use of private equity provides a greater     return on equity to the public shareholders. Parkway intends to contribute     assets from its balance sheet to form new joint ventures and expects these     subsequent ventures to be similar to discretionary funds in their duration     and economics. On the public equity side, this includes the judicious use     of common equity and preferred equity to manage the balance sheet and     growth.   
- *Asset Recycling* .     The Company has demonstrated its willingness in the past to sell assets     when management believed the time was right.  At the start of the GEAR UP     Plan, Parkway identified 25 buildings in twelve markets, totaling     approximately 5 million rentable square feet to be part of the asset     recycling program.  Most of these properties are smaller assets or located     in smaller markets that do not fit with the Company strategy of owning     larger assets in institutional markets.  The dispositions that are planned     will help align the Company's portfolio with its current acquisition     criteria, which focuses on larger properties in institutional markets.  In     most cases, Parkway will seek to keep a 10% to 30% joint venture interest     in the properties being recycled and retain management and leasing     agreements.  This is a fluid list of assets based on the Company's     evaluation of specific market conditions and review of the portfolio.  The     other side of Asset Recycling is the reinvestment of proceeds from     dispositions into other assets, either owned in the fee-simple format or     owned jointly with a partner.

*** ***

These twogoals, ***Equity Opportunities***and***Asset Recycling****,*are what combine to transform Parkway from being an owner-operator to being anoperator-owner.  Management strongly believes that these actions will result inParkway better leveraging its core strength of operating office properties andwill be advantageous for the Company's shareholders over the long term.  Sowhether we are in an economy characterized by growth or recession, purchasingassets with a good partner and leveraging our operating expertise throughearning recurring fees allows us to increase our core portfolio in larger andmore institutional markets and increase our earnings potential from theservices provided.

*** ***

•        ***Retain Customers. ***Customer retention remains thecornerstone of the Company's business and is why partners choose to partnerwith Parkway.  The goal is a customer retention rate of 70% to 75%.  Theaverage customer retention rate since the inception of the GEAR UP Plan onJanuary 1, 2006 is 72.5% and we anticipate that the annual customer retentionrate for 2008 will be in the range of 70% to 75%.

*** ***

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

*** ***

•        ***Performance. ***In the planning process, managementfirst decided what actions to take strategically over the three years of theGEAR UP Plan and secondly, modeled the economic impact of these actions.  Giventhe large component of Asset Recycling in the Plan, management selected afinancial metric that would be most appropriate to measure the success of thePlan.   This led to the adoption of Cumulative Adjusted Funds Available forDistribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP Plan,with a target of $7.18 per share cumulative over three years.  Actual CumulativeAdjusted FAD for 2006 and 2007 exceeded the amount projected by the Company atthe beginning of the plan. Management set an internal target for fixed chargecoverage before principal payments of 2.5 times as a measure of leverage forthe plan.  While not a requirement of the plan, this self-imposed target servesto prevent the performance goals being met by adopting an unhealthyover-leveraging of the Company.

For the GEAR UPPlan Parkway is not abandoning Funds from Operations, but rather carrying it astep further to include accountability for capital items and removing theaccounting adjustments which are not directly influenced by the operations ofits properties.   Management believes an Adjusted FAD goal providesan effective alignment with the shareholders by focusing the team on maximizingincome from operations while being mindful of capital expenses and ultimatelythe funds available to cover the dividend.   Cumulative Adjusted FADis calculated as the sum of Adjusted FAD for each of the three years of theplan.    The adjustments that will be made to FAD reported eachquarter principally include charges for impairment of value and expensesrelated to the early extinguishment of debt.  

Page 22 of 89

Parkway hasmade progress on its ***Asset Recycling*** and ***EquityOpportunities*** goals in 2006 and 2007 as follows:
- Dispositions.    Parkway     sold ten office properties for a gross sales price totaling $153.8 million     and recorded a total gain on the sales for financial reporting purposes in     the amount of $43.1 million.

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

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

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

* *
- Equity Offering.   On     December 18, 2006, the Company sold 600,000 shares of common stock to Banc     of America Securities LLC at a gross offering price of $50.25 per share     and a net price of $49.37 per share. The Company used the net proceeds of     approximately $29.6 million to repay indebtedness outstanding under a     $19.3 million mezzanine loan incurred in connection with the purchase of One Illinois       Center and to purchase additional investments in office properties.
- Stock Buyback.   On     August 3, 2007, the Board of Directors authorized the repurchase of up to     1.7 million shares of Parkway's outstanding common stock through July 30,     2008.  During 2007, the Company purchased approximately 688,000 shares of     Parkway common stock for $29.1 million, which equates to an average price     of $42.36 per share.

*DiscretionaryFund.*  On July 6, 2005, Parkway, through affiliated entities, entered intoa limited partnership agreement forming a $500 million discretionary fund withOhio PERS for the purpose of acquiring high-quality multi-tenant officeproperties.  Ohio PERS is a 75% investor and Parkway is a 25% investor in the Fund,which is capitalized with approximately 40% of equity capital and 60% ofnon-recourse, fixed-rate first mortgage debt.  The Fund targets acquisitions inthe existing core Parkway markets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville. As of December 31, 2007, there was approximately $228 million remainingcapacity for Fund office investments.  Subsequent to December 31, 2007, theCompany purchased three office investments for a total purchase price of $236.6million on behalf of the Fund.  Estimated closing costs, building improvements,tenant improvements and leasing costs of $14.2 million are anticipated duringthe first two years of ownership for a total investment of $250.8 million. Ofthe total investment, $227.4 million will represent investments by the Fund and$23.4 million will represent an additional investment by Parkway.  Therefore,as of February 15, 2008, the Fund was fully invested. With the Fund with OhioPERS fully invested, management is now focused on establishing a seconddiscretionary fund.

       TheFund targets properties with an anticipated leveraged internal rate of returnof greater than 11%.  Parkway serves as the general partner of the Fund andprovides asset management, property management, leasing and constructionmanagement services to the Fund, for which it is paid market-based fees.  Aftereach partner has received a 10% annual cumulative preferred return and a returnof invested capital, 20% of the excess cash flow will be paid to the generalpartner and 80% will be paid to the limited partners.    Through its generalpartner and limited partner ownership interests, Parkway may receive adistribution of the cash flow equivalent to 40%.  Parkway had three years fromthe inception date of the Fund to identify and acquire properties (the"Commitment Period"), with funds contributed as needed to close acquisitions. Parkway exclusively represents the Fund in making acquisitions within thetarget markets and within certain predefined criteria.  Parkway will not beprohibited from making fee-simple or joint venture acquisitions in marketsoutside of the target markets, acquiring properties within the target marketsthat do not meet the Fund's specific criteria or selling or joint venturing anycurrently owned properties.  The term of the Fund is seven years from theexpiration of the Commitment Period, with provisions to extend the term for twoadditional one-year periods. 

****

Page 23 of 89

**Financial Condition**

***Comments are for the balance sheet dated December 31, 2007 compared tothe balance sheet dated December 31, 2006.***

       *Office and Parking Properties. * In2007, Parkway continued the application of its strategy of operating andacquiring office properties, joint venturing interests in office assets, aswell as liquidating non-core assets and office assets that either no longermeet the Company's investment criteria or the Company has determined value willbe maximized by selling.  During the year ended December 31, 2007, total assetsincreased $23.4 million or 1.6% and office and parking properties and officeproperty development (before depreciation) increased $54.3 million or 3.6%.

**Purchases, Improvements and Development**

       Parkway's investment in consolidated officeand parking properties increased $11.4 million net of depreciation, to acarrying amount of $1.3 billion at December 31, 2007 and consisted of 60 officeand parking properties and one office property development   The primary reasonfor the increase in office and parking properties relates to the net effect ofthe purchase of land and an office property, building improvements, developmentcosts, the sale of two office properties, a capital lease for a garage anddepreciation recorded during the year.

       OnFebruary 28, 2007, the Company purchased 2.5 acres of land in Jackson,Mississippi for $1.8 million.  This land was purchased as part of the Company'splan to develop the 194,000 square foot Class A+ office building known as ThePinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company'sheadquarters building.  The estimated cost of the development is $48.5 millionwith expected completion in the fall of 2008.  The Company has receivedcommitments to lease approximately 70% of the new office space from four majorcustomers.  Parkway is considering a joint venture structure for thedevelopment whereby Parkway will retain an ownership interest of approximately20%.  The development is designed to utilize benefits available under the GulfOpportunity Zone Act for new developments in areas affected by HurricaneKatrina.  During the year ending December 31, 2007, the Company incurred $13.4million in development costs for The Pinnacle.

       Duringthe year ending December 31, 2007, the Fund purchased one office property asfollows (in thousands):

** **

** **

** **

**Square**

**Date**

**Purchase**

**Office Property**

**Location**

**Feet**

**Purchased**

**Price**

Fund  Purchase (a):

1401  Enclave Parkway (a)

Houston,  Texas

209

06/14/07

$46,500

       (a)  Parkway'sownership interest is 25% and this property is included in Parkway'sconsolidated financial statements. 

       OnSeptember 1, 2007, Parkway entered into a lease for the parking garage known asParking at Jackson Place, which is adjacent to the Company's headquarters andThe Pinnacle in Jackson, Mississippi.  The term of the lease is 60 years with arenewal option for an additional 30 years.  Since the fair value of the land isgreater than 25% of the total value of the property, the Company is accountingfor the component of the lease attributable to the land as an operating leaseand the component attributable to the building as a capital lease.  The garagewas recorded at a cost of $4.1 million.

       During the year ending December 31,2007, the Company capitalized building improvements and additional purchaseexpenses of $43.3 million and recorded depreciation expense of $59.7 millionrelated to its office and parking properties.

Page 24 of 89

**Dispositions**

** **

       Duringthe year ending December 31, 2007, Parkway sold two office properties asfollows (in thousands):

** **

** **

** **

**Square**

**Date**

**Gross Sales**

**Office Property**

**Location**

**Feet**

**Sold**

**Price**

**Gain**

First  Tennessee Plaza and Cedar Ridge

Knoxville,  Tennessee

549

06/29/07

$59,000

$20,260

       *MortgageLoan*.  On November 7, 2007, the Company purchased the B participation piece(the "B piece") of a first mortgage secured by an 844,000 square foot officebuilding in Dallas, Texas known as 2100 Ross for $6.9 million.  The B piece wasoriginated by Wachovia Bank, N.A. and has a face value of $10 million and astated coupon rate of 6.065%.  Upon maturity in May 2012, the Company willreceive a principal payment of $10 million, which produces a yield to maturityof 15.6%.

   *RentsReceivable and Other Assets.*  Rents receivable and other assets increased $9.2million or 8.4% for the year ending December 31, 2007.  The increase isprimarily attributable to the increase in earnest money and loan deposits of$5.5 million for the purchase of Gateway Center in Orlando, Florida; DesertRidge Corporate Center in Phoenix, Arizona and Citicorp Plaza in Chicago,Illinois, all of which closed during the first quarter of 2008.  

       *Intangible Assets, Net.*  Forthe year ending December 31, 2007, intangible assets net of relatedamortization decreased $11.1 million or 13.6% and was primarily due to annualamortization of the existing intangible assets.  Parkway accounts for itsacquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, "Business Combinations", which requires the fairvalue of the real estate acquired to be allocated to acquired tangible andintangible assets.

       *Notes Payable to Banks*.  Notespayable to banks increased $60.0 million or 39.4% for the year ending December31, 2007.  At December 31, 2007, notes payable to banks totaled $212.3 millionand resulted primarily from advances under bank lines of credit to purchaseadditional properties and to make improvements to office properties, purchaseParkway common stock and retire existing debt offset by proceeds from the saleof assets used to reduce bank lines of credit.

       On August 24 2007, the Companyentered into an interest rate swap agreement with US Bank.  The interest rateswap is for a $30 million notional amount and fixes the 30-day LIBOR interestrate at 4.942%, which equates to a total interest rate of 6.224%, for theperiod September 4, 2007 through August 31, 2008.  The swap serves as a hedgeon the variable interest rates on a portion of the borrowings under theCompany's $296 million line of credit.

       On December 3, 2007, the Companyentered into an interest rate swap agreement with JP Morgan.  The interest rateswap is for a $50 million notional amount and fixes the 30-day LIBOR interestrate at 4.38%, which equates to a total interest rate of 5.68%, for the periodDecember 31, 2007 through June 30, 2008.  The swap agreement serves as a hedgeof the variable interest rates on a portion of the borrowings under theCompany's $296 million line of credit.

       On December 13, 2007, the Companyexercised $96 million of the $110 million accordion feature of its existingunsecured line of credit facility with Wachovia Bank.  The Company's creditfacility increased from $200 million to $296 million and is comprised of a $60million term loan maturing April 2011 and a $236 million revolving loanmaturing in April 2010, which includes rights to a one-year extension atParkway's discretion with the same terms through April 2011.  The interest rateon the credit facility is currently LIBOR plus 130 basis points.

       The Company's $296 million unsecuredcredit facility requires compliance with a number of restrictive financialcovenants, including tangible net worth, fixed charge coverage ratio,unencumbered interest coverage ratio, total debt to total asset ratio, secureddebt to total asset value ratio, secured recourse debt to total asset valueratio and unencumbered pool restrictions.  As of December 31, 2007 theCompany was in compliance with these financial covenants.

       *MortgageNotes Payable.* Mortgage notes payable increased $18.5 million or 2.7%during the year ending December 31, 2007, as a result of the following (inthousands):

    In connectionwith the purchase of office buildings, the Fund with Ohio PERS placed the following non-recoursefirst mortgages during 2007:

**Increase**

**(Decrease)**

Placement of mortgage debt by  discretionary fund

$  59,500 

Principal paid on early  extinguishment of debt

(25,431)

Scheduled principal payments

(15,580)

$  18,489 

   

Page 25 of 89

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

•        On June 14, 2007, the Fund placed a $28 million eight-yearnon-recourse first mortgage with a fixed interest rate of 5.76% in connectionwith the purchase of 1401 Enclave Parkway in Houston, Texas.  Payments duringthe mortgage term will be on an interest only basis for five years.  Monthly principaland interest payments of $164,000 will be made over the remaining term of theloan with a balloon payment due at maturity.

       On December 28, 2007, the Companycompleted the financing facility of The Pinnacle at Jackson Place for a totalof $37.6 million.  The facility consists of two mortgages, the proceeds ofwhich will be used to complete the construction and long-term financing of thebuilding.  One of the mortgages is being funded under the Federal New MarketsTax Credit ("NMTC") program, which provides funding for development in certaingeographic areas.  The NMTC mortgage consists of a $23.5 million senior loanand a $6 million subordinate loan, both having a stated maturity of December2047.  Additionally, the facility consists of an additional $8.1 million directloan with the primary arranger of the facility with a stated maturity ofDecember 2047.  The NMTC Senior Loan and the Direct Loan bear interest at LIBORplus 190 basis points during construction; LIBOR plus 175 basis points uponcompletion of construction and LIBOR plus 150 basis points upon lease-up. The NMTC subordinate loan bears interest at 3%.  The Direct Loan can beprepaid without penalty at anytime.  The NMTC Senior and Subordinate Loanscan be called by the Lender at the end of the seventh year.

       The Company expects to continueseeking fixed-rate, non-recourse mortgage financing with maturities from fiveto ten years typically amortizing over 25 to 30 years on select office buildinginvestments as additional capital is needed.  The Company targets a debt tototal market capitalization rate at a percentage in the range of 45% to 50%. Thisrate may vary at times pending acquisitions, sales and/or equity offerings.  Inaddition, volatility in the price of the Company's common stock may affect thedebt to total market capitalization ratio.  However, over time the Companyplans to maintain a percentage in the range of 45% to 50%.  The Companycalculates this ratio by including its proportionate share of any debt onassets held in funds and partnerships.  In addition to this debt ratio, theCompany monitors interest, fixed charge and modified fixed charge coverageratios.  The interest coverage ratio is computed by comparing the cash interestaccrued to earnings before interest, taxes, depreciation and amortization("EBITDA"). The fixed charge coverage ratio is computed by comparingthe cash interest accrued, principal payments made on mortgage loans andpreferred dividends paid to EBITDA.  The modified fixed charge coverage ratiois computed by comparing cash interest accrued and preferred dividends paid toEBITDA. In connection with the GEAR UP Plan, management set an internal targetfor the modified fixed charge coverage ratio of 2.5 times as a measure ofleverage for the plan.  While not a requirement of the plan, this self-imposedtarget serves to prevent the performance goals being met by adopting anunhealthy over-leveraging of the Company.  Management believes the debt to marketcapitalization, interest coverage, fixed charge coverage and modified fixedcharge coverage ratios provide useful information on total debt levels as wellas the Company's ability to cover interest, principal and/or preferred dividendpayments with current income. As of December 31, 2007, Parkway's debt to totalmarket capitalization rate was 56.8%, which is higher than the Company's targetrange of 45% to 50%.  The increase in the rate was due primarily to a stockprice decrease.

Page 26 of 89

       Thecomputation of the interest, fixed charge and modified fixed charge coverage ratiosand the reconciliation of net income to EBITDA are as follows for the yearended December 31, 2007 and 2006 (in thousands):

**Year Ended**

**December 31**

**2007**

** **

**2006**

**Net  income**

$  19,692 

$  25,682 

**Adjustments  to net income:**

        Interest  expense

52,527 

43,532 

        Amortization  of financing costs

1,202 

1,100 

        Prepayment  expenses - early extinguishment of debt

370 

- 

        Depreciation  and amortization

77,575 

65,237 

        Amortization  of share based compensation

1,521 

863 

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

(20,307)

(22,729)

        Tax  expense

(27)

30 

        EBITDA  adjustments - unconsolidated joint ventures

1,255 

2,203 

        EBITDA  adjustments - minority interest in real estate partnerships

(16,709)

(3,803)

** **

**EBITDA  (1)**

$117,099 

$112,115 

** **

**Interest  coverage ratio:**

EBITDA

$117,099 

$112,115 

Interest  expense:

        Interest  expense

$  52,527 

$  43,532 

        Capitalized  interest

242 

- 

        Interest  expense - unconsolidated joint ventures

513 

1,015 

        Interest  expense - minority interest in real estate partnerships

(6,133)

(1,479)

Total  interest expense

$  47,149 

$  43,068 

**Interest  coverage ratio**

2.48 

2.60 

** **

**Fixed  charge coverage ratio:**

EBITDA

$117,099 

$112,115 

Fixed  charges:

        Interest  expense

$  47,149 

$  43,068 

        Preferred  dividends

4,800 

6,573 

        Principal  payments (excluding early extinguishment of debt)

15,580 

15,366 

        Principal  payments - unconsolidated joint ventures

50 

45 

        Principal  payments - minority interest in real estate partnerships

(313)

(222)

Total  fixed charges

$  67,266 

$  64,830 

**Fixed  charge coverage ratio**

1.74 

1.73 

** **

**Modified  fixed charge coverage ratio:**

EBITDA

$117,099 

$112,115 

Modified  Fixed charges:

        Interest  expense

$  47,149 

$  43,068 

        Preferred  dividends

4,800 

6,573 

Total  fixed charges

$  51,949 

$  49,641 

**Modified  fixed charge coverage ratio:**

2.25 

2.26 

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

Page 27 of 89

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

       Parkway views EBITDA primarily as aliquidity measure and, as such, the GAAP financial measure most directlycomparable to it is cash flows provided by operating activities.  BecauseEBITDA is not a measure of financial performance calculated in accordance withGAAP, it should not be considered in isolation or as a substitute for operatingincome, net income, cash flows provided by operating, investing and financingactivities prepared in accordance with GAAP.  The following table reconcilesEBITDA to cash flows provided by operating activities for the year endedDecember 31, 2007 and 2006 (in thousands):

**Year Ended**

**December 31**

**2007**

**2006**

EBITDA

$   117,099 

$    112,115 

Amortization of above market  leases

788 

1,582 

Amortization of mortgage loan discount

(71)

- 

Operating distributions from  unconsolidated joint ventures

1,036 

1,334 

Interest expense

(52,527)

(43,532)

Prepayment expense - early  extinguishment of debt

(370)

- 

Tax expense

27 

(30)

Increase in deferred leasing  costs

(7,080)

(5,937)

Increase in receivables and  other assets

(5,736)

(25,465)

Increase in accounts payable  and other liabilities

11,491 

7,118 

Adjustments for minority  interests

13,537 

3,319 

Adjustments for unconsolidated  joint ventures

(2,263)

(2,954)

Cash flows provided by  operating activities

$    75,931 

$     47,550 

       *Subsidiary Redeemable PreferredMembership Interest. *  In connection with the purchase of the Capital CityPlaza in Atlanta, Georgia on April 2, 2004, Parkway, through a subsidiarycompany, issued $15.5 million in preferred membership interests to the seller. The preferred membership interests paid the seller a 7% coupon rate and wereissued to accommodate their tax planning needs.  The seller previously redeemed$4.8 million of the preferred membership interest.  On August 7, 2007, theseller redeemed the remaining $10.7 million of preferred membership interests.

       *Minority Interest - Real EstatePartnerships.* During the year ending December 31, 2007, minority interestassociated with real estate partnerships decreased $9.8 million.  The decreaseis mainly attributable to the distribution of loan proceeds offset by equitycontributions for the purchase of buildings by the Fund.  Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operation -Financial Condition - Purchases, Improvements and Development," includes adescription of Fund office property purchases during 2007. 

Page 28 of 89

       *Stockholders'Equity. *Stockholders' equity decreased $50.4 million or 10.3% during theyear ended December 31, 2007 as a result of the following (in thousands):

** **

**Increase**

**(Decrease)**

Net income

$  19,692 

Change in  market value of interest rate swap

(1,190)

Change in  unrealized loss on equity securities

4 

Comprehensive  income

18,506 

Common stock  dividends declared

(40,537)

Preferred  stock dividends declared

(4,800)

Purchase of  Company stock

(29,138)

Exercise of  stock options

3,035 

Stock  offering - issuance costs

(28)

Shares  issued - Directors' fees

251 

Share based  compensation expense

1,521 

Shares  distributed from deferred compensation plan

354 

Shares  issued through DRIP plan

363 

Employee  Stock Purchase Plan

75 

$(50,398)

       OnAugust 3, 2007, the Board of Directors authorized the repurchase of up to 1.7million shares of Parkway's outstanding common stock through July 30, 2008. The shares may be purchased in the open market or in privately negotiatedtransactions, and at times and in amounts deemed appropriate by the Company. During 2007, the Company purchased approximately 688,000 shares of common stockfor $29.1 million, which equates to an average price per share of $42.36.

