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, 2006OR**

o       **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 1000188 East Capitol Street Jackson, Mississippi 39201-2195**(Address of principal executiveoffices) (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 ValueNew 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.

x Yeso No 

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

o Yesx No 

        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.   x Yeso No

        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.   x  

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

Large accelerated filer o                               Accelerated filer  x                               Non-accelerated filer o

        Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the Act). 

o Yesx No

        The aggregate market value ofthe voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold, or the averagebid and asked price of such common equity, as of June 30, 2006 was $613million.

        The number of sharesoutstanding in the registrant's class of common stock as of March 1, 2007 was15,886,138.

**DOCUMENTS INCORPORATED BY REFERENCE**

        Portions of the Registrant'sProxy Statement for the 2007 Annual Meeting of Shareholders are incorporated byreference into Part III.

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**PARKWAYPROPERTIES, INC.TABLE OF CONTENTS**

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| **PART I.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Business                                                                                                                                   | 3        |
| Item 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                    | 7        |
| Item 1B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Unresolved Staff Comments                                                                                                                                                                                                                                                                                                                                                                       | 11       |
| Item 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Properties                                                                                                                                      | 11       |
| Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Legal Proceedings                                                              | 16       |
| 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                                                                                                                                                                                                                                                                                                                                                                         | 19       |
| Item 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Management's Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                          | 20       |
| Item 7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                     | 41       |
| Item 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Financial Statements and  Supplementary Data                                                                                                                                                                                                                                                                                                                                                    | 41       |
| Item 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                                                                                                                                                                                                                                                                                           | 81       |
| Item 9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                         | 81       |
| Item 9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Other Information                                                                                                                                                                                                                                                                                                                                                                               | 83       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                            |     |
| **PART III.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Directors, Executive Officers and  Corporate Governance                                                                                                                                                                                                                                                                                                                                         | 83       |
| Item 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                          | 83       |
| Item 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                                                                                                                                                                                                                                                                                                 | 83       |
| Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Certain Relationships and  Related Transactions, and Director Independence                                                                                                                                                                                                                                                                                                                      | 85       |
| Item 14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Principal Accounting Fees and  Services                                                                                                                                                                                                                                                                                                                                                         | 85       |
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| **PART IV.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                 |          |
| Item 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibits and Financial  Statement Schedules                                                                                                                                                                                                                                                                                                                                                     | 85       |
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| **SIGNATURES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                 |
| Authorized Signatures                                                                                                                | 88                                                                                                                                                                                                                                                                                                                                                                                              |
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**PART I**

**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 companies engagedin 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.

       AtJanuary 1, 2007, Parkway owned or had an interest in 66 office propertieslocated in 11 states with an aggregate of approximately 13.3 million squarefeet of leasable space.  Included in the portfolio are one discretionary fundand several partnership arrangements which encompass 17 properties totaling 2.5million square feet, representing 19% 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 1.2 million square feet forthird party owners as of January 1, 2007. A significant phase of thetransformation to an operator-owner is currently under way through theCompany's GEAR UP Plan, which started January 1, 2006 and ends December 31,2008.

*Strategic Planning*

       Wecontinue to see Parkway defined as a focused office REIT with a hands-on,service-oriented approach, a disciplined asset 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 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.

- *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%.  For the     year ended December 31, 2006, Parkway's customer retention rate was 73%.

-  ***Uncompromising Focus on     Operations. ***Parkway is reaffirming its commitment to do that     which it does best, and that is to operate office properties for maximum     returns.-  ***Performance. ***In     the planning process, management first decided what actions to take     strategically over the three years of the GEAR UP Plan and secondly,     modeled the economic impact of these actions.  Given the large component     of Asset Recycling in the Plan, management selected a financial metric     that would be most appropriate to measure the success of the Plan.   This     led to the adoption of Cumulative Adjusted Funds Available for     Distribution ("Cumulative Adjusted FAD") as the metric for the GEAR UP     Plan, with a target of $7.18 per share cumulative over three years.  Actual     adjusted funds available for distribution for 2006 exceeded the amount     projected by the Company at the beginning of the plan by $.29 per diluted     share.  Additionally, Parkway established a self-imposed limit for the     modified fixed charge coverage ratio of 2.5 times as a pledge not to use     leverage to achieve Company goals.
       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.

       Parkwayhas made progress on its ***Asset Recycling*** and ***EquityOpportunities*** goals in 2006 as follows:
- Dispositions.    Parkway     sold eight office properties for a gross sales price totaling $94.8     million and recorded a total gain on the sales for financial reporting     purposes in the amount of $22.8 million. 
- Fund Acquisitions.   The     Fund with Ohio PERS purchased seven office properties at a contract purchase price of $183.7 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%.