**Results of Operations**

***Comments are for the year ended December 31, 2007 compared to the year endedDecember 31, 2006.***

       Netincome available to common stockholders for the year ended December 31, 2007,was $14.9 million ($.96 per basic common share) as compared to net incomeavailable to common stockholders of $19.1 million ($1.34 per basic commonshare) for the year ended December 31, 2006.  Net gains on the sale of realestate and other assets of $20.3 million were included in net income availableto common stockholders for the year ended December 31, 2007.  Net gains on thesale of real estate and other assets of $22.7 million were included in netincome available to common stockholders for the year ended December 31, 2006.

       *Officeand Parking Properties. *The analysis below includes changes attributableto same store properties, acquisitions and dispositions of office properties. Same store properties are those that the Company owned during both the currentand prior year reporting periods, excluding properties classified asdiscontinued operations.  At December 31, 2007, same store properties consistedof 53 properties comprising 10.8 million square feet.  Properties acquired in2006 and 2007 that do not meet the definition of same store propertiesconsisted of five properties with 970,000 square feet in 2006 and twoproperties with 286,000 square feet in 2007.

       Thefollowing table represents revenue from office and parking properties for theyears ended December 31, 2007 and 2006 (in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2007**

**2006**

**(Decrease)**

**Change**

Revenue from office and parking  properties:

      Same store properties

$199,312

$194,438

$  4,874 

2.5%

      Properties acquired in 2006   

43,622

7,123

36,499 

512.4%

      Properties acquired in 2007

3,711

-

3,711 

0.0%

      Properties disposed

32

8,446

(8,414)

-99.6%

Total revenue from office and 

     parking properties

$246,677

$210,007

$36,670 

17.5%

Page 29 of 89

       Revenue from office and parking properties for samestore properties increased $4.9 million or 2.5% for the year ended December 31,2007 compared to the same period for 2006.  The primary reason for the increaseis due to an increase in same store occupancy for same store properties for theyear ended December 31, 2007 compared to December 31, 2006.  Average same storeoccupancy was 91.7% and 90.0% for the year ended December 31, 2007 and 2006,respectively. Additionally, same store rental rates increased 2.3% for the yearended December 31, 2007 compared to the same period of 2006.

       The following table representsproperty operating expenses for the years ended December 31, 2007 and 2006 (inthousands):

**Year Ended December 31**

** **

** **

**Increase**

**%**

**2007**

**2006**

**(Decrease)**

**Change**

Property operating expenses:

      Same store properties

$  92,166

$  91,419

$       747 

0.8%

      Properties acquired in  2006

20,270

3,352

16,918 

504.7%

      Properties acquired in  2007

1,679

-

1,679 

0.0%

      Office property  development

92

-

92 

0.0%

      Properties disposed

105

4,359

(4,254)

-97.6%

Total property 

      operating expenses

$114,312

$  99,130

$  15,182 

15.3%

       

       Propertyoperating expenses for same store properties increased $747,000 for the yearended December 31, 2007 compared to the same period for 2006.  The primaryreason for the increase is due to increased contract services and personnelcosts offset by utility savings.

       Depreciation and amortization expenseattributable to office and parking properties increased $12.9 million or 20.0%for the year ended December 31, 2007 compared to the same period for 2006 andis due to the increase in the net investment in office and parking properties becauseof additional purchases and improvements to properties.

       *ManagementCompany Income*.  The decrease in management company income of $3.7 millionfor the year ended December 31, 2007 compared to the year ended December 31,2006 is primarily due to the additional management fee and incentive feerecorded in 2006 as a result of the economic returns generated above aninternal rate of return hurdle rate achieved over the life of the Viad jointventure.  The fees were received and recognized by Parkway in the secondquarter of 2006 at closing of the sale of Viad Corporate Center. 

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

       Sharebased compensation expense of $1.5 million, $863,000 and $533,000 wasrecognized for the years ended December 31, 2007, 2006 and 2005, respectively. Total compensation expense related to nonvested awards not yet recognized was$4.3 million as of December 31, 2007.  The weighted average period over whichthis expense is expected to be recognized is approximately 2.7 years.  Totalpotential compensation expense associated with shares that vest based onperformance conditions is $1.5 million as of December 31, 2007.

Page 30 of 89

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

       OnJanuary 14, 2008, the Board of Directors approved the grant of 34,542restricted shares to officers of the Company.  The shares are valued at $1.1million and 34,375 shares will vest four years from grant date and 167 shareswill vest subject to achievement of the GEAR UP Plan, which will end onDecember 31, 2008.  

       *Generaland Administrative Expense.* General and administrative expense increased$1.9 million from $4.7 million in 2006 to $6.6 million in 2007 and is primarilyattributable to increased personnel costs, share based compensation expense andprofessional fees.

       *Gainon Sale of Real Estate, Joint Venture Interests and Other Assets. *For theyear ended December 31, 2007, Parkway recorded a gain on the sale of two officeproperties in Knoxville, Tennessee in the amount of $20.3 million.  For theyear ended December 31, 2006, the Company recorded a gain on the sale of ViadCorporate Center in the amount of $13.6 million, a gain on the sale of threebuildings in Atlanta, Georgia in the amount of $1.6 million, a gain on the saleof Charlotte Park in the amount of $2.6 million and recognized an impairmentloss on investment securities in the amount of $119,000.

       *InterestExpense. *Interest expense, including amortization, increased $9.5 millionor 21.2% for the year ended December 31, 2007 compared to the same period for2006 and is comprised of the following (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2007**

**2006**

**(Decrease)**

**Change**

Interest expense:

      Mortgage interest  expense

$41,515

$   32,674

$8,841 

27.1%

      Bank line interest  expense

10,563

10,105

458 

4.5%

      Subsidiary redeemable

            preferred  membership interest

449

752

(303)

-40.3%

      Debt prepayment expense

370

- 

370 

0.0%

      Mortgage loan cost  amortization

784

671

113 

16.8%

      Bank loan cost amortization

418

430

(12)

-2.8%

Total interest expense

$54,099

$   44,632

$9,467 

21.2%

       Mortgageinterest expense increased $8.8 million or 27.1% for the year ended December31, 2007 compared to the same period for 2006 and is due to the net effect ofnew loans placed or assumed in 2007 and 2006, and the early extinguishment oftwo mortgages in 2007.  Item 7. "Management's Discussion and Analysis ofFinancial Condition and Results of Operations - Financial Condition - MortgageNotes Payable," includes a discussion of mortgages placed in 2007.  The averageinterest rate on mortgage notes payable as of December 31, 2007 and 2006 was 5.8%.

       Bankline interest expense increased $458,000 or 4.5% for the year ended December31, 2007 compared to the same period for 2006.  The change is primarily due tothe increase in the average balance of bank borrowings from $168.0 million for theyear ended December 31, 2006 to $171.5 million for the year ended December 31,2007.  Additionally, the weighted average interest rate on bank lines of creditincreased from 5.9% during the year ended December 31, 2006 to 6.2% during thesame period in 2007.  The increase in bank borrowings is primarily attributableto advances for purchases of office properties and Parkway common stock.

Page 31 of 89

       *DiscontinuedOperations.*  Discontinued operations is comprised of the following for the yearsended December 31, 2007 and 2006 (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2007**

**2006**

**(Decrease)**

**Change**

Discontinued operations:

      Income from  discontinued operations

$170

$     556 

$   (386)

-69.4%

      Gain on sale of real  estate

            from  discontinued operations

-

5,083 

(5,083)

-100.0%

Total discontinued operations 

$170

$  5,639 

$(5,469)

-97.0%

       Thenet gains and all current and prior period income from the following officeproperty dispositions are included in discontinued operations for the yearsended December 31, 2007 and 2006 (in thousands).

** **

** **

**Square**

**Date of**

**Gross Sales**

**Gain (Loss)**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**on Sale**

The Park on Camelback

Phoenix, Arizona 

102

09/09/05

$17,500

$4,419 

250 Commonwealth

Greenville, South Carolina 

46

09/14/05

4,020

(238)

2005 Dispositions

148

$21,520

$4,181 

Central Station Building

St. Petersburg, Florida 

133

08/02/06

$15,000

$   211 

Richmond Centre

Houston, Texas 

92

11/29/06

6,906

2,018 

Ashford II

Houston, Texas 

59

12/07/06

5,250

2,854 

2006 Dispositions

284

$27,156

$5,083 

***Comments are for the year ended December 31, 2006 compared to the year endedDecember 31, 2005.***

****       Net income available to commonstockholders for the year ended December 31, 2006, was $19.1 million ($1.34 perbasic common share) as compared to net income available to common stockholdersof $13.7 million ($0.97 per basic common share) for the year ended December 31,2005.  Net gains of $22.7 million were included in net income available tocommon stockholders for the year ended December 31, 2006.  Net gains of $5.2million were included in net income available to common stockholders for theyear ended December 31, 2005.

       *Officeand Parking Properties. *The analysis below includes changes attributableto same store properties, acquisitions and dispositions of office properties. Same store properties are those that the Company owned during both the currentand prior year reporting periods, excluding properties classified asdiscontinued operations.  At December 31, 2006, same store properties consistedof 51 properties comprising 10 million square feet.  Properties acquired in2005 and 2006 that do not meet the definition of same store propertiesconsisted of one property with 105,000 square feet in 2005 and eight propertieswith 2.2 million square feet in 2006.

       The following table represents incomefrom office and parking properties for the years ended December 31, 2006 and 2005(in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2006**

**2005**

**(Decrease)**

**Change**

Income from office and parking properties:

      Same store properties

$174,604 

$177,769 

$  (3,165)

-1.8%

      Properties acquired in  2005    

18,357 

7,703 

10,654 

138.3%

     Properties acquired in 2006

16,058 

- 

16,058 

 0.0%

     Properties disposed

988 

3,014 

(2,026)

-67.2%

Total income from office and 

     parking properties

$210,007 

$188,486 

$  21,521 

11.4%

Page 32 of 89

       Income from office and parking properties for samestore properties decreased $3.2 million or 1.8% for the year ended December 31,2006 compared to the same period for 2005.  The primary reason for the decreaseis due to a decline in same store occupancy for same store properties for theyear ended December 31, 2006 compared to December 31, 2005.  Average same storeoccupancy was 89.7% and 90.3% for the year ended December 31, 2006 and 2005,respectively.  Additionally, lease termination fee income decreased $1.5million for same store properties for the year ended December 31, 2006 comparedto the same period for 2005.

       Thefollowing table represents property operating expenses for the years endedDecember 31, 2006 and 2005 (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2006**

**2005**

**(Decrease)**

**Change**

Property operating expenses:

      Same store properties

$   83,203 

$   83,272 

$         (69)

-0.1%

      Properties acquired in  2005

8,441 

3,529 

4,912 

139.2%

      Properties acquired in  2006

6,971 

- 

6,971 

0.0%

      Properties disposed

          515

1,453 

(938)

-64.6%

Total property 

      operating expenses

$   99,130 

$   88,254 

$   10,876 

12.3%

       

       Propertyoperating expenses for same store properties decreased $69,000 for the yearended December 31, 2006 compared to the same period for 2005.

       Depreciationand amortization expense attributable to office and parking propertiesincreased $13.6 million or 26.7% for the year ended December 31, 2006 comparedto the same period for 2005 and is due to the increase in the net investment inoffice and parking properties because of additional purchases and improvementsto properties.

       *ManagementCompany Income*.  The increase in management company income of $2.3 millionfor the year ended December 31, 2006 compared to the year ended December 31,2005 is primarily due to the additional management fee and incentive fee of$4.2 million as a result of the economic returns generated above an internalrate of return hurdle rate achieved over the life of the Viad joint venture. The fees were received and recognized by Parkway in the second quarter of 2006at closing of the sale of Viad Corporate Center.   For the year ended December31, 2005, management company income included acquisition fees earned on theMaitland 200 joint venture of $947,000, an incentive fee of $400,000 earned inconnection with the 233 North Michigan joint venture and a commission on thesale of land on behalf of a third-party of $385,000.

       *ManagementCompany Expenses. *Management company expenses increased $534,000 for theyear ended December 31, 2006 compared to the same period for 2005 and isattributable to increased personnel and administrative costs allocated tomanage and expand fund and joint venture operations.

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

       Sharebased compensation expense of $863,000 and $533,000 was recognized for theyears ended December 31, 2006 and 2005, respectively.  Total compensationexpense related to nonvested awards not yet recognized was $3.8 million as ofDecember 31, 2006.

Page 33 of 89

       OnJune 27, 2006, the Board of Directors granted 67,500 restricted shares toofficers of the Company.  Half of the shares will vest four years from July 1,2006.  The remaining half will vest if Parkway achieves the strategic goals ofthe GEAR UP Plan, which will end December 31, 2008.  The Company will recordcompensation expense for the shares that vest based solely on serviceconditions beginning July 1, 2006 over a four year period.  Compensationexpense will not be recorded on the shares that vest based on achievement ofthe GEAR UP Plan until the Company determines that it is probable that the goalwill be achieved.  Therefore, no expense has been recorded in 2006 for the sharesthat vest based on performance conditions.  Total potential compensationassociated with shares that vest based on performance conditions is $1.5million.

       *Equity in Earnings of Unconsolidated Joint Ventures*.  Equity in earnings of unconsolidated joint venturesdecreased $745,000 for the year ended December 31, 2006  compared to the sameperiod for 2005 and is primarily due to the sale of the Company's 30% interestin the Viad Corporate Center in June 2006.  

       *Gainon Sale of Real Estate, Joint Venture Interests and Other Assets.*  For theyear ended December 31, 2006, Parkway recorded a gain on the sale of the ViadCorporate Center in the amount of $13.6 million, a gain on the sale of threebuildings in Atlanta in the amount of $1.6 million, a gain on the sale ofCharlotte Park in the amount of $2.6 million and recognized an impairment losson investment securities in the amount of $119,000.  For the year endedDecember 31, 2005, the Company recorded a gain on the sale of an 80% joint ventureinterest in Maitland 200, an office building in Orlando, Florida, in the amountof $1.3 million and recorded an impairment loss of $340,000 on 12 acres of landin New Orleans, Louisiana.

       *InterestExpense. *Interest expense, including amortization, increased $9.2 millionor 25.9% for the year ended December 31, 2006 compared to the same period for2005 and is comprised of the following (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2006**

**2005**

**(Decrease)**

**Change**

Interest expense:

      Mortgage interest  expense

$   32,674

$   26,043

$   6,631 

25.5%

      Bank line interest  expense

10,105

6,614

3,491 

52.8%

      Subsidiary redeemable

            preferred  membership interest

752

752

- 

0.0%

      Debt prepayment expense

- 

555

(555)

-100.0%

      Mortgage loan cost  amortization

671

976

(305)

-31.3%

      Bank loan cost amortization

430

504

(74)

-14.7%

Total interest expense

$   44,632

$   35,444

$   9,188 

25.9%

       Mortgageinterest expense increased $6.6 million or 25.5% for the year ended December31, 2006 compared to the same period for 2005 and is due to the net effect ofnew loans placed or assumed in 2006 and 2005, the transfer of a mortgage inconnection with the sale of a joint venture interest in 2005 and therefinancing of the Teachers Insurance and Annuity Association mortgage in 2005. The average interest rate on mortgage notes payable as of December 31, 2006and 2005 was 5.8% and 5.7%, respectively.

       Bankline interest expense increased $3.5 million or 52.8% for the year endedDecember 31, 2006 compared to the same period for 2005.  The change isprimarily due to the increase in the average balance of bank borrowings from$138.6 million for the year ended December 31, 2005 to $168 million for the yearended December 31, 2006.  Additionally, the weighted average interest rate onbank lines of credit increased from 4.6% during the year ended December 31,2005 to 5.9% during the same period in 2006.  The increase in bank borrowingsis primarily attributable to advances for purchases of office properties.

       

Page 34 of 89
*DiscontinuedOperations.*  Discontinued operations is comprised of the following for theyears ended December 31, 2006 and 2005 (in thousands):
 

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2006**

**2005**

**(Decrease)**

**Change**

Discontinued operations:

      Income from  discontinued operations

$     556 

$   2,366 

$   (1,810)

-76.5%

      Gain on sale of real  estate

            from  discontinued operations

5,083 

4,181 

902 

21.6%

Total discontinued operations 

$  5,639 

$   6,547 

$      (908)

-13.9%

 

       Thenet gains and all current and prior period income from the following officeproperty dispositions are included in discontinued operations for the yearsended December 31, 2006 and 2005 (in thousands).

** **

** **

**Square**

**Date of**

**Gross Sales**

**Gain (Loss)**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**on Sale**

The Park on Camelback

Phoenix, Arizona 

102

09/09/05

$17,500

$4,419 

250 Commonwealth

Greenville, South Carolina 

46

09/14/05

4,020

(238)

2005 Dispositions

148

$21,520

$4,181 

Central Station Building

St. Petersburg, Florida 

133

08/02/06

$15,000

$   211 

Richmond Centre

Houston, Texas 

92

11/29/06

6,906

2,018 

Ashford II

Houston, Texas 

59

12/07/06

5,250

2,854 

2006 Dispositions

284

$27,156

$5,083 

**Liquidity and CapitalResources**

       *Statement of Cash Flows.  *Cashand cash equivalents were $11.3 million and $4.5 million at December 31, 2007and December 31, 2006, respectively.  Cash flows provided by operatingactivities for the year ended December 31, 2007 were $75.9 million compared to$47.6 million for the same period of 2006.  The change in cash flows fromoperating activities is primarily attributable to the effect of the timing ofreceipt of revenues and payment of expenses.

       Cashused in investing activities was $57.0 million for the year ended December 31,2007 compared to cash used in investing activities of $280.6 million for thesame period of 2006.  The decrease in cash used by investing activities of $223.6million is primarily due to the net effect of increased office propertypurchases and sales in 2006, offset by an increase in office propertyimprovements and development costs in 2007.

       Cashused in financing activities was $12.0 million for the year ended December 31,2007 compared to cash provided by financing activities of $234.2 million forthe same period of 2006.  The decrease in cash provided by financing activitiesof $246.2 million is primarily due to the net effect of early extinguishment oftwo mortgage notes payable in 2007, the redemption of subsidiary redeemablepreferred membership interest in 2007, proceeds from the sale of officeproperties used to reduce bank lines of credit, the purchase of Parkway commonstock and proceeds received on mortgage placements in 2006.

** **       *Liquidity.  *The Company plans to continue pursuing the acquisition of additionalinvestments that meet the Company's investment criteria and intends to use banklines of credit, proceeds from the refinancing of mortgages, proceeds from thesale of non-core assets and office properties, proceeds from the sale ofportions of owned assets through joint ventures, possible sales of securitiesand cash balances to fund those acquisitions.  

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

       AtDecember 31, 2007, Parkway had a total of $212.3 million outstanding under itsunsecured bank lines of credit.  Parkway's unsecured lines of credit arecomprised of a four-year $236 million unsecured revolving credit facility and afive-year $60 million unsecured term loan, both led by Wachovia Bank andsyndicated to nine other banks (the "$296 million line"); a $15 millionunsecured line of credit with PNC Bank (the "$15 million line") and a $9million unsecured line of credit with Trustmark National Bank (the "$9 millionline").  The interest rates on the $296 million line and the $15 million linewere equal to the 30-day LIBOR rate plus 80 to 130 basis points, depending uponoverall Company leverage.  The interest rate on the $9 million line was equalto the 30-day LIBOR rate plus 132.5 basis points.  The weighted averageinterest rate on unsecured lines of credit was 6.0% and 6.3% at December 31,2007 and 2006, respectively. As of December 31, 2007, the Company had $99million available to borrow on all unsecured bank lines of credit.

Page 35 of 89

       OnDecember 13, 2007, the Company exercised $96 million of the $110 millionaccordion feature of it existing unsecured line of credit facility withWachovia Bank.  The Company's credit facility increased from $200 million to$296 million and is comprised of a $60 million term loan maturing April 2011and a $236 million revolving loan maturing in April 2010, which includes rightsto a one-year extension with the same terms through April 2011.  The interestrate on the credit facility is currently LIBOR plus 130 basis points.  TheCompany pays an annual administration fee of $35,000 and fees on the unusedportion of the revolver ranging between 12.5 and 20 basis points based uponoverall Company leverage, with the rate set at 12.5 basis points at December31, 2007.

       The$15 million line matures January 28, 2009, is unsecured and is expected to fundthe daily cash requirements of the Company's treasury management system.  The$15 million line has a current interest rate equal to the 30-day LIBOR rateplus 130 basis points as of December 31, 2007.  Under the $15 million line, theCompany does not pay annual administration fees or fees on the unused portionof the line.

       The$9 million line with Trustmark National Bank is interest only, has a currentinterest rate equal to the 30-day LIBOR rate plus 132.5 basis points andmatures December 7, 2008.  The proceeds of the loan were used to finance theconstruction of the City Centre Garage, which was completed in 2005.

       Toprotect against the potential for rapidly rising interest rates, the Companyentered into interest rate swap agreements in 2007, 2005 and 2004.  The Companydesignated the swaps as hedges of the variable interest rates on the Company'sborrowings under the Wachovia unsecured revolving credit facility. Accordingly, changes in the fair value of the swap are recognized inaccumulated other comprehensive income until the hedged item is recognized inearnings.  The Company's interest rate hedge contracts as of December31, 2007 and 2006 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December 31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2007**

**2006**

Swap

$50,000

06/30/08

1-Month LIBOR

4.380%

$     15 

$        -

Swap

$30,000

08/31/08

1-Month LIBOR

4.924%

(133)

-

Swap

$40,000

12/31/08

1-Month LIBOR

4.360%

(192)

525

Swap

$20,000

12/31/08

1-Month LIBOR

4.245%

(48)

307

$  (358)

$   832

       AtDecember 31, 2007, the Company had $714.5 million in mortgage notes payablewith an average interest rate of 5.8% secured by office properties and $212.3million drawn under bank lines of credit.  Parkway's pro rata share ofunconsolidated joint venture debt was $9.8 million with an average interest rateof 5.1% at December 31, 2007.  Based on the Company's total marketcapitalization of approximately $1.4 billion at December 31, 2007 (using theDecember 31, 2007 closing price of $36.98 per common share), the Company's debtrepresented approximately 56.8% of its total market capitalization. The Companytargets a debt to total market capitalization rate at a percentage in the rangeof 45% to 50% This rate may vary at times pending acquisitions, sales and/orequity offerings.  In addition, volatility in the price of the Company's commonstock may affect the debt to total market capitalization ratio.  However, overtime the Company plans to maintain a percentage in the range of 45% to 50%. Theincrease in the debt to total market capitalization rate at December 31, 2007was due primarily to a stock price decrease.

Page 36 of 89

       Inaddition to the debt to total market capitalization ratio, the Company alsomonitors interest, fixed charge and modified fixed charge coverage ratios.  Theinterest coverage ratio is computed by comparing the cash interest accrued toearnings before interest, taxes, depreciation and amortization ("EBITDA"). This ratio for the years ended December 31, 2007 and 2006 was 2.48 and 2.60times, respectively.  The fixed charge coverage ratio is computed by comparingthe cash interest accrued, principal payments made on mortgage loans andpreferred dividends paid to EBITDA.  This ratio for the years ended December31, 2007 and 2006 was 1.74 and 1.73 times, respectively.   The modified fixedcharge coverage ratio is computed by comparing the cash interest accrued andpreferred dividends paid to EBITDA.  This ratio for the years ended December31, 2007 and 2006 was 2.25 and 2.26 times, respectively.    In connection withthe GEAR UP Plan, management set an internal target for the modified fixedcharge coverage ratio of 2.5 times as a measure of leverage for the plan. While not a requirement of the plan, this self-imposed target serves to preventthe performance goals being met by adopting an unhealthy over-leveraging of theCompany.  Management believes the debt to market capitalization, interestcoverage, fixed charge coverage and modified fixed charge coverage ratiosprovide useful information on total debt levels as well as the Company'sability to cover interest, principal and/or preferred dividend payments withcurrent income.

       The table below presents the principal payments due andweighted average interest rates for the mortgage notes payable as of December31, 2007.

**Average**

**Mortgage Notes Payable**

**Interest Rate**

**(In thousands)**

2008

5.9%

$  55,938

2009

5.9%

36,201

2010

5.9%

97,477

2011

6.1%

111,665

2012

6.1%

63,041

Thereafter

6.3%

350,179

Total

$714,501

 

Fair  value at 12/31/07

$714,590

       TheCompany presently has plans to make additional capital improvements at itsoffice properties in 2008 of approximately $48.2 million.  These expenses includetenant improvements, leasing costs, capitalized acquisition costs andcapitalized building improvements.  Approximately $17.7 million of theseimprovements relate to upgrades on properties acquired in recent years thatwere anticipated at the time of purchase.  All such improvements are expectedto be financed by cash flow from the properties, contributions from partnersand advances on the bank lines of credit.

      In 2006, theCompany announced the development of a 194,000 square foot Class A+ officebuilding in Jackson, Mississippi known as The Pinnacle at Jackson Place,adjacent to the Company's headquarters building.  The estimated cost of thedevelopment is $48.5 million and it is expected to be completed in the fall of2008. In 2008, the Company expects to incur approximately $22.4 million inconstruction costs.  The Company has received commitments to leaseapproximately 70% of the new office space from four major customers.  Parkwayis considering a joint venture structure for the development whereby Parkwaywill retain an ownership interest of approximately 20%.  The development isdesigned to utilize benefits available under the Gulf Opportunity Zone Act fornew developments in areas affected by Hurricane Katrina.

       OnDecember 28, 2007, the Company completed the financing facility of The Pinnacleat Jackson Place for a total of $37.6 million.   The facilityconsists of two mortgages, proceeds of which will be used to complete theconstruction and long-term financing of the building.  One of themortgages is being funded under the Federal New Markets Tax Credit ("NMTC") program which provides funding for development in certain geographic areas or areas thathave been designated for Federal relief under the Gulf Opportunity ZoneAct.  The NMTC mortgage consists of a $23.5 million senior loan and a $6million subordinate loan, both having a stated maturity of December 2047. Additionally, the facility consists of an $8.1 million loan with the primaryarranger of the facility with a stated maturity of December 2047.  The NMTC Senior Loan and the Direct Loan bear interest at LIBOR plus 190 basis points duringconstruction; LIBOR plus 175 basis points upon completion of construction andLIBOR plus 150 basis points upon lease-up.  The NMTC subordinate loanbears interest at 3%.  The Direct Loan can be prepaid without penalty atanytime.  The NMTC Senior and Subordinate Loans can be called by thelender at the end of the seventh year.

       Inaccordance with the GEAR UP Plan, the Company made three investments in thefirst quarter of 2008 on behalf of the Fund, totaling $236.6 million.  Of thetotal purchase price, $215 million represents investments by the Fund and $21.6million represents an additional investment by Parkway.  The investments werefunded with $142.2 million in mortgage debt and $94.4 million in equitycontributions from partners.  Parkway's share of the total equity contributionwas $30.1 million and was funded with advances from unsecured bank lines ofcredit.  With these three investments, the Fund with Ohio PERS is fullyinvested.  Additionally, the Company continues to pursue its strategy ofselling smaller assets, or assets in smaller markets that do not fit with theCompany's strategy of owning larger assets in institutional markets. Item 7.  "Management's Discussion and Analysis of Financial Condition andResults of Operations - Overview - Strategic Planning," includes a fulldiscussion of the GEAR UP Plan.  

Page 37 of 89

In the thirdquarter of 2008 Parkway has only one mortgage note payable maturing forapproximately $40 million that is secured by the Capital City Plaza officeproperty in Atlanta, Georgia.  The mortgage will be paid off with advances fromunsecured bank lines of credit.  

       The Company anticipates that its current cash balance,operating cash flows, contributions from partners and borrowings (includingborrowings under the working capital line of credit) will be adequate to paythe Company's (i) operating and administrative expenses, (ii) debt serviceobligations, (iii) distributions to shareholders, (iv) capital improvements,and (v) normal repair and maintenance expenses at its properties, both in theshort and long term.  In addition, the Company may use proceeds from sales ofassets, possible sales of securities and borrowings to fund propertyacquisitions.  

**Off-Balance Sheet Arrangements**

       As of December 31, 2007,the Company was invested in four unconsolidated joint ventures with unrelatedinvestors. These joint ventures are accounted for using the equity method ofaccounting, as Parkway does not control, but has the ability to significantlyinfluence the operations of the joint ventures and is not the primarybeneficiary, as that term is defined in FIN 46R.  As a result, the assetsand liabilities of the joint ventures are not included in Parkway'sconsolidated balance sheet.  Information relating to the unconsolidatedjoint ventures at December 31, 2007 is detailed below (in thousands).

** **

** **

** **

**Parkway's**

** **

** **

** **

**Ownership**

**Joint Ventures**

**Property Name**

**Location**

**Interest**

** **

** **

** **

** **

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

Parkway Joint Venture, LLC ("Jackson JV")

UBS Building/River Oaks

Jackson, MS

20.0%

RubiconPark I, LLC ("Rubicon JV")

Lakewood/Falls Pointe

Atlanta, GA

20.0%

Carmel Crossing

Charlotte, NC

RubiconPark II, LLC ("Maitland JV")

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 topartners in joint ventures where the percentage of debt assumed isdisproportionate to the ownership percentage in the venture is distributedbased on each partner's share of cash available for distribution before debtservice, based on their ownership percentage, less the partner's share of debtservice based on the percentage of debt assumed by each partner.

       Parkway providesmanagement, construction and leasing services for all of the unconsolidatedjoint ventures except for the Wink-Parkway Partnership, and receives marketbased fees for these services.  The portion of fees earned onunconsolidated joint ventures attributable to Parkway's ownership interest iseliminated in consolidation.

       The following information summarizes the financial positionat December 31, 2007 for the investments in which we held an interest atDecember 31, 2007 (in thousands):

** **

** **

**Mortgage**

** **

**Parkway's**

**Summary of Financial Position**

**Total Assets**

**Debt (1)**

**Total Equity**

**Investment**

Parkway Joint Venture, LLC

$  17,389

$12,600

$  4,061

$    (244)

Wink-Parkway Partnership

1,473

176

1,274

637 

RubiconPark I, LLC

74,031

52,000

20,451

5,433 

RubiconPark II, LLC

30,450

18,617

11,147

5,410 

$123,343

$83,393

$36,933

$11,236 

(1)  The mortgage debt, all of which isnon-recourse, is collateralized by the individual real estate property orproperties within each venture, the net book value of which totaled $113.4million at December 31, 2007.  Parkway's proportionate share of thenon-recourse mortgage debt totaled $9.8 million at December 31, 2007.

Page 38 of 89

       The followinginformation summarizes the results of operations for the year ended December31, 2007 for investments which impacted our 2007 results of operations (inthousands):

** **

** **

** **

**Parkway's Share**

**Parkway's Share**

** **

** **

** **

** Net**

**of Equity in Earnings**

**of Gain on**

** **

** **

**Total**

**Income**

**of Unconsolidated**

**Sale of**

**Parkway's Share**

**Summary of Operations**

**Revenue**

**(Loss)**

**Joint Ventures**

**Real Estate**

**of Net Income**

Phoenix OfficeInvest, LLC (1)

$           -

$   128 

$   (12)

$50

$     38

Parkway Joint Venture, LLC

2,875

(3)

-  

-

-

Wink-Parkway Partnership

373

232 

117  

-

117

RubiconPark I, LLC

10,228

1,727 

507  

-

507

RubiconPark II, LLC

4,363

1,141 

396  

-

396

$17,839

$3,225 

$1,008  

$50

$1,058

(1)     Phoenix OfficeInvest,LLC is a joint venture that owned Viad Corporate Center, an office property inPhoenix, Arizona, and a venture in which Parkway owned a 25% interest.  On June23, 2006, the venture sold Viad Corporate Center.  Parkway received netproceeds of $15.4 million and recognized a gain of $13.6 million from the sale.

**Contractual Obligations**

****       We have contractual obligationsincluding mortgage notes payable and lease obligations.  The table belowpresents total payments due under specified contractual obligations by yearthrough maturity as of December 31, 2007 (in thousands):

**Payments Due By Period**

**Contractual  Obligations**

**Total**

**2008**

**2009**

**2010**

**2011**

**2012**

**Thereafter**

Long-Term Debt (Mortgage  Notes Payable) 

$   952,950

$  96,590

$74,009

$132,673

$140,266

$86,717

$422,695

Capital  Lease Obligations

7,125

346

252

113

113

113

6,188

Operating  Leases

564

341

107

93

23

-

-

Purchase  Obligations

45,627

44,084

1,142

57

344

-

-

Total

$1,006,266

$141,361

$75,510

$132,936

$140,746

$86,830

$428,883

       The amounts presented above formortgage notes payable and capital lease obligations include principal andinterest payments.  The amounts presented for purchase obligations representthe remaining tenant improvement allowances for leases in place and commitmentsfor building improvements and development costs as of December 31, 2007.

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

       Parkway has a 75% ownership interestin MBALP and acts as the managing general partner.  MBALP is primarily fundedwith financing from a third party lender, which is secured by a first lien onthe rental property of the partnership.  The creditors of MBALP do not haverecourse to Parkway.  In acting as the general partner, Parkway is committed toproviding additional funding to partnership deficits up to an aggregate amountof $1 million.  To date Parkway has not been required to provide any additionalfunding to MBALP.

       Inconnection with the 10-year $148.5 million non-recourse first mortgage on OneIllinois Center in Chicago, Illinois, the Company delivered $1.4 million inletters of credit to satisfy the various escrow requirements made by thelender.  The letters of credit expire June 30, 2008.

 

Page 39 of 89
**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, as defined in FASB Interpretation 46R "Consolidation of VariableInterest Entities" ("FIN 46R").  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses for the reportingperiod.  Actual results could differ from our estimates.

       The accounting policies and estimatesused in the preparation of our Consolidated Financial Statements are more fullydescribed in the notes to our Consolidated Financial Statements.  However,certain of the Company's significant accounting policies are consideredcritical accounting policies due to the increased level of assumptions used orestimates made in determining their impact on our Consolidated FinancialStatements.

       Parkwayconsiders critical accounting policies and estimates to be those used in thedetermination of the reported amounts and disclosure related to the following:

       (1)  Impairment or disposal of long-livedassets;

       (2) Depreciable lives applied to real estate and improvements to real estate;

       (3) Initial recognition, measurement and allocation of the cost of real estateacquired; and

       (4) Allowance for doubtful accounts

       *Impairment or Disposal ofLong-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. 

       Real estate assets are classified asheld for sale or held and used in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets".  In accordance with SFAS No. 144, the Companyrecords assets held for sale at the lower of carrying amount or fair value lesscost to sell.  With respect to assets classified as held and used, weperiodically review these assets to determine whether our carrying amount willbe recovered.  A long-lived asset is considered impaired if its carrying valueexceeds the estimated fair value.  Fair value is based on the estimated andrealizable contract sales price (if available) for the asset less estimatedcosts to sell.  If a sales price is not available, the estimated undiscountedcash flows of the asset for the remaining useful life are used to determine ifthe carrying value is recoverable.  The cash flow estimates are based onassumptions about employing the asset for its remaining useful life.  Factorsconsidered in projecting future cash flows include but are not limited to: Existing leases, future leasing and terminations, market rental rates, capitalimprovements, tenant improvements, leasing commissions, inflation and otherknown variables.  Upon impairment, the Company would recognize an impairmentloss to reduce the carrying value of the long-lived asset to our estimate ofits fair value.  The estimate of fair value and cash flows to be generated fromproperties requires us to make assumptions.  If one or more assumptions proveincorrect or if the assumptions change, the recognition of an impairment losson one or more properties may be necessary in the future, which would result ina decrease in net income.

*       *Parkway recorded an impairmentloss on equity securities in the amount of $11,000 and $119,000 in 2007 and2006, respectively, and an impairment loss on 12 acres of land in New Orleans,Louisiana in the amount of $340,000 in 2005.

*       Depreciable Lives Applied to RealEstate and Improvements to Real Estate.*  Depreciation of buildings andparking garages is computed using the straight-line method over an estimateduseful life of 40 years.  Depreciation of building improvements is computedusing 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 40 of 89

*       Initial Recognition, Measurementand Allocation of the Cost of Real Estate Acquired.*  Parkway accounts forits acquisitions of real estate in accordance with Statement of FinancialAccounting Standards No. 141, "Business Combinations," which requires the fairvalue of the real estate acquired to be allocated to the acquired tangibleassets, consisting of land, building, garage, building improvements and tenantimprovements, identified intangible assets and liabilities, consisting of thevalue of above and below market leases, customer relationships, lease costs andthe value of  in-place leases and any value attributable to above or below marketdebt assumed with the acquisition.

*       *Parkway allocates the purchaseprice of properties to tangible and intangible assets based on fair values. TheCompany determines the fair value of the tangible and intangible componentsusing a variety of methods and assumptions all of which result in anapproximation of fair value.  Differing assumptions and methods could result indifferent estimates of fair value and thus, a different purchase priceallocation and corresponding increase or decrease in depreciation andamortization expense.

* *

*       Allowancefor Doubtful Accounts. *Accounts receivable are reduced by an allowance foramounts that may become uncollectible in the future.  Our receivable balance iscomprised primarily of rents and operating expense recoveries due from customers. Change in 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 collectibility 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.

**Funds FromOperations**

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

Page 41 of 89

       Thefollowing table presents a reconciliation of the Company's net income to FFOfor the years ended December 31, 2007 and 2006 (in thousands, except per sharedata):
 **Total  Dollar Amount****Diluted  Per Share** **Year  Ended****Year  Ended** **December  31****December  31** **2007****2006****2007****2006**Net income
$ 19,692 
$ 25,682 
$ 1.26 
$ 1.77 Adjustments to derive funds from operations:    
     Depreciation  and amortization
77,574 
64,655 

4.96 

4.28 

     Depreciation  and amortization - discontinued operations
1 
582 

-  

0.04 

     Minority  interest depreciation and amortization

(10,414)

(2,275)

(0.67)

(0.15)

     Adjustments  for unconsolidated joint ventures

732  

815  

0.05  

0.05  
     Preferred  dividends
(4,800)

(4,800)
(0.31)
(0.33)
     Convertible  preferred dividends

-  

(1,773)

-  

(0.12)

     Gain  on real estate and joint venture interests

(20,260)

(22,848)

(1.29)

(1.51)

     Minority  interest - unit holders

2 

1 

-  

-  
     Diluted  share adjustment for convertible preferred stock
-  
-  -  0.07 Funds from operations applicable to  common shareholders$ 62,527 $ 60,039 $ 4.00 $ 4.10 
**Inflation**

       Inflation has not had a significant impacton the Company because of the relatively low inflation rate in the Company'sgeographic areas of operation.  Additionally, most of the leases require thecustomers to pay their pro rata share of operating expenses, including commonarea maintenance, real estate taxes, utilities and insurance, thereby reducingthe Company's exposure to increases in operating expenses resulting frominflation.  The Company's leases typically have three to seven year terms,which may enable the Company to replace existing leases with new leases atmarket base rent, which may be higher or lower than the existing lease rate.

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

**Forward-Looking Statements**

Page 42 of 89

****       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.  *Quantitative and Qualitative Disclosures About MarketRisk.***

****       See information appearing underthe caption "Liquidity" appearing in Item 7. "Management'sDiscussion and Analysis of Financial Condition and Results of Operations".

****       As of December 31, 2007, totaloutstanding debt was $926.9 million of which $212.3 million or 23% is variablerate debt.  If market rates of interest on the variable rate debt fluctuate by10% (or approximately 60 basis points), the change in interest expense on thevariable rate debt would increase or decrease future earnings and cash flows byapproximately $1.3 million annually.

** **

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

**Index to Consolidated  Financial Statements**

**Page**

Report  of Independent Registered Public Accounting Firms

44

Consolidated Balance Sheets -  as of December 31, 2007 and 2006

46

Consolidated Statements of  Income - for the years ended December 31, 2007, 2006 and 2005

47

Consolidated Statements of  Stockholders' Equity - for the years ended December 31, 2007, 2006 and 2005

48

Consolidated Statements of Cash  Flows - for the years ended December 31, 2007, 2006 and 2005

49

Notes to Consolidated Financial  Statements

50

Schedule  II - Valuations and Qualifying Accounts

78

Schedule  III - Real Estate and Accumulated Depreciation

79

Note  to Schedule III - Real Estate and Accumulated Depreciation

82

Schedule  IV - Mortgage Loans on Real Estate

83

Note  to Schedule IV - Mortgage Loans on Real Estate

83

** **

Page 43 of 89

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Shareholders and Board of Directors of

Parkway Properties, Inc. 

We have audited the accompanying consolidated balance sheets of ParkwayProperties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity, and cashflows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedules listed in the index atItem 15(a)2.  These financial statements and financial statement schedules arethe responsibility of the Company's management.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedules based on our audits. We did not audit the financial statements of ParkwayProperties Office Fund, LP, a consolidated joint venture, which statementsreflect total assets of $276.7 million and $225.0 million as of December 31, 2007 and 2006, respectively, and total revenues of $33.5 million and $6.8million for the years ended December 31, 2007 and 2006, respectively.  Those statements were audited by other auditors whose report has been furnished to us, andour opinion, insofar as it relates to the amounts included for ParkwayProperties Office Fund, LP, is based solely on the report of the otherauditors.

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that ouraudits and the report of other auditors provide a reasonable basis for ouropinion.

In our opinion, based on our audits and the report of other auditors, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Parkway Properties, Inc. andsubsidiaries at December 31, 2007 and 2006 and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2007, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, the related financial statement schedules,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Parkway Properties, Inc.'s internal control over financialreporting as of December 31, 2007, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 27, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Houston, TexasFebruary 27, 2008

Page 44 of 89

**Report of IndependentRegistered Public Accounting Firm**

The Partners ofParkway Properties Office Fund, LP:

We have audited the consolidatedhistorical‐cost balance sheets of Parkway Properties Office Fund, LP (thePartnership) as of December 31, 2007 and 2006, and the related consolidatedhistorical-cost statements of operations, changes in partners' capital and cashflows for the years then ended, not included herein. We also have audited thesupplemental consolidated current-value balance sheets of the Partnership as ofDecember 31, 2007 and 2006, and the related supplemental consolidatedcurrent-value statements of operations and changes in partners' capital for theyears then ended, not included herein. These consolidated financial statementsare the responsibility of the Partnership's management. Our responsibility isto express an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits 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 audits provide 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, LPas of December 31, 2007 and 2006, and the results of its operations and itscash flows for the years then ended, in conformity with U.S. generally acceptedaccounting principles.

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 tobe a 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 audits weremade for the purpose of forming an opinion on the consolidated historical-costand consolidated current-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 audits of the consolidated current-valuefinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the consolidated current-value financial statementstaken as a whole.

/s/ KPMG LLP

Jackson, Mississippi

February 26, 2008

Page 45 of 89

**PARKWAYPROPERTIES, INC.CONSOLIDATED BALANCE SHEETS**(In thousands)

**December 31**

**December 31**

**2007**

**2006**

**Assets**

Real estate related investments:

     Office and parking  properties

$1,552,982 

$1,512,104 

     Office property development

13,411 

- 

     Accumulated depreciation

(251,791)

(208,891)

1,314,602 

1,303,213 

     Land available for sale

1,467 

1,467 

     Mortgage loan

7,001 

- 

     Investment in unconsolidated  joint ventures

11,236 

11,179 

1,334,306 

1,315,859 

Rents receivable and other assets

119,457 

110,213 

Intangible assets, net

70,719 

81,800 

Cash and cash equivalents

11,312 

4,474 

$1,535,794 

$1,512,346 

** **

** **

** **

**Liabilities**

** **

** **

Notes payable to banks

$   212,349 

$    152,312 

Mortgage notes payable 

714,501 

696,012 

Accounts payable and other liabilities

88,496 

72,659 

Subsidiary redeemable preferred membership interests

- 

10,741 

1,015,346 

931,724 

** **

** **

** **

**Minority Interest**

** **

** **

Minority Interest - unit holders

34 

36 

Minority Interest - real estate partnerships

80,506 

90,280 

** **

80,540 

90,316 

** **

** **

** **

**Stockholders' Equity**

** **

** **

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

     shares authorized, issued  and outstanding

57,976 

57,976 

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

     15,223,350 and 15,764,799  shares issued and outstanding

     in 2007 and 2006, respectively

15 

16 

Common stock held in trust, at cost, 104,500 and 115,000  

     shares in 2007 and 2006,  respectively 

(3,540)

(3,894)

Additional paid-in capital

425,221 

449,141 

Accumulated other comprehensive income (loss)

(358)

828 

Accumulated deficit

(39,406)

(13,761)

439,908 

490,306 

$1,535,794 

$1,512,346 

Seenotes to consolidated financial statements.