* *

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**- 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.   

*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, 2006,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 will be capitalizedwith approximately $200 million of equity capital and $300 million ofnon-recourse, fixed-rate first mortgage debt.  The Fund targets acquisitions inthe existing core Parkway markets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville. There is approximately $275 million remaining capacity for Fund officeinvestments.  The remaining office investments are expected to be funded byapproximately $165 million in mortgage debt and $110 million in equitycontributions from partners.

       The Fund targets properties with cashon cash return greater than 7% and a leveraged internal rate of return ofgreater 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 will have three yearsto identify and acquire properties for the Fund (the "Commitment Period"), withfunds contributed as needed to close acquisitions.  Parkway will exclusivelyrepresent the Fund in making acquisitions within the target markets and withincertain predefined criteria.  Parkway will not be prohibited from makingfee-simple or joint venture acquisitions in markets outside of the targetmarkets, acquiring properties within the target markets that do not meet thefund's specific criteria or selling or joint venturing any currently ownedproperties.  The term of the Fund will be seven years from the expiration ofthe Commitment Period, with provisions to extend the term for two additionalone-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").  In additionto the Company's owned properties, Parkway Realty currently manages and/orleases approximately 3.7 million net rentable square feet for third-partyowners, joint venture interests and Fund properties.  The Company intends toexpand its third party fee business through funds or similar ventures.

*Financing Strategy*       

       The Companyexpects to continue seeking fixed rate, non-recourse mortgage financing withmaturities from five to ten years typically amortizing over 25 to 30 years onselect office building investments as additional capital is needed.  TheCompany targets a debt to total market capitalization ratio at a percentage inthe range of 45% to 50%.    This ratio may vary at times pending thetiming of acquisitions, sales and/or sales of equity securities.  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 on assetsheld in funds and partnerships.   In addition to this debt ratio, theCompany monitors interest, fixed charge and modified fixed charge coverageratios.  In connection with the GEAR UP Plan, Parkway established a self‐imposedlimit for the modified fixed charge coverage ratio of 2.5 times to serve as apledge not to use leverage to achieve Company goals. Management believes thedebt to market 

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**capitalization, interest coverage, fixed charge coverage andmodified fixed charge coverage ratios provide useful information on total debtlevels as well as the Company's ability to cover interest, principal and/orpreferred dividend payments with current income.

       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.

* 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.   

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

*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 21 years of real estate industry experience, and have workedtogether at Parkway for an average of 16 years.  Management has developed ahighly service-oriented operating culture and believes that its focus onoperations, proactive leasing, property management and asset managementactivities will result in higher customer retention and occupancy and willcontinue 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, 2007, the Company had 282 employees.  The operations of theCompany are conducted from approximately 20,000 square feet of office spacelocated at 188 East Capitol Street, One Jackson Place, Suite 1000, Jackson, Mississippi. The building is owned by Parkway and is leased by Parkway at market rentalrates.

*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 such materialwith, 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 and CompensationCommittee of the Board of Directors are available on the "Investor Relations"page of Parkway's web site.  Copies of these documents are also available freeof charge in print upon written request addressed to Investor Relations,Parkway Properties, Inc., One Jackson Place Suite 1000, 188 East CapitolStreet, Jackson, Mississippi 39201-2195.

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**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
- 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.

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

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

*Ourcurrent and future joint venture investments could be adversely affected by 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. *

**       **Undervarious federal, state, and local laws, ordinances and regulations, we may be consideredan owner or operator of real property and may be responsible for paying for thedisposal or treatment of hazardous or toxic substances released on or in ourproperty or disposed of by us, as well as certain other potential costs whichcould relate to hazardous or toxic substances (including governmental fines andinjuries to persons and property).  This liability may be imposed whether ornot we knew about, or were responsible for, the presence of hazardous or toxicsubstances.

*Uninsuredand underinsured losses may adversely affect operations.*

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

Page 8 of 88

*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 seek protectionfrom our creditors under applicable law.

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

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

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

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

*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. 

Page 9 of 88

*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 existing propertiesor 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 certain statutoryprovisions, we will be disqualified from treatment as a REIT for the fourtaxable years following the year during which we failed to qualify.  Thistreatment would reduce net earnings available for investment or distribution tostockholders because of the additional tax liability for the year or yearsinvolved.  In addition, we would no longer be required to make distributions toour stockholders.  To the extent that distributions to stockholders had beenmade based on our qualifying as a REIT, we might be required to borrow funds orto liquidate certain of our investments to pay the applicable tax. 