Page 46 of 89

**PARKWAYPROPERTIES, INC.**

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

**Year Ended December 31**

**2007**

**2006**

**2005**

**Revenues**

Income  from office and parking properties

$246,677 

$210,007 

$188,486 

Management company income

1,605 

5,329 

2,997 

      Total  revenues

248,282 

215,336 

191,483 

** **

**Expenses**

Property  operating expense

114,312 

99,130 

88,254 

Depreciation  and amortization

77,574 

64,655 

51,046 

Operating  expense for other real estate properties

5 

5 

5 

Management  company expenses

1,188 

1,141 

607 

General  and administrative

6,597 

4,651 

4,468 

199,676 

169,582 

144,380 

** **

**Operating  income**

48,606 

45,754 

47,103 

** **

**Other  income and expenses**

Interest  and other income

528 

40 

255 

Equity  in earnings of unconsolidated joint ventures

1,008 

751 

1,496 

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

20,307 

17,646 

1,039 

Interest  expense

(54,099)

(44,632)

(35,444)

** **

**Income  before minority interest and discontinued operations**

16,350 

19,559 

14,449 

Minority  interest - unit holders

(2)

(1)

(2)

Minority  interest - real estate partnerships

3,174 

485 

(187)

** **

**Income  from continuing operations**

19,522 

20,043 

14,260 

Discontinued  operations:

      Income  from discontinued operations

170 

556 

2,366 

      Gain  on sale of real estate from discontinued operations

- 

5,083 

4,181 

** **

**Net  income**

19,692 

25,682 

20,807 

Change  in market value of interest rate swaps

(1,190)

(73)

1,131 

Change  in unrealized gain (loss) on equity securities

4 

75 

(79)

**Comprehensive  income**

$18,506 

$  25,684 

$  21,859 

** **

**Net  income available to common stockholders:**

** **

** **

** **

Net  income

$19,692 

$  25,682 

$  20,807 

Dividends  on preferred stock

(4,800)

(4,800)

(4,800)

Dividends  on convertible preferred stock

- 

(1,773)

(2,346)

**Net  income available to common stockholders**

$14,892 

$  19,109 

$  13,661 

** **

**Net  income per common share:**

Basic:

      Income  from continuing operations

$     0.95 

$     0.95 

$     0.50 

      Discontinued  operations

0.01 

0.39 

0.47 

      Net  income

$     0.96 

$     1.34 

$     0.97 

Diluted:

      Income  from continuing operations

$     0.94 

$     0.93 

$     0.50 

      Discontinued  operations

0.01 

0.39 

0.46 

      Net  income

$     0.95 

$     1.32 

$     0.96 

** **

**Dividends per common share**

$    2.60 

$     2.60 

$     2.60 

** **

**Weighted  average shares outstanding:**

      Basic  

15,482 

14,306 

14,065 

      Diluted

15,648 

14,487 

14,233 

Seenotes to consolidated financial statements.

Page 47 of 89

**PARKWAY PROPERTIES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**(In thousands)

**Year Ended December 31**

**2007**

**2006**

**2005**

** **

**8.34% Series B Cumulative  Convertible Preferred stock, $.001 par value**

     Balance  at beginning of year

$             - 

$  28,122 

$  28,122 

          Conversion  of preferred stock to common stock

- 

(28,122)

- 

     Balance  at end of year

- 

- 

28,122 

** **

**8.00% Series D Preferred  stock, $.001 par value**

     Balance  at beginning of year

57,976 

57,976 

57,976 

     Balance  at end of year

57,976 

57,976 

57,976 

** **

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

     Balance  at beginning of year

16 

14 

12 

          Purchase  of Company stock

(1)

- 

- 

          Shares  issued - stock offering

- 

1 

2 

          Shares  issued - conversion of preferred stock to common stock

- 

1 

- 

     Balance  at end of year

15 

16 

14 

**Common stock held in  trust**

     Balance  at beginning of year

(3,894)

(4,198)

(4,400)

          Shares  distributed from deferred compensation plan

354 

304 

202 

     Balance  at end of year

(3,540)

(3,894)

(4,198)

** **

** **

** **

** **

**Additional paid-in  capital**

** **

** **

** **

     Balance  at beginning of year

449,141 

389,971 

310,455 

          Stock  options and warrants exercised

3,035 

6,034 

2,104 

          Conversion  of preferred stock to common stock

- 

28,121 

- 

          Shares  issued in lieu of Directors' fees

251 

170 

193 

          Restricted  shares issued (forfeited)

- 

- 

(679)

          Deferred  incentive share units issued

- 

- 

191 

          Shares  issued - DRIP Plan

363 

407 

1,899 

          Proceeds/(issuance  costs) from stock offerings

(28)

29,487 

75,808 

          Employee  Stock Purchase Plan

75 

3 

- 

          Purchase  of Company stock

(29,137)

(2,814)

- 

          Share  based compensation expense

1,521 

863 

- 

          Reclassification  upon the adoption of SFAS No. 123R

- 

(3,101)

- 

     Balance  at end of year

425,221 

449,141 

389,971 

** **

**Unearned compensation**

     Balance  at beginning of year

- 

(3,101)

(4,122)

          Restricted  shares (issued) forfeited

- 

- 

679 

          Deferred  incentive share units issued

- 

- 

(191)

          Share  based compensation expense

- 

- 

533 

          Reclassification  upon the adoption of SFAS No. 123R

- 

          3,101 

          - 

**     **Balance at end of year

- 

- 

(3,101)

** **

** **

** **

** **

**Accumulated other  comprehensive income (loss)**

** **

** **

** **

     Balance  at beginning of year

828 

826 

(226)

          Change  in market value of interest rate swaps

(1,190)

(73)

1,131 

          Change  in unrealized gain (loss) on equity securities

4 

75 

(79)

     Balance  at end of year

(358)

828 

826 

** **

** **

** **

** **

**Retained earnings (deficit)**

** **

** **

** **

     Balance  at beginning of year

(13,761)

4,906 

27,831 

          Net  income

19,692 

25,682 

20,807 

          Preferred  stock dividends declared

(4,800)

(4,800)

(4,800)

          Convertible  preferred stock dividends declared

- 

(1,773)

(2,346)

          Common  stock dividends declared

(40,537)

(37,776)

(36,586)

     Balance  at end of year

(39,406)

(13,761)

4,906 

**Total stockholders'  equity**

$439,908 

$490,306 

$474,516 

See notes to consolidated financial statements.

Page 48 of 89

**PARKWAYPROPERTIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

**Year Ended December 31**

**2007**

**2006**

**2005**

**Operating  activities**

     Net income

$   19,692 

$    25,682 

$    20,807 

     Adjustments  to reconcile net income to cash

          provided  by operating activities:

          Depreciation  and amortization

77,574 

64,655 

51,046 

          Depreciation  and amortization - discontinued operations

1 

582 

1,050 

          Amortization  of above market leases

788 

1,582 

1,970 

          Amortization  of mortgage loan discount

(71)

- 

- 

          Amortization  of loan costs

1,202 

1,100 

1,480 

          Share  based compensation expense

1,521 

863 

533 

          Operating  distributions from unconsolidated 

               joint  ventures

1,036 

1,334 

2,587 

          Income  (loss) allocated to minority interests

(3,172)

(484)

189 

          Net  gain on sale of real estate, joint venture interests 

               and  other assets

(20,307)

(22,729)

(5,220)

          Equity  in earnings of consolidated joint ventures

(1,008)

(751)

(1,496)

          Increase  in deferred leasing costs

(7,080)

(5,937)

(6,468)

          Changes  in operating assets and liabilities:

               Increase  in receivables and other assets

(5,736)

(25,465)

(11,571)

               Increase  (decrease) in accounts payable and 

                    other  liabilities

11,491 

7,118 

(1,320)

     **Cash  provided by operating activities**

75,931 

47,550 

53,587 

** **

**Investing  activities**

     Investment  in mortgage loan

(6,930)

- 

- 

     Distributions  from unconsolidated joint ventures

89 

15,395 

1,845 

     Investments  in unconsolidated joint ventures

(75)

(113)

(45)

     Purchases  of real estate related investments

(55,428)

(328,909)

(163,238)

     Proceeds  from sales of real estate and joint venture interests

56,795 

61,228 

24,153 

     Real  estate development

(11,615)

- 

(3,087)

     Improvements  to real estate related investments

(39,877)

(28,223)

(25,973)

**     Cash  used in investing activities**

(57,041)

(280,622)

(166,345)

** **

**Financing  activities**

     Principal  payments on mortgage notes payable

(41,011)

(49,066)

(79,120)

     Proceeds  from long-term financing

59,500 

213,700 

103,160 

     Proceeds  from bank borrowings

241,126 

153,098 

217,820 

     Payments  on bank borrowings

(181,921)

(151,230)

(170,936)

     Redemption  of subsidiary redeemable preferred membership interests

(10,741)

- 

- 

     Debt  financing costs

(1,688)

(2,215)

(1,044)

     Stock  options and warrants exercised

3,035 

6,034 

2,104 

     Purchase  of Company stock

(29,138)

(2,814)

- 

**     **Dividends paid on common stock

(40,222)

(37,480)

(36,356)

     Dividends  paid on preferred stock

(4,800)

(7,160)

(7,623)

     Contributions  from minority interest partners

42,182 

82,621 

9,864 

     Distributions  to minority interest partners

(48,784)

(1,203)

(534)

     Employee  stock purchase plan

75 

3 

- 

     Proceeds  from DRIP Plan

363 

407 

1,899 

     Proceeds/(issuance  costs) from stock offerings

(28)

29,488 

75,810 

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

(12,052)

234,183 

115,044 

**     Change  in cash and cash equivalents**

6,838 

1,111 

2,286 

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

4,474 

3,363 

1,077 

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

$    11,312 

$     4,474 

$     3,363 

 

See notes to consolidated financial statements.

Page 49 of 89

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

**NOTE A - Summary ofSignificant Accounting Policies**

**Basis of Presentation and Principles of Consolidation**

        Theaccompanying financial statements are prepared following U.S. generally accepted accounting principles (GAAP) and the requirements of the Securitiesand Exchange Commission (SEC).  The financial statements include all normal andrecurring adjustments that are necessary for a fair presentation of financialposition and operating results.

       The consolidated financial statementsinclude the accounts of Parkway Properties, Inc. ("Parkway" or"the Company"), its wholly-owned subsidiaries and joint ventures inwhich the Company has a controlling interest.  The other partners' equityinterests in the consolidated joint ventures are reflected as minorityinterests in the consolidated financial statements.  Parkway also consolidatessubsidiaries where the entity is a variable interest entity and Parkway is theprimary beneficiary, as defined in FASB Interpretation 46R "Consolidation ofVariable Interest Entities" ("FIN 46R").  All significant intercompanytransactions and accounts have been eliminated in the accompanying financialstatements.

        The Company determines consolidation for joint ventures based onstandards set forth in EITF 96-16, "Investor's Accounting for an Investee Whenthe Investor Has a Majority of the Voting Interest but the Minority Shareholderor Shareholders Have Certain Approval or Veto Rights";**EITF 04-5, "DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights"; Statement of Position 78-9, "Accounting for Investments in Real EstateVentures"; and FIN 46R.  Based on the guidance set forth in thesepronouncements, the Company consolidates certain joint ventures where itexercises significant control over major operating and management decisions, orwhere the Company is the sole general partner and the limited partners do notpossess kick-out rights or other substantive participating rights or where theentity is a variable interest entity and Parkway is the primary beneficiary. The equity method of accounting is used for those joint ventures that do notmeet the criteria for consolidation and where Parkway exercises significantinfluence but does not control these joint ventures.

**Business**

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

**Use of Estimates**

       The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results could differ from those estimates.

**Real Estate Properties**

      Real estate properties are stated at thelower of cost less accumulated depreciation, or fair value.  Cost includes thecarrying amount of the Company's investment plus any additional considerationpaid, liabilities assumed, costs of securing title and improvements madesubsequent to acquisition.  Depreciation of buildings and building improvementsis computed using the straight-line method over the estimated useful lives ofthe assets.  Depreciation of tenant improvements, including personal property,is computed using the straight-line method over the lesser of useful life orthe term of the lease involved.  Maintenance and repair expenses are charged toexpense as incurred.  

       Whenthe Company is the owner of the tenant improvements, the leased space is readyfor its intended use when the tenant improvements are substantially completed.In limited instances, when the tenant is the owner of the tenant improvements,straight-line rent is recognized when the tenant takes possession of theunimproved space.

Page 50 of 89

       Thedetermination of who owns the tenant improvements is subject to significantjudgment. In making that determination, the Company considers various factors,including, but not limited to:
-  Whether the lease agreement specifies what or how the tenant     improvement allowance is spent; 
-  Whether the tenant improvements are unique to the tenant or     general-purpose in nature;
-  Whether the ownership of the tenant improvements remains with the     landlord or remains with the tenant at the end of the lease term;
-  Who bears substantial construction risk and cost of the tenant     improvements.

       Whenthe Company is the owner of the tenant improvements, the cost to construct thetenant improvements is recorded as an asset and depreciated over the shorter ofthe asset's useful life or the lease term. To the extent Parkway funded all ora portion of an improvement that is owned by the tenant, the Company treats thecost as a lease incentive and amortizes the costs as a reduction to rentalrevenue on a straight-line basis over the term of the lease. Lease incentivesmay also include cash payments to or on behalf of tenants or the buy-out of aprospective tenant's existing lease obligation with a third party and areamortized as a reduction to rental revenue on a straight-line basis over theterm of the lease.  

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

** **

** **

**December  31**

**December  31**

**Asset  Category**

**Estimated  Useful Life**

**2007**

**2006**

Building and  garage

40  years

$1,163,974

$1,157,534

Building  improvements

7  to 40 years

90,563

65,109

Tenant  improvements

Lesser  of useful life or term of lease

149,391

145,742

$1,403,928

$1,368,385

       Depreciation expense related to theseassets of $59.7 million, $49.7 million and $40.5 million was recognized in2007, 2006 and 2005, respectively.

       The Company evaluates its real estateassets upon occurrence of significant adverse changes in their operations toassess whether any impairment indicators are present that affect the recoveryof the carrying amount.  The carrying amount includes the net book value oftangible and intangible assets.  Real estate assets are classified as held forsale or held and used in accordance with Statement of Financial AccountingStandards ("SFAS") No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets".  In accordance with SFAS No. 144, Parkwayrecords assets held for sale at the lower of carrying amount or fair value lesscost to sell.  With respect to assets classified as held and used, Parkwayrecognizes an impairment loss to the extent the carrying amount is notrecoverable and exceeds its fair value.  Fair value is based on the estimatedand realizable contract sales price (if available) for the asset less estimatedcosts to sell.  If a sales price is not available, the estimated undiscountedcash flows of the asset for the remaining useful life are used to determine ifthe carrying value is recoverable.  The cash flow estimates are based onassumptions about employing the asset for its remaining useful life.  Factorsconsidered in projecting future cash flows include but are not limited to:  existingleases, future leasing and terminations, market rental rates, capitalimprovements, tenant improvements, leasing commissions, inflation and otherknown variables.  Upon impairment, Parkway recognizes an impairment loss toreduce the carrying value of the real estate asset to the estimate of its fairvalue.

       Gains from sales of real estate arerecognized based on the provisions of Statement of Financial AccountingStandards ("SFAS") No. 66 which require upon closing, the transfer ofrights of ownership to the purchaser, receipt from the purchaser of an adequatecash down payment and adequate continuing investment by the purchaser.  If therequirements for recognizing gains have not been met, the sale and relatedcosts are recorded, but the gain is deferred and recognized generally on theinstallment method of accounting as collections are received.

       Land available for sale (see Note F) iscarried at the lower of cost or fair value minus estimated cost to sell.

** **

**Purchase Price Allocation**

Page 51 of 89

       Parkway accounts for its acquisitionsof real estate in accordance with Statement of Financial Accounting StandardsNo. 141, "Business Combinations" ("SFAS 141").  Parkway allocates the purchaseprice of real estate to tangible and intangible assets and liabilities based onfair values.  Tangible assets consist of land, building, garage, buildingimprovements and tenant improvements.  Intangible assets and liabilitiesconsist of the value of above and below market leases, lease costs, the valueof in-place leases, customer relationships and any value attributable to aboveor below market debt assumed with the acquisition.

        The Company may engage independentthird-party appraisers to perform the valuations used to determine the fairvalue 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 estimating carryingcosts, the Company includes real estate taxes, insurance and other operatingexpenses and estimates of lost rentals at market rates during the expectedlease-up periods depending on specific local market conditions and depending onthe type of property acquired. Additionally, Parkway estimates costs to executesimilar leases including leasing commissions, legal and other related expensesto the extent that such costs are not already incurred in connection with a newlease origination as part of the transaction.

       The fair value of above or belowmarket in-place lease values is the present value of the difference between thecontractual amount to be paid pursuant to the in-place lease and the estimatedcurrent market lease rate expected over the remaining non-cancelable life ofthe lease.  The capitalized above market lease values are amortized as areduction of rental income over the remaining term of the respective leases.The capitalized below market lease values are amortized as an increase torental income over the remaining term of the respective leases.   Totalamortization for above and below market leases was a net reduction of rentalincome of $788,000, $1.6 million and $2.0 million for the years ending December31, 2007, 2006 and 2005, respectively.

       Amortization of above and belowmarket leases is projected as an increase (decrease) to rental income asfollows for the next five years (in thousands):

Amount

2008

$(319)

2009

(151)

2010

123 

2011

154 

2012

223 

       The fair value of customerrelationships represents the quantifiable benefits related to developing arelationship with the current customer.  Examples of these benefits would begrowth prospects for developing new business with the existing customer, theability to attract similar customers to the building, the tenant's creditquality and expectations of lease renewals (including those existing under theterms of the lease agreement or management's expectation for renewal), amongother factors.  Management believes that there would typically be little valueassociated with customer relationships that is in excess of the value of thein-place lease and their typical renewal rates.  Any value assigned to customerrelationships is amortized over the remaining terms of the respective leasesplus any expected renewal periods as a lease cost amortization expense. Currently, the Company has no value assigned to customer relationships.

       The fair value of at market in-placeleases is the present value associated with re-leasing the in-place lease as ifthe property was vacant.  Factors to be considered include estimates ofcarrying costs during hypothetical expected lease-up periods consideringcurrent market conditions and costs to execute similar leases.  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.  The value of at market in-place leases is amortizedas a lease cost amortization expense over the expected life of the lease,including expected renewals.  Total amortization expense for the value ofin-place leases was $9.0 million, $8.4 million and $5.5 million for the yearsending December 31, 2007, 2006 and 2005, respectively.

Page 52 of 89

       Amortizationexpense for the value of in-place leases is projected as follows for the nextfive years (in thousands):

Amount

2008

$7,750

2009

7,628

2010

7,290

2011

6,906

2012

5,971

       A separate component of the fairvalue of in-place leases is identified for the lease costs.  The fair value oflease costs represents the estimated commissions and legal fees paid inconnection 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 the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding. Should a customer terminate its lease, the unamortized portion of thetenant improvement, in-place lease value, lease cost and customer relationshipintangibles would be charged to expense.  Additionally, the unamortized portionof above market in-place leases would be recorded as a reduction to rentalincome and the below market in-place lease value would be recorded as anincrease to rental income.

**Mortgage Loan Receivable**

** **

       Parkwayrecords its mortgage loan receivable at the stated principal amount net anypremium or discount.  As of December 31, 2007 the carrying amount of themortgage loan receivable was $7.0 million.  The Company recognizes the premiumor discount over the life of the mortgage loan using the effective interestmethod.  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 losses were recognized in 2007 associated with themortgage loan receivable.

** **

**Investment in Unconsolidated Joint Ventures**

       As of December 31, 2007 and 2006,Parkway had a non-controlling interest in four unconsolidated joint ventures,which are accounted for using the equity method of accounting.  Therefore,Parkway reports its share of income and losses based on its economic interestin these entities, as measured by its ownership interest or expected cashdistributions if materially different than distributions based on ownership interest. Parkway classifies its interests as non-controlling when it holds less than amajority voting interest in the entity and does not have the sole ability,based on the terms of the joint venture agreements, to make decisions about theentities' activities regarding items such as major leases, encumbering theentities with debt, major capital expenditures and whether to dispose of theentities.

** **

**Allowance for Doubtful Accounts**

**       **Accounts receivable are reducedby an allowance for amounts that the Company estimates to be uncollectible. The receivable balance is comprised primarily of rent and expense reimbursementincome due from the customers.  Management evaluates the adequacy of theallowance for doubtful accounts considering such factors as the credit qualityof our customers, delinquency of payment, historical trends and currenteconomic conditions.  The Company provides an allowance for doubtful accountsfor customer balances that are over 90 days past due and for specific customerreceivables for which collection is considered doubtful.

**Cash Equivalents**

       The Company considers all highlyliquid investments with a maturity of three months or less when purchasedto be cash equivalents.

Page 53 of 89

**Minority Interest**

*Minority Interest - Unit Holders*

       Minority interest in ParkwayProperties LP (the "Operating Partnership") represents the limited partner'sproportionate share of the equity in the operating partnership.  The operatingpartnership pays a regular quarterly distribution to the holders of operatingunits.  Income is allocated to minority interest based on the economicpercentage ownership during the year.  As of December 31, 2007, the minorityinterest in our operating partnership consisted of 1,318 operating units heldby a party other than the Company.

*Minority Interest - Real Estate Partnerships*

       The Company has an interest in twojoint ventures that are included in its consolidated financial statements.Parkway has a 75.025% interest in Parkway Moore, LLC, which owns an interest inMoore Buildings Associates, LP.  The Company also owns a 25% interest in ParkwayProperties Office Fund, LP.  

       MooreBuilding Associates, LP ("MBALP") was established for the purpose of owning acommercial office building (the Toyota Center in Memphis, Tennessee).  Inacting as the general partner, Parkway is committed to providing additionalfunding to meet partnership operating deficits up to an aggregate amount of $1million.  Parkway receives income from MBALP in the form of interest from aconstruction note receivable, incentive management fees and property managementfees.  Parkway also receives interest income on a note receivable from ParkwayMoore, LLC ("PMLLC").  Any intercompany asset, liability, revenue and expenseaccounts between Parkway and MBALP and PMLLC have been eliminated.

       OnJuly 6, 2005, Parkway, through affiliated entities, entered into a limitedpartnership agreement forming a $500 million discretionary fund ("the Fund")with Ohio Public Employees Retirement System ("Ohio PERS") for the purpose ofacquiring high-quality multi-tenant office properties.  Ohio PERS has a 75% economicinterest and Parkway has a 25% economic interest in the Fund.  Parkway servesas the general partner of the Fund and provides asset management, propertymanagement, leasing and construction management services to the Fund, for whichit is paid market-based fees. As of December 31, 2007, the Fund had fixed ratenon-recourse mortgage debt totaling $156.0 million that is secured by ten officeproperties, which have a carrying value of $234.9 million. Subsequent toDecember 31, 2007, the Fund purchased three office investments for a totalpurchase price of $215 million with estimated closing costs, buildingimprovements, tenant improvements and leasing costs of $12.4 millionanticipated during the first two years of ownership for a total investment of$227.4 million.  Therefore, as of February 15, 2008, the Fund was fullyinvested.  

       Since Parkway is the sole generalpartner and has the authority to make major decisions on behalf of the Fund, thereby giving Parkway a controllinginterest, the Fund is included in Parkway's consolidated financial statements.

      Minority interest in real estatepartnerships represents the other partners' proportionate share of equity inthe partnerships discussed above at December 31, 2007.  Income is allocated tominority interest based on the weighted average percentage ownership during theyear.

**Revenue Recognition**

       Revenue from real estate rentals isrecognized on a straight-line basis over the terms of the respective leases.  Thecumulative difference between lease revenue recognized under this method andcontractual lease payment terms is recorded as straight line rent receivable onthe accompanying balance sheets.  The straight line rent adjustment increasedrevenue by $3.2 million, $5.3 million and $4.2 million in 2007, 2006 and 2005,respectively.

Page 54 of 89

       The leases also typically provide fortenant 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 theactual amount and the amounts billed monthly during the year.  Thesedifferences are recorded to expense reimbursement income in the period thefinal bills are prepared, usually beginning in February and completed by May inthe subsequent fiscal year.  The net amounts of any such adjustments were notmaterial for the years ended December 31, 2007, 2006 and 2005.  

       Management company income representsmarket based fees earned from providing management, construction, leasing, brokerageand acquisition services to third parties. Management fee income is computedand recorded monthly in accordance with the terms set forth in the stand alonemanagement service agreements. Leasing and brokerage commissions are recognizedpursuant to the terms of the stand alone agreements at the time underlyingleases are signed, which is the point at which the earnings process is completeand collection of the fees is reasonably assured. Fees relating to the purchaseor sale of property are recognized when the earnings process is complete andcollection of the fees is reasonably assured, which usually occurs at closing.All fees on Company-owned properties and consolidated joint ventures areeliminated in consolidation.  The portion of fees earned on unconsolidatedjoint ventures attributable to Parkway's ownership interest is eliminated inconsolidation. 

**Amortization**

       Debt origination costs are deferredand amortized using a method that approximates the interest method over theterm of the loan.  Leasing costs are deferred and amortized using thestraight-line method over the term of the respective lease.

**Early Extinguishment of Debt**

       When outstanding debt isextinguished, the Company records any prepayment premium and unamortized loan coststo expense.

**Derivative Financial Instruments**

       The Company follows SFAS No. 133"Accounting for Derivative Instruments and Hedging Activities" andrecognizes all derivative instruments on the balance sheet at their fairvalue.  Changes in the fair value of derivatives are recorded each period incurrent earnings or other comprehensive income, depending on whether aderivative is designated as part of a hedge transaction and, if it is, the typeof hedge transaction.  The ineffective portion of the hedge, if any, isimmediately recognized in earnings.

**Share Based Compensation**

       Effective January 1, 2003, thestockholders of the Company approved Parkway's 2003 Equity Incentive Plan (the"2003 Plan") that authorized the grant of up to 200,000 equity based awards toemployees of the Company.  At present, it is Parkway's intention to grantrestricted 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.

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

       Restricted shares and deferredincentive share units are forfeited if an employee leaves the Company beforethe vesting date.  Shares and/or units that are forfeited become available forfuture grant under the 2003 Plan.

**Income Taxes**

       Effective January 1, 1997, the Company elected to be taxed as a real estate investmenttrust (REIT) under the Internal Revenue Code of 1986, as amended.  TheCompany completed its reorganization into the UPREIT (Umbrella PartnershipREIT) structure effective January 1, 1998. The Company anticipates that the UPREIT structure will enable it to pursue additional investment opportunities byhaving the ability to offer tax-advantaged operating partnership units toproperty owners in exchange for properties.

Page 55 of 89

       Acorporate REIT is a legal entity that holds real estate assets, and throughdistributions to stockholders, is exempt from the payment of Federal income taxesat the corporate level.  To maintain qualification as a REIT, the Company issubject to a number of organizational and operational requirements, including arequirement that it currently distribute to stockholders at least 90% of itsannual taxable income.

**Net Income Per Common Share**

       Basic earnings per share ("EPS") arecomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the year.  In arrivingat income available to common stockholders, preferred stock dividends arededucted.  Diluted EPS reflects the potential dilution that could occur ifshare equivalents such as employee stock options, restricted shares, deferredincentive share units, warrants and dilutive 8.34% Series B cumulativeconvertible preferred stock were exercised or converted into common stock thatthen shared in the earnings of Parkway.

**       **The computation of diluted EPSis as follows:

**Year Ended December 31**

**2007**

**2006**

**2005**

(in thousands, except  per share data)

Numerator:

    Basic  and diluted net income

        available  to common stockholders

$14,892

$19,109

$13,661

Denominator:

    Basic  weighted average shares

15,482

14,306

14,065

    Effect  of employee stock options, deferred

        incentive  share units and warrants

166

181

168

    Diluted  weighted average shares

15,648

14,487

14,233

Diluted  earnings per share

$    0.95

$    1.32

$    0.96

       The computation of diluted EPS for2006 and 2005 did not assume the conversion of the 8.34% Series B cumulativeconvertible preferred stock because their inclusion would have beenanti-dilutive.  As of December 31, 2006, there were no shares of Series Bpreferred stock authorized and outstanding.

Reclassifications

       Certain reclassificationshave been made in the 2006 and 2005 consolidated financial statements toconform to the 2007 classifications with no impact on previously reported netincome or stockholders' equity.  

**New Accounting Pronouncements**

In September2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No.157").  SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements.  SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the impact of SFAS No. 157 anddoes not expect the adoption of this Statement on January 1, 2008 to have a material impact on the Company's consolidated financial statements.

In December2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS No. 141R),which revised the previously issued SFAS No. 141 (SFAS No. 141).  SFAS No. 141Rretains the fundamental requirements of SFAS No. 141, but expands the scope toinclude all transactions and other events in which one entity obtains controlover one or more other businesses.  SFAS No. 141R applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.  TheCompany is currently evaluating the impact of SFAS No. 141R on the Company'sconsolidated financial statements.

Page 56 of 89

In December 2007,the FASB issued SFAS No. 160, "Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of ARB No. 51" (SFAS No. 160).  SFAS No. 160amends ARB No. 51 to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  SFAS No. 160 also amends certain of ARB No. 51's consolidationprocedures for consistency with the requirements of SFAS No. 141R.  SFAS No.160 is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008.  The Company is currentlyevaluating the impact of SFAS No. 160 on the Company's consolidated financialstatements.

**Unaudited Statistical Information**

       The square feet and percentage leasedstatistics presented in Notes B, E and H are unaudited.

** **

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

****       Included in investment in officeand parking properties at December 31, 2007 are 60 office and parkingproperties located in nine states with an aggregate of 12.0 million square feet of leasable space.  This excludesoffice properties in unconsolidated joint ventures, which are outlined in Note E- Investment in Unconsolidated Joint Ventures. The contract purchase price,excluding closing costs and other adjustments, of office properties acquiredduring the year ended December 31, 2007 is as follows:

** **

**Cost**

**Market Location**

**(in thousands)**

Houston, Texas

$46,500

       The Company's acquisitions areaccounted for by the purchase method.  The results of each acquired propertyare included in the Company's results of operations from their respectivepurchase dates.

*Summary of Acquisitions*

       OnJune 14, 2007, the Fund with Ohio PERS, of which Parkway owns 25%, purchasedfor $46.5 million 1401 Enclave Parkway, a 209,000 square foot six-story officebuilding in Houston, Texas.  The Fund expects to spend $346,000 for closingcosts, building improvements, leasing costs and tenant improvements during thefirst two years of ownership.  The purchase was funded with a $28 million firstmortgage placement by the Fund and with equity contributions from thepartners.  In accordance with GAAP, the Fund has been included in theconsolidated financial statements of Parkway since Parkway is the sole generalpartner and has authority to make major decisions on behalf of the Fund,thereby giving Parkway controlling interest. 

       Thepurchase price allocated to intangible assets and (liabilities) and weightedaverage amortization period for each class of asset or liability is as followsfor 2007 office property acquisitions (in thousands):

** **

**Weighted**

**Amount**

**Average Life**

Lease in place value

$2,692 

4  years

Above market leases

438 

3  years

Below market leases

(1,101)

4  years

       Subsequentto December 31, 2007, the Company purchased three office investments for atotal purchase price of $236.6 million on behalf of the Fund.  Of the totalpurchase price, $215 million represents investments by the Fund and $21.6million represents an additional investment by Parkway.  The investments werefunded with $142.2 million in mortgage debt and $94.4 million in equitycontributions from partners.  Parkway's share of the total equity contributionwas $30.1 million and was funded with advances from unsecured bank lines ofcredit.  As of February 15, 2008, the Fund was fully invested.

*Summary of Dispositions*

* *

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

Page 57 of 89

* *

*Contractual Obligations andMinimum Rental Receipts*

       Obligations for tenant improvementallowances for leases in place and commitments for building improvements anddevelopment costs as of December 31, 2007 are as follows (in thousands):

2008

$44,084

2009

1,142

2010

57

2011

344

Total

$45,627

       Minimumfuture operating lease payments for various equipment leased at the officeproperties is as follows for operating leases in place as of December 31, 2007(in thousands):

2008

$     341

2009

107

2010

93

2011

23

Total

$     564

       The following is a schedule by yearof future approximate minimum rental receipts under noncancelable leasesfor office buildings owned as of December 31, 2007 (in thousands):

2008

$180,248

2009

166,389

2010

142,820

2011

117,692

2012

85,633

Thereafter

209,809

$902,591

**Note C - Office PropertyDevelopment**

** **

       OnFebruary 28, 2007, the Company purchased 2.5 acres of land in Jackson,Mississippi for $1.8 million.  The land was purchased as part of the Company's planto develop the 194,000 square foot Class A+ office building known as ThePinnacle at Jackson Place ("The Pinnacle"), adjacent to the Company'sheadquarters building.  The estimated cost of the development is $48.5 millionwith expected completion in the fall of 2008.  The Company has receivedcommitments to lease approximately 70% of the new office space from four majorcustomers.  Parkway is considering a joint venture structure for thedevelopment whereby Parkway will retain an ownership interest of approximately20%.  The development is designed to utilize benefits available under the GulfOpportunity Zone Act for new developments in areas affected by HurricaneKatrina.  During the year ended December 31, 2007, the Company incurred $13.4million in development costs of the Pinnacle.

       OnSeptember 1, 2007, Parkway entered into a lease for the parking garage known asParking at Jackson Place, which is adjacent to the Company's headquarters andThe Pinnacle in Jackson, Mississippi.  The term of the lease is 60 years with arenewal option for an additional 30 years.  Since the fair value of the land isgreater than 25% of the total value of the property, the Company is accountingfor the component of the lease attributable to the land as an operating leaseand the component attributable to the building as a capital lease.  The garagewas recorded at a cost of $4.1 million.

** **

**Note D - Mortgage Loan**

** **

       OnNovember 7, 2007, the Company purchased the B participation piece (the "Bpiece") of a first mortgage secured by an 844,000 square foot office buildingin Dallas, Texas known as 2100 Ross for $6.9 million.  The B piece wasoriginated by Wachovia Bank, N.A. and has a face value of $10 million and astated coupon rate of 6.065%.  Upon maturity in May 2012, the Company willreceive a principal payment of $10 million, which produces a yield to maturityof 15.6%.

** **

Page 58 of 89

**Note E - Investment inUnconsolidated Joint Ventures**

****       In addition to the 60 office andparking properties included in the consolidated financial statements, theCompany is also invested in four unconsolidated joint ventures with unrelatedinvestors.  These investments are accounted for using the equity method ofaccounting, as Parkway does not control any of these joint ventures.  Accordingly,the assets and liabilities of the joint ventures are not included on Parkway'sconsolidated balance sheets as of December 31, 2007 and 2006.  Informationrelating to these unconsolidated joint ventures is detailed below (inthousands).

** **

** **

** **

**Parkway's**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership %**

**Feet**

**Leased**

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

32

100.0%

Parkway Joint Venture, LLC ("Jackson JV")

UBS/River Oaks

Jackson, MS

20.0%

167

85.7%

RubiconPark I, LLC ("Rubicon JV")

Lakewood/Falls Pointe

Atlanta, GA

20.0%

552

97.5%

Carmel Crossing

Charlotte, NC

RubiconPark II, LLC ("Maitland JV")

Maitland 200

Orlando, FL

20.0%

204

100.0%

955

96.1%

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

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

Page 59 of 89

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

**Balance Sheet Information  *(unaudited)***

** **

**December 31, 2007**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**JV**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Real Estate, Net

 $

- 

 $

1,191 

 $

15,945 

 $

66,914 

 $

29,341 

 $

113,391 

Other Assets

- 

282 

1,444 

7,117 

1,109 

9,952 

    Total Assets

 $

- 

 $

1,473 

 $

17,389 

 $

74,031 

 $

30,450 

 $

123,343 

Mortgage Debt

 $

- 

 $

176 

 $

12,600 

 $

52,000 

 $

18,617 

 $

83,393 

Other Liabilities

- 

23 

728 

1,580 

686 

3,017 

Partners'/Shareholders' Equity

- 

1,274 

4,061 

20,451 

11,147 

36,933 

    Total Liabilities and  Partners'/Shareholders' Equity

 $

- 

 $

1,473 

 $

17,389 

 $

74,031 

 $

30,450 

 $

123,343 

** **

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

Real Estate, Net

 $

- 

 $

595 

 $

3,189 

 $

13,383 

 $

5,868 

 $

23,035 

Mortgage Debt

 $

- 

 $

88 

 $

2,520 

 $

7,200 

 $

- 

 $

9,808 

Investment in Joint Ventures

 $

- 

 $

637 

 $

(244)

 $

5,433 

 $

5,410 

 $

11,236 

**December 31, 2006**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**JV**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Real Estate, Net

 $

- 

 $

1,214 

 $

16,431 

 $

68,053 

 $

28,980 

 $

114,678 

Other Assets

190 

256 

1,083 

6,355 

663 

8,547 

    Total Assets

190 

 $

1,470 

 $

17,514 

 $

74,408 

 $

29,643 

 $

123,225 

Mortgage Debt

 $

- 

 $

275 

 $

12,600 

 $

52,000 

 $

19,061 

 $

83,936 

Other Liabilities

26 

113 

493 

1,333 

489 

2,454 

Partners'/Shareholders'  Equity

164 

1,082 

4,421 

21,075 

10,093 

36,835 

    Total Liabilities and  Partners'/Shareholders' Equity

 $

190 

 $

1,470 

 $

17,514 

 $

74,408 

 $

29,643 

 $

123,225 

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

Real Estate, Net

 $

- 

 $

607 

 $

3,286 

 $

13,611 

 $

5,796 

 $

23,300 

Mortgage Debt

 $

- 

 $

137 

 $

2,520 

 $

7,200 

 $

- 

 $

9,857 

Net  Investment in Joint Ventures

 $

- 

 $

541 

 $

(150)

 $

5,676 

 $

5,112 

 $

11,179 

Page 60 of 89

       Incomestatement information for the unconsolidated joint ventures is summarized belowfor the years ended December 31, 2007 and 2006 (in thousands):

**Results of Operations (*unaudited*)**

**Year Ended December 31, 2007**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**JV (1)**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated Joint  Ventures (at 100%):**

Revenues

 $

- 

 $

373 

 $

2,875 

 $

10,228 

 $

4,363 

 $

17,839 

Operating  Expenses

(38)

(93)

(1,274)

(3,856)

(1,662)

(6,923)

    Net  Operating Income (Loss)

(38)

280 

1,601 

6,372 

2,701 

10,916 

Interest  Expense

- 

(22)

(736)

(2,565)

(825)

(4,148)

Loan  Cost Amortization

- 

(3)

(3)

(63)

(15)

(84)

Depreciation  and Amortization

- 

(23)

(865)

(2,017)

(720)

(3,625)

Income  (Loss) Before Gain on Sale of Real Estate

(38)

232 

(3)

1,727 

1,141 

3,059 

Gain  on Sale of Real Estate

166 

- 

- 

- 

- 

166 

    Net  Income (Loss)

 $

128 

 $

232 

$

(3)

 $

1,727 

$

1,141 

 $

3,225 

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

Income  (Loss) Before Gain on Sale of Real Estate

 $

(12)

 $

117 

 $

- 

 $

507 

$

396 

 $

1,008 

Gain  on Sale of Real Estate

50 

- 

- 

- 

- 

50 

Net  Income

 $

38 

 $

117 

 $

- 

 $

507 

$

396 

 $

1,058 

Depreciation  and Amortization

 $

- 

12 

 $

173 

 $

403 

$

144 

 $

732 

Property  Management Fees

 $

- 

 $

- 

 $

137 

 $

348 

$

168 

 $

653 

Promote  Fee

 $

27 

 $

- 

 $

- 

 $

- 

$

- 

 $

27 

Interest  Expense

 $

- 

 $

12 

 $

147 

 $

354 

$

- 

 $

513 

Loan  Cost Amortization

 $

- 

 $

2 

 $

- 

 $

8 

$

- 

 $

10 

**Other  Supplemental Information:**

Distributions  from Unconsolidated

     Joint Ventures

 $

89 

 $

20 

 $

92 

 $

750 

$

174 

 $

1,125 

**Year Ended December 31, 2006**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**JV (1)**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated Joint  Ventures (at 100%):**

Revenues

 $

5,835 

 $

333 

 $

2,664 

 $

9,923 

 $

4,332 

 $

23,087 

Operating  Expenses 

(2,968)

(153)

(1,307)

(3,803)

(1,790)

(10,021)

    Net  Operating Income

2,867 

180 

1,357 

6,120 

2,542 

13,066 

Interest  Expense

(2,413)

(28)

(736)

(2,566)

(843)

(6,586)

Loan  Cost Amortization

(457)

(3)

(4)

(62)

(14)

(540)

Depreciation  and Amortization

(717)

(23)

(535)

(1,791)

(614)

(3,680)

Income  (Loss) Before Gain on Sale of Real Estate

(720)

126 

82 

1,701 

1,071 

2,260 

Gain  on Sale of Real Estate

42,693 

- 

- 

- 

- 

42,693 

    Net  Income

 $

41,973 

 $

126 

$

82 

 $

1,701 

$

1,071 

 $

44,953 

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

Income  (Loss) Before Gain on Sale of Real Estate

 $

(217)

 $

63 

 $

17 

 $

502 

$

386 

 $

751 

Gain  on Sale of Real Estate

13,584 

- 

- 

- 

- 

13,584 

Net  Income

 $

13,367 

 $

63 

 $

17 

 $

502 

$

386 

 $

14,335 

Depreciation  and Amortization

 $

216 

 $

12 

 $

106 

 $

358 

$

123 

 $

815 

Property  Management Fees

 $

718 

 $

- 

 $

155 

 $

513 

$

140 

 $

1,526 

Promote  Fee

 $

3,861 

 $

- 

 $

- 

 $

- 

$

-  

 $

3,861 

Interest  Expense

 $

499 

 $

14 

 $

145 

 $

357 

$

- 

 $

1,015 

Interest Expense -  Prepayment

225 

- 

- 

- 

- 

225 

Total  Interest Expense

 $

724 

 $

14 

 $

145 

 $

357 

$

- 

 $

1,240 

Loan  Cost Amortization

 $

138 

 $

1 

 $

1 

 $

8 

$

- 

 $

148 

**Other  Supplemental Information:**

Distributions  from Unconsolidated

     Joint Ventures

 $

15,702 

 $

40 

 $

92 

 $

517 

$

378 

 $

16,729 

(1)     Phoenix OfficeInvest,LLC (the "Viad JV") is a joint venture that owned Viad Corporate Center, anoffice property in Phoenix, Arizona, and a venture in which Parkway owned a 25%interest.  On June 23, 2006, the venture sold Viad Corporate Center.    Parkwayreceived net proceeds of $15.4 million and recognized a gain of $13.6 millionfrom the sale.    

Page 61 of 89

       Inmost cases the Company's share of debt related to its unconsolidated jointventures is the same as its ownership percentage in the venture.  However,in the case of the Rubicon Joint Venture and Maitland Joint Venture, theCompany's share of debt is disproportionate to its ownership percentage. The disproportionate 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, 2007 and 2006 (inthousands):

                                                                  

**Parkway's Share of Unconsolidated Joint Ventures'  Debt *(unaudited)***

** **

** **

** **

** **

**Parkway's**

**Monthly**

**Loan**

**Loan**

** **

**Type of**

** **

** **

**Share**

**Debt**

**Balance**

**Balance**

**Description**

**Debt Service**

**Interest Rate**

**Maturity**

**of Debt**

**Service**

**12/31/07**

**12/31/06**

     Wink Partnership

Amortizing

8.625%

07/01/09

50.00%

$         5 

$     88

$     137

     Maitland JV

Interest Only

4.390%

06/01/11

0.00%

- 

-

-

     Rubicon JV

Interest Only

4.865%

01/01/12

13.85%

30 

7,200

7,200

     Jackson JV

Interest Only

5.840%

07/01/15

20.00%

12 

2,520

2,520

$       47 

$9,808

$  9,857

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

5.149%

5.167%

****       Parkway's share of the scheduledprincipal payments on mortgage debt for the unconsolidated joint ventures foreach of the next five years and thereafter through maturity as of December 31,2007 are as follows (in thousands) *(unaudited)*:

**Wink**

**Maitland**

**Rubicon**

**Jackson**

**Schedule  of Mortgage Maturities by Year:**

**Partnership**

**JV**

**JV**

**JV**

**Total**

2008

$      54

$         -

$          -

$          -

$      54

2009

34

-

100

12

146

2010

-

-

114

33

147

2011

-

-

119

35

154

2012

-

-

6,867

37

6,904

Thereafter

-

-

-

2,403

2,403

$      88

$         -

$  7,200

$  2,520

$ 9,808

**Note F - Land Available for Sale**

****       At December 31, 2007, Parkway'sinvestment in land available for sale consisted of 12 acres of land in NewOrleans, Louisiana with a book value of $1.5 million or .1% of total assets.

**Note G - Notes Payable**

**Notes Payable to Banks**

       At December 31, 2007, the Company hada total of $212.3 million outstanding under the following lines of credit (inthousands):

** **

** **

** **

** **

**Outstanding**

**Line of Credit**

**Lender**

**Interest Rate**

**Maturity**

**Balance**

$9 Million Unsecured Line of  Credit

Trustmark National Bank

6.6%

12/07/08

$         9,000

$15 Million Unsecured Line of  Credit

PNC Bank

5.9%

01/28/09

8,349

$236 Million Unsecured Line of  Credit (1)

Wachovia Bank

6.1%

04/27/10

135,000

$60 Million Unsecured Term Loan  (2)

Wachovia Bank

5.6%

04/27/11

60,000

6.0%

$     212,349

(1)   The interest rate on the $236 Million Unsecured Line of Creditrepresents the weighted average interest rate of short-term LIBOR borrowingsand includes a $30 million interest rate swap that expires August 31, 2008 anda $50 million interest rate swap that expires June 30, 2008.

 

Page 62 of 89

 (2)  The interest rate on the $60 Million Term Loan represents theweighted average interest rate of two interest rate swaps that expire December31, 2008.

     On August 24 2007, the Company entered into aninterest rate swap agreement with US Bank.  The interest rate swap is for a $30million notional amount and fixes the 30-day LIBOR interest rate at 4.924%,which equates to a total interest rate of 6.224%, for the period September 4,2007 through August 31, 2008.  The swap serves as a hedge on the variableinterest rates on a portion of the borrowings under the Company's $296 millionline.

                                                                                                                                                          On December 3, 2007, the Company entered into aninterest rate swap agreement with JP Morgan.  The interest rate swap is for a$50 million notional amount and fixes the 30-day LIBOR interest rate at 4.38%,which equates to a total interest rate of 5.68%, for the period December 31,2007 through June 30, 2008.  The swap agreement serves as a hedge of the variableinterest rates on a portion of the borrowings under the Company's $296 millionline.

     On December 13, 2007, the Company exercised $96million of the $110 million accordion feature of its existing unsecured bankcredit facility with Wachovia Bank.  The Company's credit facility increasedfrom $200 million to $296 million and is comprised of a $60 million term loanmaturing April 2011 and a $236 million revolving loan maturing in April 2010,which includes rights to a one-year extension with the same terms through April2011.  The interest rate on the credit facility is currently LIBOR plus 130basis points.  The Company pays an annual administration fee of $35,000 andfees on the unused portion of the revolver ranging between 12.5 and 20 basispoints based upon overall Company leverage, with the rate set at 12.5 basispoints at December 31, 2007.

     The Company's $296 million unsecured creditfacility requires compliance with a number of restrictive financial covenants,including tangible net worth, fixed charge coverage ratio, unencumberedinterest coverage ratio, total debt to total asset ratio, secured debt to totalasset value ratio, secured recourse debt to total asset value ratio andunencumbered pool restrictions.  As of December 31, 2007 the Company wasin compliance with these financial covenants and had a total of $99 millionavailable to borrow on all unsecured lines of credit.

     The $15 million line matures January 28, 2009, isunsecured and is expected to fund the daily cash requirements of the Company'streasury management system.  The $15 million line has a current interest rateequal to the 30-day LIBOR rate plus 130 basis points.  Under the $15 millionline, the Company does not pay annual administration fees or fees on the unusedportion of the line.

       The $9 million line with TrustmarkNational Bank is unsecured, has a current interest rate equal to the 30-dayLIBOR rate plus 132.5 basis points and matures December 7, 2008.  The proceedsof the loan were used to finance the construction of the City Centre Garage,which was completed in 2005.

       To protect against the potential forrapidly rising interest rates, the Company entered into interest rate swapagreements in 2007, 2005 and 2004.  The Company designated the swaps as cashflow hedges of the variable interest rates on the Company's borrowings underthe $296 million line.  These swaps are considered to be fully effective andchanges in the fair value of the swaps are recognized in accumulated othercomprehensive income.  The Company's interest rate hedge contracts asof December 31, 2007 and 2006 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market  Value**

** **

** **

** **

** **

** **

**Asset/(Liability)**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2007**

**2006**

Swap

$50,000

06/30/08

1  - Month LIBOR

4.380%

$         15 

$             - 

Swap

$30,000

08/31/08

1  - Month LIBOR

4.924%

(133)

- 

Swap

$40,000

12/31/08

1  - Month LIBOR

4.360%

(192)

525 

Swap

$20,000

12/31/08

1  - Month LIBOR

4.245%

(48)

307 

$      (358)

$        832 

Page 63 of 89

**Mortgage notes payable**

       A summary of mortgage notes payableat December 31, 2007 and 2006 which are non-recourse to the Company, is asfollows (in thousands):

** **

** **

** **

** **

**Carrying**

** **

** **

** **

** **

** **

** **

**Amount**

**Note Balance**

** **

**Interest**

**Monthly**

**Maturity**

**of**

**December 31**

**Office Property**

**Rate**

**Payment**

**Date**

**Collateral**

**2007**

**2006**

**Wholly  Owned**

Citrus  Center

6.000%

$      - 

08/01/07

$    32,297

$           ‐

$  18,164

Capital City Plaza

3.670%

298

09/01/08

58,579

42,196

44,167

John Hancock Facility (3 properties)

4.830%

138

03/01/09

27,978

22,450

23,006

John Hancock Facility (3 properties)

5.270%

112

05/01/10

22,042

18,190

18,581

Capitol Center

8.180%

165

09/01/10

34,236

18,465

18,910

One Jackson Place

7.850%

152

10/10/10

15,505

10,661

11,609

Squaw Peak 

4.920%

261

12/01/10

40,915

35,339

36,693

Forum I

5.250%

91

06/01/11

17,970

11,731

12,192

Wells Fargo

4.390%

53

07/01/11

11,909

9,345

9,567

233 N. Michigan

4.940%

763

07/11/11

155,772

100,279

104,374

400 North Belt

8.250%

65

08/01/11

9,750

2,431

2,990

Woodbranch

8.250%

32

08/01/11

4,188

1,170

1,440

Bank of America Plaza

7.100%

146

05/10/12

33,059

18,414

18,840

One Park 10 Plaza

7.100%

64

06/01/12

5,845

8,974

9,092

First Tennessee Plaza

7.170%

-

12/15/12

-

-

7,954

Teachers Insurance and

    Annuity Association (5  properties)

6.210%

565

01/01/16

104,116

83,074

84,644

111 East Wacker, LLC

6.290%

804

07/11/16

176,463

148,500

148,500

Morgan Keegan Tower

7.620%

163

10/01/19

28,717

15,258

16,024

Pinnacle at Jackson Place - Subordinate NMTC Loan (3)

3.000%

-

12/27/47

-

-

-

Pinnacle at Jackson Place - Direct Loan (3)

7.250%

-

12/27/47

14,077

1

-

Pinnacle at Jackson Place - Sr NMTC Loan (3)

7.250%

-

12/27/47

-

-

-

**    Total Wholly Owned**

3,872

793,418

546,478

586,747

** **

** **

** **

** **

** **

** **

** **

**Consolidated Joint Ventures**

** **

** **

** **

** **

** **

** **

Moore Building Associates LP

7.895%

124

06/01/10

19,359

12,006

12,517

Parkway Properties Office Fund, LP:

Renaissance Center

5.469%

97

06/01/12

34,885

16,797

17,015

Maitland 100

4.920%

36

10/07/12

13,730

8,820

8,820

555 Winderley Place

4.920%

34

10/07/12

12,108

8,340

8,340

1401 Enclave (2)

5.760%

134

07/10/15

42,337

28,000

-

100 Ashford Center/Peachtree Ridge

5.606%

151

01/08/16

44,806

31,060

31,073

BellSouth Building/Centurion Centre

5.900%

71

06/10/16

21,408

14,400

14,400

Chatham Centre

5.560%

79

01/10/17

25,505

17,100

17,100

Overlook II (1)

5.610%

152

03/01/17

40,157

31,500

-

**    Total  Consolidated Joint Ventures**

878

254,295

168,023

109,265

** **

**    Total  Secured Debt**

$4,750

$1,047,713

$714,501

$696,012

(1)     On February 9, 2007, the Fund placed a $31.5 million ten-yearnon-recourse first mortgage with an interest rate of 5.61% in connection withthe 2006 purchase of Overlook II in Atlanta, Georgia.  Payments during themortgage term will be on an interest only basis and the loan matures on March1, 2017.

(2)     On June 14, 2007, the Fund placed a $28 million eight-year non-recoursefirst mortgage with a fixed interest rate of 5.76% in connection with thepurchase of 1401 Enclave Parkway in Houston, Texas.  Monthly payments duringthe first five years of the mortgage will be on an interest only basis.  Monthlyprincipal and interest payments of $164,000 will be made over remaining term ofloan with a balloon payment due at maturity.

Page 64 of 89

(3)  On December 28, 2007, the Company completed the financing facility ofThe Pinnacle at Jackson Place for a total of $37.6 million.   Thefacility consists of two mortgages, proceeds of which will be used to completethe construction and long-term financing of the building.  One of themortgages is being funded under the Federal New Markets Tax Credit ("NMTC") program which provides funding for development in certain geographic areas or areas thathave been designated for Federal relief under the Gulf Opportunity ZoneAct.  The NMTC mortgage consists of a $23.5 million senior loan and a $6million subordinate loan, both having a stated maturity of December 2047. Additionally, the facility consists of an $8.1 million loan with the primaryarranger of the facility with a stated maturity of December 2047.  The NMTC Senior Loan and the Direct Loan bear interest at LIBOR plus 190 basis points duringconstruction; LIBOR plus 175 basis points upon completion of construction andLIBOR plus 150 basis points upon lease-up.  The NMTC subordinate loanbears interest at 3%.  The Direct Loan can be prepaid without penalty atanytime.  The NMTC Senior and Subordinate Loans can be called by thelender at the end of the seventh year.

       Theaggregate annual maturities of mortgage notes payable at December 31, 2007 areas follows (in thousands):

2008

$  55,938

2009

36,201

2010

97,477

2011

111,665

2012

63,041

Subsequently

350,179

$714,501

       On March 1, 2007, the Company paidoff the $18 million first mortgage secured by Citrus Center in Orlando, Floridawhich had an interest rate of 6.0% and was scheduled to mature on August 1,2007.  

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

       On February 1, 2008, the Company paidoff the mortgage notes payable on 400 North Belt and Woodbranch with a totalprincipal balance of $3.5 million with advances under bank lines of credit. The mortgages had an interest rate of 8.25% and were scheduled to mature on August1, 2011.  Parkway will record expenses related to the prepayment of thesemortgages of approximately $400,000 in the first quarter of 2008.

 

       Inconnection with the Fund investments during the first quarter of 2008 discussedin Note B - Investment in Office and Parking Properties, total mortgage debtwas placed in the amount of $142.2 million at a weighted average interest rateof 5.7%.  The portion of mortgage debt attributable to the Fund was $129.2million and $13.0 million was attributable to Parkway.  The mortgages aresecured by the respective properties, have one to three year interest onlyperiods and mature in 2016.

**Note H - Discontinued Operations**

****       Allcurrent and prior period income from the following office property dispositionsare included in discontinued operations for the years ended December 31, 2007,2006 and 2005 (in thousands).

** **

** **

**Square**

**Date of**

**Gross Sales**

**Net Book Value**

**Gain (Loss)**

**Office Property**

**Location**

**Feet**

**Sale**

**Price**

**of Real Estate**

**on Sale**

The Park on Camelback

 Phoenix, Arizona 

102

09/09/05

$  17,500

$  12,526

$  4,419 

250 Commonwealth

 Greenville, South Carolina 

46

09/14/05

4,020

4,104

(238)

2005 Dispositions

148

$  21,520

$  16,630

$  4,181 

Central Station Building

 St. Petersburg, Florida 

133

08/02/06

$  15,000

$  14,338

$     211 

Richmond Centre

 Houston, Texas 

92

11/29/06

6,906

4,551

2,018 

Ashford II

 Houston, Texas 

59

12/07/06

5,250

2,185

2,854 

2006 Dispositions

284

$  27,156

$  21,074

$  5,083 

       The Company made a decision to sellthe above assets because the properties are smaller assets or located insmaller markets that do not fit with the Company's strategy of owning largerassets in institutional markets.  

Page 65 of 89

       Theamount of revenue and expense for these five office properties reported indiscontinued operations for the years ended December 31, 2007, 2006 and 2005 isas follows (in thousands):

** **

** **

**Year Ended  December 31**

** **

**2007**

** **

**2006**

** **

**2005**

Revenues

Revenue from office and parking properties

 $

67 

 $

3,043 

 $

6,084 

** **

67 

3,043 

6,084 

Expenses

Office and parking properties:

        Operating expense

(104)

1,905 

2,668 

        Depreciation and amortization

1 

582 

1,050 

** **

(103)

2,487 

3,718 

Income from discontinued operations

170 

556 

2,366 

Gain on sale of real estate from discontinued operations

- 

5,083 

4,181 

Total discontinued operations

 $

170 

 $

5,639 

 $

6,547 

**Note I - Income Taxes**

       The Company elected to be taxed as areal estate investment trust (REIT) under the Internal Revenue Code, commencingwith its taxable year ended December 31, 1997.  To qualify as a REIT, theCompany must meet a number of organizational and operational requirements,including a requirement that it currently distribute at least 90% of itsadjusted taxable income to its stockholders.  It is management's currentintention to adhere to these requirements and maintain the Company's REITstatus.  As a REIT, the Company generally will not be subject to corporatelevel federal income tax on taxable income it distributes currently to itsstockholders.  If the Company fails to qualify as a REIT in any taxable year,it will be subject to federal income taxes at regular corporate rates(including any applicable alternative minimum tax) and may not be able toqualify as a REIT for four subsequent taxable years.  Even if the Companyqualifies for taxation as a REIT, the Company may be subject to certain stateand local taxes on its income and property, and to federal income and excisetaxes on its undistributed taxable income. In addition, taxable income fromnon-REIT activities managed through taxable REIT subsidiaries is subject tofederal, state and local income taxes.

       In January 1998, the Companycompleted its reorganization into an umbrella partnership REIT("UPREIT") structure under which substantially all of the Company'soffice building real estate assets are owned by an operating partnership,Parkway Properties LP (the "Operating Partnership"). Presently, substantiallyall interests in the Operating Partnership are owned by the Company and awholly-owned subsidiary.

       At December 31, 2007, the Company hadnet operating loss ("NOL") carryforwards for federal income taxpurposes of $5.3 million which expire at various dates beginning in 2008 through2018. The utilization of these NOLs can cause the Company to incur a smallalternative minimum tax liability.

Page 66 of 89

       TheCompany's income differs for income tax and financial reporting purposesprincipally because real estate owned has a different basis for tax andfinancial reporting purposes, producing different gains upon dispositionand different amounts of annual depreciation.  The following reconciles GAAPnet income to taxable income for the years ending December 31, 2007, 2006 and2005 (in thousands):

**2007**

**2006**

**2005**

**Estimate**

**Actual**

**Actual**

GAAP net income from REIT  operations (1) 

$19,692 

$25,682 

$20,807 

GAAP to tax adjustments:

     Depreciation and  amortization

19,864 

13,623 

16,086 

     Gains and losses from capital  transactions

(2,467)

4,283 

(2,684)

     Share based compensation expense

1,521 

863 

533 

     Stock options exercised

(2,096)

(1,615)

(1,166)

     Deferred compensation  distributions

(712)

(466)

(351)

     Other differences

75 

182 

(664)

Taxable income before  adjustments

35,877 

42,552 

32,561 

Less:  NOL carryforward

- 

- 

- 

Adjusted taxable income subject  to 90% dividend requirement

$35,877 

$42,552 

$32,561 

(1)  GAAP net income from REIT operations is net of amountsattributable to minority interest.

       The following reconciles cashdividends paid with the dividends paid deduction for the years ending December31, 2007, 2006 and 2005 (in thousands):

**2007**

**2006**

**2005**

**Estimate**

**Actual**

**Actual**

Cash distributions paid

$44,849 

$44,009 

$43,502 

Less:  Dividends on deferred  compensation plan shares

(276)

(303)

(330)

Less:  Dividends absorbed by  current earnings and profits

(5,740)

(1,154)

(3,114)

Less:  Return of capital

(2,956)

- 

(7,497)

Dividends paid deduction

$35,877 

$42,552 

$32,561 

       The following characterizesdistributions paid per common share for the years ending December 31, 2007, 2006and 2005:

**2007**

**2006**

**2005**

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$1.38

53.1%

$0.99

38.1%

$1.98

76.2%

Post May 5, 2003 capital gain

0.38

14.6%

1.17

45.0%

0.13

5.0%

Unrecaptured Section 1250 gain

0.65

25.0%

0.44

16.9%

0.03

1.1%

Return of capital

0.19

7.3%

- 

- 

0.46

17.7%

$2.60

100.0%

$2.60

100.0%

$2.60

100.0%

**Note J - Stock Option and Long-Term Compensation Plans**

       Effective January 1, 2003, thestockholders of the Company approved Parkway's 2003 Equity Incentive Plan ("the2003 Plan") that authorized the grant of up to 200,000 equity based awards toemployees of the Company.  At present, it is Parkway's intention to grantrestricted shares and/or deferred incentive share units instead of stockoptions to employees of the Company, although the 2003 Plan authorizes variousforms of incentive awards, including options.  On each July 1 beginning withJuly, 2004, the number of shares available under the plan will increaseautomatically by .25% of the number of shares of common stock outstanding onthat date (increase of 39,750 and 35,370 shares in 2007 and 2006,respectively), provided that the number of shares available for grant underthis plan and the 2001 Directors' Plan shall not exceed 11.5% of the sharesoutstanding (less the restricted shares issued and outstanding) plus sharesissuable on the conversion of outstanding convertible debt and equitysecurities or the exercise of warrants or other rights to purchase commonshares.  The 2003 Plan has a ten-year term.

       On January 12, 2007, the Board ofDirectors approved the grant of 35,874 restricted shares to officers of theCompany.  The shares are valued at $1.9 million and 34,875 shares will vestfour years from grant date and 999 shares will vest subject to achievement ofthe GEAR UP Plan, which will end December 31, 2008.

Page 67 of 89

       Asof December 31, 2007, a total of 220,999 shares of restricted stock have been grantedto officers of the Company.  The shares are valued at $9.0 million, whichequates to an average price per share of $40.72, with 121,000 shares vestingseven years from the grant date, 66,375 shares vesting four years from grantdate and the remaining 33,624 shares vesting upon achievement of the goals ofthe GEAR UP Plan.  The value, including estimated forfeitures, of restrictedshares that vest based on service conditions will be amortized to compensationexpense ratably over the vesting period for each grant of stock.  The value ofrestricted shares that vest based on performance conditions, in this caseachievement of the GEAR UP Plan goals, will be amortized to expense over theapplicable vesting period once the Company determines that it is probable thatthe goal will be achieved.  As of December 31, 2007, a total of 21,835 deferredincentive share units have been granted to employees of the Company.  Thedeferred incentive share units are valued at $1.0 million, which equates to anaverage price per share of $45.96, and the units vest four years from grantdate.  Compensation expense related to the restricted stock and deferredincentive units of $1.5 million, $863,000 and $533,000 was recognized in 2007,2006 and 2005, respectively.  Total compensation expense related to nonvestedawards subject to service conditions not yet recognized was $4.3 million as ofDecember 31, 2007.  The weighted average period over which this expense isexpected to be recognized is approximately 2.7 years.  Total potentialcompensation associated with shares that vest based on performance conditionsis $1.5 million.

       OnJanuary 14, 2008, the Board of Directors approved the grant of 34,542restricted shares to officers of the Company.  The shares are valued at $1.1million and 34,375 shares will vest four years from grant date and 167 shareswill vest subject to achievement of the GEAR UP Plan.

       Asummary of the Company's restricted stock and deferred incentive share unit activityunder the 2003 Equity Incentive Plan is as follows:

** **

**Weighted**

**Deferred**

**Weighted**

**Restricted**

**Average**

**Incentive**

**Average**

**Shares**

**Price**

**Share Units**

**Price**

**Outstanding at December 31, 2004**

143,500 

$35.97

9,487 

 $35.97

Granted

500 

50.57

6,145 

44.61

Forfeited

(20,000)

35.19

(1,804)

45.90

**Outstanding at December 31, 2005**

124,000 

36.16

13,828 

45.38

Granted

67,500 

43.03

8,255 

47.78

Forfeited

(3,000)

37.11

(3,277)

45.98

**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

       Proforma information regarding net income and net income per share is required byFAS 123R, and has been determined as if the Company had accounted for itsemployee stock options under the fair value method of that Statement.  The fairvalue for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following weighted-averageassumptions for 2005: risk-free interest of 4.3%, dividend yield of 5.55%;volatility factor of the expected market price of the Company's common stock of..196; and a weighted-average expected life of the options of five years for the1994 Stock Option Plan, 1991 Directors' Stock Option Plan and 2001 Directors'Stock Option Plan.  No options were granted during 2005, 2006 and 2007.

Page 68 of 89

       Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FAS 123R**tostock-based employee compensation for the years ended December 31, 2005 (inthousands, except per share amounts):

**Year  Ended**

**December  31**

**2005**

Net income available to common  stockholders, as reported

$   13,661 

Add:  Stock based compensation  expense included in reported net income

533 

Deduct:  Stock based  compensation expense assuming fair value method

      for  all awards

(641)

Pro forma net income available  to common stockholders

$   13,553 

Earnings per common share:

      Basic  - as reported

$       0.97 

      Basic  - pro forma

$       0.96 

      Diluted  - as reported

$       0.96 

      Diluted  - pro forma

$       0.95 

       A summary of theCompany's stock 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, 2004**

393,357 

$  30.38

37,500 

$  28.76

45,300 

$  37.31

Exercised                                  

(74,412)

27.97

(2,250)

10.17

- 

- 

Forfeited                                         

(18,270)

34.72

- 

-

- 

- 

**Outstanding at December 31, 2005**

300,675 

30.72

35,250 

29.95

45,300 

37.31

Exercised                                  

(104,865)

30.01

(2,250)

16.00

(6,000)

37.54

Forfeited                                         

(4,339)

35.91

- 

- 

- 

- 

**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

**Vested and Exercisable at December 31, 2007**

121,615 

$  31.38

13,500 

$  31.10

30,300 

$  37.88

       The total intrinsic value of stockoptions exercised for the year ended December 31, 2007, 2006, and 2005 was $1.7million, $1.7 million and $1.5 million, respectively.

Page 69 of 89

       Following is asummary of the status of options outstanding at December 31, 2007:

**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

84,336

1.8  years

$30.30

$ 1,474

$31.43 - $36.65

37,279

3.8  years

33.81

521

** **

121,615

2.4  years

$31.38

$ 1,995

**1991 Directors Stock Option Plan**

$26.18 - $31.42

10,500

2.6  years

$30.28

$    184

$31.43 - $36.65

3,000

1.4  years

34.00

41

13,500

2.4  years

$31.10

$    225

**2001 Directors Stock  Option Plan**

$26.18 - $31.42

6,000

3.4  years

$30.70

$    102

$31.66 - $36.65

5,800

4.4  years

36.12

68

$36.66 - $41.89

12,000

5.4  years

38.95

106

$41.90 - $47.12

6,500

5.8  years

44.10

24

30,300

4.9  years

$37.88

$    300

** **

**Note K - Commitments andContingencies**

**Legal Matters**

       Parkway is subject to various legalproceedings and claims that arise in the ordinary course of business.  Thesematters are generally covered by insurance.  The Company believes that thefinal outcome of such matters will not have a material effect on our financialstatements.

**Commitments**

       Parkway has an investment in MooreBuilding Associates LP ("MBALP") established for the purpose of owning acommercial office building (the Toyota Center in Memphis, Tennessee).  Parkwayhas a 75% ownership interest in MBALP and acts as the managing general partnerof 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 million.

** **

**Standby Letters of Credit**

****       In connection with the firstmortgage placed on One Illinois Center, located at 111 East Wacker Drive inChicago, Illinois, the Company delivered $1.4 million in letters of credit tosatisfy the various escrow requirements made by the lender.  The letters ofcredit expire June 30, 2008.

**Note L - Other Matters**

****      In connection with the purchase of theCapital City Plaza in Atlanta, Georgia on April 2, 2004, Parkway, through asubsidiary company, issued $15.5 million in preferred membership interests tothe seller.  The preferred membership interests paid the seller a 7% couponrate and were issued to accommodate their tax planning needs.  The sellerpreviously redeemed $4.8 million of the preferred membership interest.  On August 7, 2007, the seller redeemed the remaining $10.7 million of preferred membershipinterests.

      On August 3, 2007, the Board of Directorsauthorized the repurchase of up to 1.7 million shares of Parkway's outstandingcommon stock through July 30, 2008.  As of December 31, 2007, the Company haspurchased approximately 688,000 shares for $29.1 million, which equates to anaverage price of $42.36 per share.

****

Page 70 of 89

**Supplemental Profit and LossInformation**

     Includedin operating expenses are taxes, principally property taxes, of $34.3 million, $29.0million and $24.3 million for the years ended December 31, 2007, 2006 and2005, respectively.

** **

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

** **

** **

**Year Ended  December 31**

** **

**2007**

**2006**

**2005**

(In thousands)

**Supplemental cash flow  information:**

         Interest  paid

$52,707 

$42,807

$  33,374 

         Income  taxes paid (refunded)

(48)

13

(86)

**Supplemental schedule of  non-cash investing    **

**         and  financing activity:**

         Mortgages  assumed in purchases

- 

47,795

124,530 

         Mortgage  transferred to joint venture

- 

-

(19,275)

         Restricted  shares and deferred incentive

               share  units issued (forfeited)

1,954 

1,585

(488)

         Shares  issued in lieu of Directors' fees

251 

170

193 

         Capital  lease obligation

4,040 

-

- 

** **

**Rents Receivable and OtherAssets**

** **

**December 31**

** **

**2007**

**2006**

** **

(In thousands)

Rents receivable  

$   4,124 

$    2,324 

Allowance for doubtful accounts

(1,004)

(356)

Straight line rent receivable

20,976 

18,441 

Other receivables

6,800 

5,470 

Lease costs (net of accumulated  amortization of

     $27,030 and $18,879,  respectively)

34,233 

36,422 

Loan costs (net of accumulated  amortization of

     $3,653 and $2,861,  respectively)

5,309 

4,833 

Escrow and other deposits

39,014 

38,617 

Prepaid items

7,089 

1,897 

Other assets

2,916 

2,565 

$119,457 

$110,213 

** **

**Intangible Assets**

       The following table reflects theportion of the purchase price of office properties allocated to intangibleassets in accordance with SFAS 141, as discussed in "Note A".  The portion ofpurchase price allocated to below market lease value and the relatedaccumulated amortization is reflected in the Schedule of Accounts Payable andOther Liabilities within this note.

** **

**December 31**

** **

**2007**

**2006**

** **

(In thousands)

Lease in place value

$  77,648 

$ 76,507 

    Accumulated  amortization

(18,344)

(11,081)

Above market lease value

23,208 

23,629 

    Accumulated  amortization

(11,793)

(7,255)

$  70,719 

$ 81,800 

** **

** **

** **

** **

Page 71 of 89

**Accounts Payable and OtherLiabilities**

** **

**December 31**

** **

**2007**

**2006**

** **

(In thousands)

Office property payables:

     Accrued  expenses and accounts payable

$ 28,115 

$ 17,468 

     Accrued  property taxes

25,444 

24,756 

     Security  deposits

4,270 

3,951 

     Below  market lease value

19,878 

18,517 

     Accumulated  amortization - below market

          lease  value

(7,792)

(4,547)

Capital lease obligations

4,100 

63 

Corporate payables

2,642 

1,628 

Deferred compensation plan liability

5,237 

5,401 

Dividends payable

1,200 

1,200 

Accrued payroll

2,291 

1,337 

Interest payable

3,111 

2,885 

$ 88,496 

$ 72,659 

**Note M - Fair Values of Financial Instruments**

**Cash and cash equivalents**

       The carrying amounts for cash and cashequivalents approximated fair value at December 31, 2007 and 2006.

**Mortgage loans**

       The fair value of the mortgage notespayable are estimated using discounted cash flow analysis, based on theCompany's current incremental borrowing rates for similar types ofborrowing arrangements.  The aggregate fair value of the mortgage notes payablewithout recourse at December 31, 2007 was $714.6 million as compared to itscarrying amount of $714.5 million.  The aggregate fair value of the mortgagenotes payable without recourse at December 31, 2006 was $707.2 million ascompared to its carrying amount of $696.0 million.

**Note N - Segment Information**

       Parkway's primary business is theownership and operation of office properties. The Company accounts for eachoffice 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.   

       TheCompany believes that the individual operating segments exhibit similareconomic characteristics such as being leased by the square foot, sharing thesame primary operating expenses and ancillary revenue opportunities and beingcyclical in the economic performance based on current supply and demandconditions.  The individual operating segments are also similar in thatrevenues are derived from the leasing of office space to customers and each officeproperty is managed and operated consistently in accordance with Parkway'sstandard operating procedures.  The range and type of customer uses of ourproperties is similar throughout our portfolio regardless of location or classof building and the needs and priorities of our customers do not vary frombuilding to building.  Therefore, Parkway's management responsibilities do notvary from location to location based on the size of the building, geographiclocation or class.

Page 72 of 89

       The management of the Companyevaluates the performance of the reportable office segment based on funds fromoperations applicable to common shareholders ("FFO").  Management believes thatFFO is an appropriate measure of performance for equity REITs and computes thismeasure in accordance with the National Association of Real Estate InvestmentTrusts' ("NAREIT") definition of FFO.  Funds from operations isdefined by NAREIT as net income (computed in accordance with generally acceptedaccounting principles "GAAP"), excluding gains or losses from salesof property and extraordinary items under GAAP, plus depreciation andamortization, and after adjustments to derive the Company's pro rata share ofFFO of consolidated and unconsolidated joint ventures.  Further, the Companydoes not adjust FFO to eliminate the effects of non-recurring charges.  TheCompany believes that FFO is a meaningful supplemental measure of its operatingperformance because historical cost accounting for real estate assets inaccordance with GAAP implicitly assumes that the value of real estate assetsdiminishes predictably over time, as reflected through depreciation andamortization expenses.  However, since real estate values have historicallyrisen or fallen with market and other conditions, many industry investors andanalysts have considered presentation of operating results for real estatecompanies that use historical cost accounting to be insufficient.  Thus, NAREITcreated FFO as a supplemental measure of operating performance for real estateinvestment trusts that excludes historical cost depreciation and amortization,among other items, from net income, as defined by GAAP.  The Company believesthat the use of FFO, combined with the required GAAP presentations, has beenbeneficial in improving the understanding of operating results of real estateinvestment trusts among the investing public and making comparisons ofoperating results among such companies more meaningful.  FFO as reported byParkway may not be comparable to FFO reported by other REITs that do not definethe term in accordance with the current NAREIT definition.  Funds fromoperations do not represent cash generated from operating activities inaccordance with accounting principles generally accepted in the United States and is not an indication of cash available to fund cash needs.  Funds fromoperations should not be considered an alternative to net income as anindicator of the Company's operating performance or as an alternative to cashflow as a measure of liquidity.

Page 73 of 89

       Thefollowing is a reconciliation of FFO and net income available to commonstockholders for office properties and total consolidated entities for theyears ending December 31, 2007, 2006 and 2005.  Amounts presented as"Unallocated and Other" represent primarily income and expense associated with providingmanagement services, corporate general and administration expense, interestexpense on unsecured lines of credit and preferred dividends.

** **

** As of or for the year ended December 31, 2007**

** Office**

** Unallocated  **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands)  

Property operating revenues  (a)

$                246,677 

$                           - 

$                246,677 

Property operating expenses  (b)

(114,312)

- 

(114,312)

Property net operating  income from continuing operations

132,365 

- 

132,365 

Management company income

- 

1,605 

1,605 

Other income

- 

528 

528 

Interest expense (c) 

(43,118)

(10,981)

(54,099)

Management company expenses

- 

(1,188)

(1,188)

General and administrative  expenses

- 

(6,597)

(6,597)

Other expense

- 

(5)

(5)

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

1 

- 

1 

Adjustment for minority  interest - real estate partnerships

(7,240)

- 

(7,240)

Income from discontinued  operations

170 

- 

170 

Gain on non depreciable  assets

47 

- 

47 

Dividends on preferred stock

- 

(4,800)

(4,800)

Funds from operations  available to common stockholders

83,965 

(21,438)

62,527 

 

 

 

Depreciation and  amortization

(77,574)

- 

(77,574)

Depreciation and  amortization - unconsolidated joint ventures

(732)

- 

(732)

Depreciation and amortization  - discontinued operations

(1)

- 

(1)

Depreciation and  amortization - minority interest - real estate partnerships

10,414 

- 

10,414 

Gain on sale of real estate

20,260 

- 

20,260 

Minority interest - unit holders

- 

(2)

(2)

Net income (loss) available  to common stockholders

$                  36,332 

$                (21,440)

$                  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 (d)

$                  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)  Capital expenditures  include capitalized acquisition costs, building improvements, tenant  improvements and deferred leasing costs.

Page 74 of 89

** As of or for the year ended December 31, 2006**

** Office**

** Unallocated **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands)  

Property operating revenues  (a)

 $                210,007 

 $                           - 

 $                210,007 

Property operating expenses  (b)

(99,130)

- 

(99,130)

Property net operating  income from continuing operations

110,877   

- 

110,877 

Management company income

-   

5,329 

5,329   

Other income

-   

40 

40   

Interest expense (c) 

(34,097)

(10,535)

(44,632)

Management company expenses

-   

(1,141)

(1,141)

General and administrative  expenses

-   

(4,651)

(4,651)

Other expense

-   

(5)

(5)

Equity in earnings of  unconsolidated joint ventures

751   

- 

751   

Adjustment for depreciation  and amortization - unconsolidated joint ventures

815   

- 

815   

Adjustment for depreciation  and amortization - discontinued operations

582   

- 

582   

Adjustment for minority  interest - real estate partnerships

(1,790)

- 

(1,790)

Income from discontinued  operations

556   

- 

556   

Loss on non depreciable  assets

(119)

- 

(119)

Dividends on preferred stock

-   

(4,800)

(4,800)

Dividends on convertible  preferred stock

-   

(1,773)

(1,773)

Funds from operations  available to common stockholders

77,575   

(17,536)

60,039   

 

 

 

Depreciation and  amortization

(64,655)

- 

(64,655)

Depreciation and  amortization - unconsolidated joint ventures

(815)

- 

(815)

Depreciation and  amortization - discontinued operations

(582)

- 

(582)

Depreciation and amortization  - minority interest - real estate partnerships

2,275   

- 

2,275   

Gain on sale of real estate

17,765   

- 

17,765   

Gain on sale of real estate  from discontinued operations

5,083   

- 

5,083   

Minority interest - unit holders

-   

(1)

 (1)

Net income (loss) available  to common stockholders

 $                  36,646   

 $                (17,537)

 $                  19,109   

 

 

 

Total assets

 $             1,506,753   

 $                   5,593   

 $             1,512,346 

 

 

 

Office and parking properties

 $             1,303,213   

 $                           - 

 $             1,303,213   

 

 

 

Investment in unconsolidated  joint ventures

 $                  11,179   

 $                           - 

 $                  11,179 

 

 

 

Capital expenditures (d)

 $                  34,160   

 $                           - 

 $                  34,160 

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

Page 75 of 89

** As of or for the year ended December 31, 2005**

** Office**

** Unallocated **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands)  

Property operating revenues  (a)

 $                   188,486   

 $                                - 

 $                   188,486   

Property operating expenses  (b)

                 (88,254)

                           -   

                 (88,254)

Property net operating  income from continuing operations

                 100,232   

                           -   

                 100,232   

Management company income

                           -   

                    2,997   

                    2,997   

Other income

                           -   

                       255   

                       255   

Interest expense (c) 

                 (28,326)

                   (7,118)

                 (35,444)

Management company expenses

                           -   

                      (607)

                      (607)

General and administrative  expenses

                           -   

                   (4,468)

                   (4,468)

Other expense

                           -   

                         (5)

                         (5)

Equity in earnings of  unconsolidated joint ventures

                    1,496   

                           -   

                    1,496   

Adjustment for depreciation  and amortization - unconsolidated joint ventures

                    1,057   

                           -   

                    1,057   

Adjustment for depreciation  and amortization - discontinued operations

                    1,050 

                           -   

                    1,050   

Adjustment for minority  interest - real estate partnerships

                   (1,206)

                           -   

                   (1,206)

Income from discontinued  operations

                    2,366   

                           -   

                    2,366   

Gain (loss) on non  depreciable real estate

                        48   

                      (340)

                      (292)

Dividends on preferred stock

                           -   

                   (4,800)

                   (4,800)

Dividends on convertible  preferred stock

                           -   

                   (2,346)

                   (2,346)

Funds from operations  available to common stockholders

                  76,717   

                 (16,432)

                  60,285   

 

 

 

Depreciation and  amortization

                 (51,046)

                           -   

                 (51,046)

Depreciation and  amortization - unconsolidated joint ventures

                   (1,057)

                           -   

                   (1,057)

Depreciation and  amortization - discontinued operations

                   (1,050)

                           -   

                   (1,050)

Depreciation and  amortization - minority interest - real estate partnerships

                    1,019 

                           -   

                    1,019   

Gain on sale of real estate

                    1,331   

                           -   

                    1,331   

Gain on sale of real estate  from discontinued operations

                    4,181   

                           -   

                    4,181   

Minority interest - unit holders

                           -   

                         (2)

                         (2)

Net income (loss) available  to common stockholders

 $                     30,095 

 $                    (16,434)

 $                     13,661   

 

 

 

Total assets

 $                1,181,263   

 $                        7,079   

 $                1,188,342   

 

 

 

Office and parking  properties

 $                1,040,929   

 $                                -     

 $                1,040,929   

 

 

 

Investment in unconsolidated  joint ventures

 $                     12,942   

 $                                -     

 $                     12,942   

 

 

 

Capital expenditures (d)

 $                     32,441   

 $                                -     

 $                     32,441   

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

Page 76 of 89

**Note O - Selected QuarterlyFinancial Data (Unaudited):**

       Summarized quarterly financial datafor the years ended December 31, 2007 and 2006 are as follows (in thousands,except per share data):

**2007**

**First**

** **

**Second**

** **

**Third**

** **

**Fourth**

Revenues (other than gains)

$      61,871 

$       61,516 

$     61,217 

$        63,678 

Expenses

(49,359)

(49,864)

(50,237)

(50,216)

Operating Income

12,512 

11,652 

10,980 

13,462 

Interest and other income

146 

72 

90 

220 

Interest expense

(13,084)

(14,052)

(13,374)

(13,589)

Equity in earnings of  unconsolidated joint ventures

305 

243 

234 

226 

Gain on sale of joint  venture interest and real estate

50 

20,260 

(3)

- 

Minority interest - unit  holders

- 

- 

(2)

- 

Minority interest - real  estate partnerships

471 

1,016 

1,088 

599 

Income (loss) from  continuing operations

400 

19,191 

(987)

918 

Income (loss) from  discontinued operations

28 

49 

93 

- 

Net income (loss)

428 

19,240 

(894)

918 

Dividends on preferred stock

(1,200)

(1,200)

(1,200)

(1,200)

Dividends on convertible  preferred stock

- 

- 

- 

- 

Net income (loss) available  to common stockholders

$         (772)

$     18,040 

$      (2,094)

$          (282)

Net income (loss) per common  share:

Basic

$        (0.05)

$         1.15 

$        (0.14)

$         (0.02)

Diluted

$        (0.05)

$         1.14 

$        (0.14)

$         (0.02)

Dividends per common share

$          0.65 

$         0.65 

$         0.65 

$           0.65 

Weighted average shares  outstanding:

Basic

15,616 

15,672 

15,507 

15,138 

Diluted

15,616 

15,847 

15,507 

15,138 

**2006**

**First**

** **

**Second**

** **

**Third**

** **

**Fourth**

Revenues (other than gains)

 $      49,023 

 $      53,312   

 $      55,207 

 $       57,794   

Expenses

     (38,677)

     (38,153)

     (45,353)

     (47,399)

Operating Income

      10,346   

      15,159   

        9,854 

      10,395   

Interest and other income

             19   

              7   

              8   

              6   

Interest expense

       (9,426)

       (9,796)

     (12,565)

     (12,845)

Equity in earnings of  unconsolidated joint ventures

           410   

            (84)

           198   

           227   

Gain on sale of joint  venture interest and real estate

             -     

      13,465   

             -     

        4,181   

Minority interest - unit  holders

             -     

             -     

             (1)

             -     

Minority interest - real  estate partnerships

             80   

             64   

           225   

           116   

Income (loss) from  continuing operations

        1,429   

      18,815   

       (2,281)

        2,080   

Income (loss) from  discontinued operations

           312   

           344   

           130   

          (230)

Gain on sale of real estate  from discontinued operations

             -     

             -     

           211   

        4,872   

Net income (loss)

        1,741   

      19,159   

       (1,940)

        6,722   

Dividends on preferred stock

       (1,200)

       (1,200)

       (1,200)

       (1,200)

Dividends on convertible  preferred stock

          (587)

          (586)

          (481)

          (119)

Net income (loss) available  to common stockholders

 $           (46)

 $      17,373   

 $      (3,621)

 $         5,403   

Net income (loss) per common  share:

Basic

$               - 

 $          1.24   

 $        (0.25)

 $           0.36   

Diluted

$               - 

 $          1.20   

 $        (0.25)

 $           0.36   

Dividends per common share

 $          0.65 

 $          0.65   

 $          0.65   

 $           0.65   

Weighted average shares  outstanding:

Basic

14,049   

14,036   

14,236   

14,895   

Diluted

      14,049   

      15,000 

      14,236   

15,086 

Page 77 of 89

SCHEDULEII - VALUATIONS AND QUALIFYING ACCOUNTS

(In thousands)

** **

**Balance**

**Additions**

**Deductions**

**Balance**

** **

**Beginning**

**Consolidation**

**Charged to**

**Written Off as**

**Assets Sold or**

**End**

**Description**

**of Period**

**of Entities**

**Cost & Expenses**

**Uncollectible**

**Joint Ventured**

**of Period**

Allowance for Doubtful  Accounts:

Year Ended:

December 31, 2007

$356

$     -

$1,024 

$(376)

$     - 

$1,004

December 31, 2006

450

-

494 

(588)

- 

356

December 31, 2005

353

210

34 

(137)

(10)

450

Page 78 of 89

** **

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

**DECEMBER 31, 2007**

(In thousands)

** **

**Initial Cost to the Company**

**Subsequent**

** **

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

**Arizona**

Squaw  Peak Corp Center

$            35,339  

$    5,800 

$            35,169  

$       4,413 

$       45,382 

Mesa  Corporate Center

-   

3,353 

15,243 

1,049 

19,645 

**Florida**

Hillsboro  Center V

10,626 

1,325 

12,249 

2,905 

16,479 

Hillsboro  Center I-IV

7,245 

1,129 

7,734 

2,041 

10,904 

Bellsouth  Building

8,027 

3,477 

7,839 

1,417 

12,733 

Centurion  Centre

6,373  

2,951 

6,253 

1,200 

10,404 

Stein  Mart Building

 -   

1,653 

16,636 

3,549 

21,838 

Riverplace  South

 -   

2,316 

5,412 

1,838 

9,566 

Maitland  100

8,820 

2,667 

10,181 

2,145 

14,993 

555  Winderley Place

8,340 

2,100 

9,698 

1,382 

13,180 

Citrus  Center

 -   

4,000 

26,712 

6,556 

37,268 

Wachovia  Plaza

 -   

785 

18,071 

2,932 

21,788 

**Georgia**

100  Ashford Center

15,507 

6,258 

15,622 

1,449 

23,329 

Peachtree  Ridge

15,553   

2,203 

19,005 

2,298 

23,506 

Overlook  II

31,500 

5,394 

33,889 

2,428 

41,711 

Waterstone

6,192 

 859 

7,207 

2,190 

10,256 

Meridian

-   

 994 

9,547 

2,171 

12,712 

Peachtree  Dunwoody Pavilion

30,428 

9,373 

24,579 

5,397 

39,349 

Capital  City Plaza

42,196 

3,625 

57,218 

3,241 

64,084 

**Illinois**

Chatham  Centre

17,100 

3,358 

20,144 

3,629 

27,131 

233  North Michigan

100,279 

18,181 

133,594 

25,410 

177,185 

111  East Wacker

148,500 

23,285 

124,016 

41,854 

189,155 

**Mississippi**

One  Jackson Place

10,661 

1,799 

19,730 

9,371 

30,900 

City  Centre

-   

1,707 

19,935 

10,638 

32,280 

111  Capitol Building

-   

915 

10,830 

6,587 

18,332 

Parking  at Jackson Place

-   

-   

4,129 

921 

5,050 

**South  Carolina**

Tower  at 1301 Gervais

-   

316 

20,350 

5,392 

26,058 

Atrium  at Stoneridge

-   

572 

7,775 

1,519 

9,866 

Capitol  Center

18,465 

973 

37,234 

6,354 

 44,561 

**Tennessee**

Renaissance  Center

16,797 

4,255 

29,789 

2,135 

36,179 

Forum  II & III

-   

2,634 

13,886 

2,311 

18,831 

Morgan  Keegan Tower

15,258 

-   

36,549 

3,034 

39,583 

Falls  Building

-   

190 

7,628 

1,847 

9,665 

Moore  Building

12,006 

727 

22,716 

 88 

23,531 

Toyota  Garage

-   

 -   

7,939 

223 

8,162 

Forum  I

11,731 

4,737 

12,485 

2,118 

19,340 

Bank  of America Plaza

18,414 

1,464 

28,712 

8,643 

38,819 

**Texas**

1401  Enclave

28,000 

5,160 

36,039 

2,091 

43,290 

One  Park Ten Plaza

8,974 

 606 

6,149 

3,460 

10,215 

400  North Belt

2,431 

 419 

9,655 

3,647 

13,721 

Woodbranch

1,170 

303 

3,805 

2,704 

6,812 

Sugar  Grove

6,773 

364 

7,385 

3,227 

10,976 

Honeywell

-   

856 

15,175 

1,912 

17,943 

Schlumberger

-   

1,013 

11,102 

3,940 

16,055 

One  Commerce Green

20,285 

 489 

37,103 

3,786 

41,378 

Comerica  Bank Building

14,490 

1,921 

21,222 

3,068 

26,211 

550  Greens Parkway

5,225 

1,006 

8,014 

293 

9,313 

1717  St. James

4,817 

430 

6,340 

1,536 

8,306 

5300  Memorial Building

10,056 

682 

11,712 

2,314 

14,708 

Town  and Country

7,577 

436 

7,674 

2,720 

10,830 

Wells  Fargo

9,345 

2,600 

8,247 

2,696 

13,543 

Page 79 of 89

**                                               SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**                                         DECEMBER 31, 2007**

                                            (In Thousands)

** **

**Initial Cost to the Company**

**Subsequent**

** **

**Building and**

**Capitalized**

**Total**

**Description**

**Encumbrances**

**Land**

**Improvements**

**Costs**

**Real Estate**

**Office  and Parking Properties:**

**Virginia**

Lynnwood  Plaza

-   

985 

8,306 

2,461 

11,752 

Town  Point Center

-   

-   

10,719 

3,780 

14,499 

Greenbrier  Tower I

-   

584 

7,503 

1,798 

9,885 

Greenbrier  Tower II

-   

573 

7,354 

1,994 

9,921 

Glen  Forest

-   

537 

8,503 

1,731 

10,771 

Moorefield  II

-   

469 

4,752 

819 

6,040 

Moorefield  III

-   

490 

5,135 

1,206 

6,831 

Boulders  Center

-   

1,265 

11,825 

2,398 

15,488 

Winchester  Building

-   

956 

10,852 

2,799 

14,607 

Moorefield  I

-   

260 

3,698 

899 

4,857 

** **

714,500 

147,779 

1,163,974 

239,954 

1,551,707 

**Office  Property Development:**

**Mississippi**

The  Pinnacle at Jackson Place

1 

1,275 

13,411 

-  

14,686 

** **

1 

1,275 

13,411 

-  

14,686 

**Total  Real Estate Owned**

$          714,501  

$    149,054 

$        1,177,385  

$      239,954  

$     1,566,393 

** **

 Page 80 of 89
****
**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2007**

(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**

**Acquir.**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

**Arizona**

Squaw Peak Corp Center

$    5,800  

$    39,582  

$    45,382

$    4,970

$              40,412

2004

1999/2000

(3)

Mesa Corporate Center

3,353  

16,292  

19,645  

1,356  

18,289  

2005

2000

(3)

**Florida**

Hillsboro Center V

1,325  

15,154  

16,479  

4,377  

12,102  

1998

1985

(3)

Hillsboro Center I-IV

1,129  

9,775  

10,904  

2,806  

8,098  

1998

1985

(3)

Bellsouth Building

3,477  

9,256  

12,733  

997  

11,736  

2006

1996

(3)

Centurion Centre

2,951  

7,453  

10,404  

628  

9,776  

2006

1993

(3)

Stein Mart Building

1,653  

20,185  

21,838  

2,269  

19,569  

2005

1985

(3)

Riverplace South

2,316  

7,250  

9,566  

1,201  

8,365  

2005

1981

(3)

Maitland 100

2,667  

12,326  

14,993  

1,189  

13,804  

2005

1981

(3)

555 Winderley Place

2,100  

11,080  

13,180  

1,014  

12,166  

2005

1985

(3)

Citrus Center

4,000  

33,268  

37,268  

5,018  

32,250  

2003

1971

(3)

Wachovia Plaza

785  

21,003  

21,788  

5,740  

16,048  

1998

1985

(3)

**Georgia**

100 Ashford Center

6,258  

17,071  

23,329  

855  

22,474  

2006

1987

(3)

Peachtree Ridge

2,203  

21,303  

23,506  

996  

22,510  

2006

1986

(3)

Overlook II

5,394  

36,317  

41,711  

1,407  

40,304  

2006

1985

(3)

Waterstone

859  

9,397  

10,256  

3,424  

6,832  

1995

1987

(3)

Meridian

994  

11,718  

12,712  

3,745  

8,967  

1997

1985

(3)

Peachtree Dunwoody Pavilion

9,373  

29,976  

39,349  

4,722  

34,627  

2003

1976/1980

(3)

Capital City Plaza

3,625  

60,459  

64,084  

6,175  

57,909  

2004

1989

(3)

**Illinois**

Chatham Centre

3,358  

23,773  

27,131  

1,510  

25,621  

2006

1989

(3)

233 North Michigan

18,181  

159,004  

177,185  

21,412  

155,773  

2005

1972

(3)

111 East Wacker

23,285  

165,870  

189,155  

13,691  

175,464  

2006

1970

(3)

**Mississippi**

One Jackson Place

1,799  

29,101  

30,900  

15,393  

15,507  

1986

1986

(3)

City Centre

1,707  

30,573  

32,280  

8,431  

23,849  

1995

(2) 1987

(3)

111 Capitol Building

915  

17,417  

18,332  

5,705  

12,627  

1998

1983

(3)

Parking at Jackson Place

-    

5,050  

5,050  

34  

5,016  

2007

1980

(3)

**South Carolina**

Tower at 1301 Gervais

316  

25,742  

26,058  

6,851  

19,207  

1997

1973

(3)

Atrium at Stoneridge

572  

9,294  

9,866  

2,537  

7,329  

1998

1986

(3)

Capitol Center

973  

43,588  

44,561  

10,323  

34,238  

1999

1987

(3)

**Tennessee**

Renaissance Center

4,255  

31,924  

36,179  

1,187  

34,992  

2006

2000

(3)

Forum II & III

2,634  

16,197  

18,831  

5,171  

13,660  

1997

1985

(3)

Morgan Keegan Tower

-    

39,583  

39,583  

10,864  

28,719  

1997

1985

(3)

Falls Building

190  

9,475  

9,665  

2,464  

7,201  

1998

(2) 1982/84/90

(3)

Moore Building

727  

22,804  

23,531  

4,578  

18,953  

2000

2000

(3)

Toyota Garage

-    

8,162  

8,162  

1,614  

6,548  

2000

2000

(3)

Forum I

4,737  

14,603  

19,340  

1,490  

17,850  

2005

1982

(3)

Bank of America Plaza

1,464  

37,355  

38,819  

6,144  

32,675  

2001

1977

(3)

**Texas**

** **

** **

** **

** **

** **

** **

** **

** **

1401 Enclave

5,160  

38,130  

43,290  

835  

42,455  

2007

1999

(3)

One Park Ten Plaza

606  

9,609  

10,215  

4,369  

5,846  

1996

1982

(3)

400 North Belt

419  

13,302  

13,721  

3,969  

9,752  

1996

1982

(3)

Woodbranch

303  

6,509  

6,812  

2,622  

4,190  

1996

1982

(3)

Sugar Grove

364  

10,612  

10,976  

3,664  

7,312  

1997

1982

(3)

Honeywell

856  

17,087  

17,943  

4,537  

13,406  

1997

1983

(3)

Schlumberger

1,013  

15,042  

16,055  

4,606  

11,449  

1998

1983

(3)

One Commerce Green

489  

40,889  

41,378  

11,869  

29,509  

1998

1983

(3)

Comerica Bank Building

1,921  

24,290  

26,211  

6,659  

19,552  

1998

1983

(3)

550 Greens Parkway

1,006  

8,307  

9,313  

1,409  

7,904  

2001

1999

(3)

1717 St. James

430  

7,876  

8,306  

1,349  

6,957  

2002

1975/94

(3)

5300 Memorial Building

682  

14,026  

14,708  

2,591  

12,117  

2002

1982

(3)

Town and Country

436  

10,394  

10,830  

2,034  

8,796  

2002

1982

(3)

Wells Fargo

2,600  

10,943  

13,543  

1,659  

11,884  

2003

1978

(3)

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 81 of 89

**SCHEDULE III - REAL ESTATE AND ACCUMULATED  DEPRECIATION - (Continued)**

**DECEMBER 31, 2007**

(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**

**Acquir.**

**Constructed**

**Lives (Yrs.)**

**Office and Parking  Properties:**

**Virginia**

Lynnwood Plaza

985  

10,767  

11,752  

3,329  

8,423  

1998

1986

(3)

Town Point Center

-    

14,499  

14,499  

4,012  

10,487  

1998

1987

(3)

Greenbrier Tower I

584  

9,301  

9,885  

2,715  

7,170  

1997

1985/87

(3)

Greenbrier Tower II

573  

9,348  

9,921  

2,779  

7,142  

1997

1985/87

(3)

Glen Forest

537  

10,234  

10,771  

2,966  

7,805  

1998

1985

(3)

Moorefield II

469  

5,571  

6,040  

1,420  

4,620  

1998

1985

(3)

Moorefield III

490  

6,341  

6,831  

1,778  

5,053  

1998

1985

(3)

Boulders Center

1,265  

14,223  

15,488  

3,490  

11,998  

1998

1986

(3)

Winchester Building

956  

13,651  

14,607  

3,634  

10,973  

1998

1987

(3)

Moorefield I

260  

4,597  

4,857  

1,208  

3,649  

1999

1984

(3)

** **

147,779  

1,403,928  

1,551,707

251,791  

1,299,916  

**Office Property Development:**

**Mississippi**

The Pinnacle at Jackson  Place

1,275  

13,411  

14,686  

-    

14,686  

-

In Process

(3)

** **

1,275  

13,411  

14,686  

-    

14,686  

**Total Real Estate Owned**

$149,054  

$1,417,339  

$1,566,393  

$ 251,791  

$       1,314,602  

** **

(1)   The aggregate cost for  federal income tax purposes was approximately $1.6 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**

**As of December 31,2007 and 2006**

(In thousands)

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

**December 31**

**2007**

** **

**2006**

**Real Estate:**

**Office and Parking Properties:**

Balance at beginning of year

$1,512,104 

$1,220,565 

Additions:

Acquisitions and improvements

91,261 

360,113 

Office property development

14,686 

- 

Cost of real estate sold or  disposed

(51,658)

(68,574)

Balance at close of year

$1,566,393 

$1,512,104 

**Accumulated Depreciation:**

Balance at beginning of year

$   208,891 

$   179,636 

Depreciation expense

58,954 

46,851 

Depreciation expense -  discontinued operations

- 

545 

Real estate sold or disposed

(16,054)

(18,141)

Balance at close of year

$   251,791 

$   208,891 

Page 82 of 89

**SCHEDULE IV -  MORTGAGE LOAN ON REAL ESTATE**

**DECEMBER 31,  2007**

(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

$       7,001

$               -

(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 million will be due.

(3) The cost for federal tax purposes is approximately  $7.0 million.

 

**NOTE TO SCHEDULE  IV**

**As of December  31, 2007**

(In Thousands)

Balance at December 31, 2006

 $

-  

Additions:

New mortgage loans

6,930 

Amortization of discount

71 

Balance at December 31, 2007

 $

7,001 

**Item 9.  *Changes in and Disagreements with Accountants onAccounting and Financial Disclosure*.**

       None.

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

       The Company's management, with theparticipation of the Company's Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of Parkway's disclosure controls andprocedures as of December 31, 2007.  Based on that evaluation, the Company'sChief Executive Officer and Chief Financial Officer concluded that Parkway'sdisclosure controls and procedures were effective as of December 31, 2007. There were no changes in the Company's internal control over financialreporting during the fourth quarter of 2007 that has materially affected, or isreasonably likely to affect, the Company's internal control over financialreporting.

       The Company's internal control systemwas designed to provide reasonable assurance to the Company's management andboard of directors regarding the preparation and fair presentation of publishedfinancial statements. All internal control systems, no matter how welldesigned, have inherent limitations.  Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to thefinancial statement preparation and presentation.

**Management's Report on Internal Control Over Financial Reporting**

       The Company's management, with theparticipation of the Company's Chief Executive Officer and Chief FinancialOfficer, is responsible for establishing and maintaining adequate internalcontrol over financial reporting.  The Company's management has assessed theeffectiveness of the Company's internal control over financial reporting as ofDecember 31, 2007.  In making this assessment, we used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *InternalControl - Integrated Framework*.  Based on our assessment we have concludedthat, as of December 31, 2007, the Company's internal control over financialreporting is effective based on those criteria.  Our independent registeredpublic accounting firm, Ernst & Young LLP, have provided an attestationreport on the Company's internal control over financial reporting as ofDecember 31, 2007.

Page 83 of 89

**Report of Independent Registered Public Accounting Firm**

****The Shareholders and Board of Directors

Parkway Properties, Inc.

****We have audited Parkway Properties Inc.'s internal control over financialreporting as of December 31, 2007, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). ParkwayProperties, Inc.'s management is responsible for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting included in the accompanyingManagement's Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the company's internal control overfinancial reporting 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 effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company's internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally acceptedaccounting principles. A company's internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany's assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, ParkwayProperties, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the 2007 consolidated financial statements of ParkwayProperties, Inc. and our report dated February 27, 2008 expressed an unqualified opinion thereon.

                                                                                                                                                                                                         

/s/ Ernst & Young LLP

Houston, Texas                                      

February 27, 2008

Page 84 of 89

**Item 9B.  *Other Information*.**

       None.

**PART III**

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

      The information regarding directors isincorporated herein by reference from the section entitled "Proposal One:Election of Director  − Nominees" in the Company's definitive ProxyStatement ("2008 Proxy Statement") to be filed pursuant to Regulation14A of the Securities Exchange Act of 1934, as amended, for the Company'sAnnual Meeting of Stockholders to be held on May 8, 2008.  The 2008 ProxyStatement will be filed within 120 days after the end of the Company's fiscalyear ended December 31, 2007. 

      The information regarding executiveofficers is incorporated herein by reference from the section entitled"Proposal 1: Election of Directors − Executive Officers" in theCompany's 2008 Proxy Statement.

      The information regarding compliance withSection 16(a) of the Securities Exchange Act of 1934 is incorporated herein byreference from the section entitled "Proposal 1: Election of Directors− Section 16(a) Beneficial Ownership Reporting Compliance" in theCompany's 2008 Proxy Statement. 

      Information regarding the Company's code ofbusiness conduct and ethics found in the subsection captioned "AvailableInformation" in Item 1 of Part I hereof is also incorporated herein byreference into this Item 10.

      The information regarding the Company'saudit committee, its members and the audit committee financial experts isincorporated by reference herein from the second paragraph in the sectionentitled "Proposal 1: Election of Directors − Board Committees andMeetings; Director Education" in the Company's 2008 Proxy Statement. 

**Item 11.  *Executive Compensation*.**

      The information included under thefollowing captions in the Company's 2008 Proxy Statement is incorporated hereinby reference: "Proposal 1: Election of Directors − CompensationDiscussion and Analysis, − Summary Compensation Table, − 2007 Grantsof Plan-Based Awards, − Outstanding Equity Awards at 2007 Fiscal Year-End,− 2007 Option Exercises and Stock Vested, − Potential Payments uponChange in Control, − Compensation of Directors and − CompensationCommittee Interlocks."  The information included under the heading"Proposal 1: Election of Directors − Compensation CommitteeReport" in the Company's 2008 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.  *Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters.***

      Information regarding security ownership ofcertain beneficial owners and management is incorporated herein by reference fromthe sections entitled "Security Ownership of Certain BeneficialOwners," "Proposal 1: Election of Directors − SecurityOwnership of Management and Directors" in the Company's 2008 ProxyStatement.

Page 85 of 89

**Equity Compensation Plans**

      The following table sets forth thesecurities authorized for issuance under Parkway's equity compensation plans asof December 31, 2007:

** **

** **

** **

**Number of  securities**

** **

** **

** **

**remaining  available for**

** **

** **

** **

**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

187,250

$28.75

329,738
            
Equity compensation plans 

not approved by security

holders

-

-

-

Total

187,250

$28.75

329,738

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

       The informationregarding transactions with related persons and director independence isincorporated herein by reference from the sections entitled "Independence" and"Certain Transactions and Relationships" in the Company's 2008 Proxy Statement.

**Item 14.  *Principal Accounting Fees 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 2008 Proxy Statement.

**PART IV**

**Item 15.  *Exhibits and Financial Statement Schedules*.**

(a)   1            Consolidated Financial Statements

                      Report of Independent RegisteredPublic Accounting Firm

                      Consolidated BalanceSheets-as of December 31, 2007 and 2006

                      Consolidated Statements ofIncome-for the years ended December 31, 2007, 2006 and 2005

                      Consolidated Statements ofStockholders' Equity-for the years ended December 31, 2007, 2006 and 2005

                      Consolidated Statements ofCash Flows-for the years ended December 31, 2007, 2006 and 2005

                      Notes to ConsolidatedFinancial Statements

2            ConsolidatedFinancial Statement Schedules

Schedule II - Valuations and Qualifying Accounts

                      Schedule III - Real Estateand Accumulated Depreciation

                      Note to Schedule III

                      Schedule IV - MortgageLoan on Real Estate

                      Note to Schedule IV

                  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:

 

**                      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).

Page 86 of 89

        3.2         Bylaws, as amended, of the Company (incorporatedby reference to Exhibit 3.2 to the Company's Form 10-K for the year endedDecember 31, 2006).

        3.3         Amendment to Bylaws of the Company (incorporatedby reference 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 contractor compensatory plan or arrangement):

        10.1*     Form of Change-in-Control Agreement that Company hasentered into with Leland R. Speed, Steven G. Rogers, William R. Flatt, James M.Ingram, Thomas C. Maloney and G. Mitchel Mattingly (incorporated by referenceto Exhibit 10.1 to the Company's Form 10-K for the year ended December 31,2004).

        10.2*     Form of Change-in-Control Agreement that the Companyhas entered into with John J. Buckley, Roy Butts, Sarah P. Clark, David R.Fowler, Mandy M. Pope, Warren L. Speed and Jack R. Sullenberger (incorporatedby reference to Exhibit 10.2 to the Company's Form 10-K for the year endedDecember 31, 2004).

        10.3*     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).

        10.4*     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).

        10.5*     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).

        10.6*     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).

        10.7       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).

        10.8       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).

        10.9       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).

        10.10     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).

        10.11     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).

        10.12     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).

        10.13     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).

        10.14     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. (filed hereweith).

        10.15     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. (filed hereweith).

        10.16*   Performance measures for the Company's 2008 cashbonus 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 January 16,2008).

        10.17     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).

Page 87 of 89

        10.18    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).

        10.19    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).

        10.20*  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).

        10.21    Real Estate Sales Agreement between Lincoln-CarlyleIllinois Center LLC and Parkway Properties LP (incorporated by reference toExhibit 10.1 to the Company's Form 8-K filed July 14, 2006).

        10.22     First Amendment to Real Estate Sales Agreementbetween Lincoln-Carlyle Illinois Center LLC and Parkway Properties LP(incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed July14, 2006).

        10.23    Second Amendment to Real Estate Sales Agreementbetween Lincoln-Carlyle Illinois Center LLC and Parkway Properties LP(incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed July14, 2006).

        10.24    Mortgage, Security Agreement, Assignment of Rentsand Fixture Filing by 111 East Wacker LLC to Wachovia Bank, NationalAssociation (incorporated by reference to Exhibit 10.4 to the Company's Form8-K filed July 14, 2006).

        10.25    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).

        10.26*   Adoption Agreement for the Executive NonqualifedExcess Plan (incorporated by reference to Exhibit 10.25 to the Company's Form10-K for the year ended December 31, 2006).

        10.27*   Appendix to Adoption Agreement for ParkwayProperties, Inc Deferred Compensation Plan, as amended (incorporated byreference to Exhibit 10.26 to the Company's Form 10-K for the year endedDecember 31, 2006).

        10.28*   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).

        10.29*   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).

        10.30*   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).

        21          Subsidiaries of the Company (filed herewith).

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

        23.2       Consent of KPMG LLP (filed herewith).

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

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

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

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

Page 88 of 89

** **

**SIGNATURES**

     Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

PARKWAY  PROPERTIES, INC.

Registrant

/s/ Steven G. Rogers

Steven G. Rogers

President, Chief Executive

Officer and Director

February 28, 2008

/s/  Mandy M. Pope

Mandy  M. Pope

Chief  Financial Officer

February 28, 2008

     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/ Michael J. Lipsey

Daniel P. Friedman, Director

Michael J. Lipsey, Director

February 28, 2008

February 28, 2008

/s/ Roger P. Friou

/s/ Steven G. Rogers

Roger P. Friou, Director

Steven G. Rogers

February 28, 2008

President, Chief Executive  Officer and Director

February 28, 2008

/s/ Martin L. Garcia

Martin L. Garcia, Director

/s/ Leland R. Speed

February 28, 2008

Leland R. Speed

Chairman of the Board and  Director

February 28, 2008

/s/ Matthew W. Kaplan

Matthew W. Kaplan, Director

February 28, 2008

/s/ Troy A. Stovall

Troy A. Stovall, Director

February 28, 2008

/s/  Lenore M. Sullivan

Lenore M. Sullivan, Director

February 28, 2008

Page 89 of 89