**       **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. *

**       **Certainprovisions contained in our charter and bylaws and certain provisions of Marylandlaw may have the effect of discouraging a third party from making anacquisition proposal for us and may thereby inhibit a change of control. Provisions of our charter are designed to assist us in maintaining ourqualification as a REIT under the Code by preventing concentrated ownership ofour capital stock that might jeopardize REIT qualification.  Among otherthings, these provisions provide that, if a transfer of our stock or a changein our capital structure would result in (1) any person (as defined in thecharter) directly or indirectly acquiring beneficial ownership of more than9.8% (in value or in number, whichever is more restrictive) of our outstandingequity stock excluding Excess Stock, (2) our outstanding shares beingconstructively or beneficially owned by fewer than 100 persons, or (3) ourbeing "closely held" within the meaning of Section 856(h) of theCode, then:
-  any     proposed transfer will be void from the beginning and we will not     recognize such transfer;
-  we may     institute legal proceedings to enjoin such transfer;

Page 10 of 88
-  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.

*Marylandbusiness statutes may limit the ability of a third party to acquire control ofus.*

**       **Marylandlaw provides protection for Maryland corporations against unsolicited takeoversby limiting, among other things, the duties of the directors in unsolicitedtakeover situations.  The duties of directors of Maryland corporations do notrequire them to (a) accept, recommend or respond to any proposal by a personseeking to acquire control of the corporation, (b) authorize the corporation toredeem any rights under, or modify or render inapplicable, any stockholdersrights plan, (c) make a determination under the Maryland Business CombinationAct, or (d) act or fail to act solely because of the effect of the act orfailure to act may have on an acquisition or potential acquisition of controlof the corporation or the amount or type of consideration that may be offeredor paid to the stockholders in an acquisition.  Moreover, under Maryland lawthe 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.  Marylandlaw also contains a statutory presumption that an act of a director of a Marylandcorporation satisfies the applicable standards of conduct for directors under Marylandlaw.

**       **TheMaryland Business Combination Act provides that unless exempted, a Marylandcorporation may not engage in business combinations, including mergers, dispositionsof 10 percent or more of its assets, certain issuances of shares of stock andother specified transactions, with an "interested stockholder" or anaffiliate of an interested stockholder for five years after the most recentdate on which the interested stockholder became an interested stockholder, andthereafter unless specified criteria are met.  An interested stockholder isgenerally a person owning or controlling, directly or indirectly, 10 percent ormore of the voting power of the outstanding stock of the Maryland corporation.

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

**       **None.

**ITEM 2.  *Properties*.**

**General**

       The Company operates and investsprincipally in office properties in the Southeastern and Southwestern UnitedStates and Chicago, but is not limited to any specific geographical region orproperty type.  As of January 1, 2007, the Company owned or had an interest in 66office properties comprising approximately 13.3 million square feet of officespace located in 11 states.

       Property acquisitions in 2006, 2005 and2004 were funded through a variety of sources, including:

a.         Cash reserves and cash generated from operating activities,

Page 11 of 88

b.         Sales of non-core assets,

c.         Sales of office properties,

d.         Sales of joint venture interests,

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

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

g.         Sales of Parkway preferred and common stock,

h.         Advances on bank lines of credit, and

i.          Issuances of preferred membership interests to sellers.

**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.

       In 2006, the Company announced theproposed development of a 194,000 square foot Class A+ office building in Jackson, Mississippi known as The Pinnacle at Jackson Place ("The Pinnacle"), adjacentto the Company's headquarters building.  The estimated cost of the developmentis $39 million and it is expected to be completed in the fall of 2008.  TheCompany has received commitments to lease approximately 73% of the new officespace from four major customers.  Parkway will be seeking partners for an 80%ownership interest in the development.  There can be no assurance that thedevelopment or joint venture of The Pinnacle will occur.

       We believe that our insurancecoverage contains policy specifications and insured limits that are customaryfor similar 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 88

       Thefollowing table sets forth certain information about office properties theCompany owned or had an interest in as of January 1, 2007:

** **

** **

** **

** **

** **

**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)**

**2007 (4)**

**1/1/2007**

Chicago, IL

3

2,290

17.3%

$30.09

$29.98

3.2%

86.7%

Houston, TX

13

2,092

15.8%

18.50

18.81

15.1%

96.4%

Atlanta, GA

9

1,776

13.4%

20.77

20.63

7.0%

92.2%

Memphis, TN

6

1,199

9.0%

19.65

20.72

8.4%

89.2%

Columbia, SC

3

867

6.5%

13.61

15.84

2.7%

85.0%

Jackson, MS

5

842

6.4%

17.36

18.66

4.7%

90.9%

Orlando, FL

4

694

5.2%

22.25

21.00

12.8%

92.6%

Knoxville, TN

2

549

4.1%

14.99

17.00

8.1%

91.0%

Richmond, VA

6

497

3.8%

17.49

17.12

36.4%

87.9%

Jacksonville, FL

4

482

3.6%

18.62

18.58

11.7%

95.0%

Nashville, TN

1

434

3.3%

13.94

16.75

1.5%

78.7%

Phoenix, AZ

2

393

3.0%

24.54

26.22

5.4%

94.9%

Hampton Roads, VA

3

386

2.9%

17.60

18.36

23.8%

94.7%

Charlotte, NC

1

325

2.5%

18.79

18.00

5.4%

96.7%

Ft. Lauderdale, FL

2

215

1.6%

21.25

23.96

19.0%

88.2%

St. Petersburg, FL

1

186

1.4%

19.71

21.00

7.7%

93.1%

Other Markets

1

32

0.2%

8.00

8.00

0.0%

100.0%

** **

66

13,259

100.0%

$20.54

$21.07

9.4%

90.8%

(1)    Includes 49 office properties owned directly and 17office 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, 2007.

(3)    Estimated average market rent per square foot isbased 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.  Estimated average market rent is weighted by thenet rentable square feet expiring in each property.

(4)    The percentage of leases expiring in 2007 representsthe ratio of square feet under leases expiring in 2007 divided by total netrentable square feet.

Page 13 of 88

       Thefollowing table sets forth scheduled lease expirations for properties owned asof January 1, 2007 on leases executed as of January 1, 2007, 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)**

2007

343

1,240

9.4%

$    24,627

$  19.87

$  19.82

2008

283

1,734

13.1%

34,556

19.93

20.01

2009

295

1,942

14.6%

42,446

21.86

21.74

2010

209

1,507

11.4%

29,299

19.45

19.42

2011

181

1,781

13.4%

38,533

21.64

22.15

2012

73

955

7.2%

17,723

18.56

20.17

Thereafter

130

2,877

21.7%

60,095

20.89

22.30

1,514

12,036

90.8%

$  247,279

$  20.54

$  21.07

(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 market rent is based uponinformation obtained from (i) the Company's own experience in leasing space atthe properties: (ii) leasing agents in the relevant markets with respect toquoted rental rates and completed leasing transactions for comparableproperties in the relevant markets; and (iii) publicly available data withrespect thereto as of January 1, 2007.  Estimated average market rent isweighted by the net rentable square feet expiring in each property.

       Fixed-ratemortgage notes payable total $696 million at December 31, 2006 and are securedby 35 properties in various markets with interest rates ranging from 3.67% to8.25%.  Maturity dates on these mortgage notes payable range from August 2007to October 2019 on 15 to 30 year amortizations.  See Note E - "Notes Payable" tothe consolidated financial statements.

       The majority of the Company's fixedrate secured debt contains prepayment provisions based on the greater of ayield maintenance penalty or 1% of the outstanding loan amount.  The yieldmaintenance penalty essentially compensates the lender for the differencebetween the fixed rate under the loan and the yield that the lender wouldreceive if the lender reinvested the prepaid loan balance in U.S. TreasurySecurities with a similar maturity as the loan.

Page 14 of 88

**Customers**

       The office properties are leasedto approximately 1,514 customers, which are in a wide variety of industriesincluding banking, insurance, professional services (including legal,accounting, and consulting), energy, financial services and telecommunications. Our largest customer and 25 largest customers accounted for 4.3% and 37.3%,respectively, of our annualized rental revenue.  The following table sets forthinformation concerning the 25 largest customers of the properties owneddirectly or through joint ventures as of January 1, 2007 (in thousands, exceptsquare foot data):

** **

**Leased**

**Annualized**

** **

**Lease**

** **

**Square**

**Rental**

** **

**Expiration**

**Customer**

**Feet (1)**

**Revenue (1)**

**Office Property**

**Date**

General Services  Administration (GSA)

412,650

$  9,132 

(2)

(2)

Blue Cross Blue Shield of  Georgia, Inc.

272,718

6,678 

Capital City Plaza

(3)

Cox Enterprises, Inc.

307,391

5,977 

(4)

(4)

Regions Financial  Corporation

243,024

4,681

(5)

(5)

Young & Rubicam

122,078

4,370

233 North Michigan

(6)

Federal Home Loan Bank of Chicago

135,932

4,172

111 East Wacker

(7)

Nabors Industries/Nabors  Corporate Services

202,276

3,791

One Commerce Green

12/08

United Healthcare Services

79,549

3,426

(8)

(8)

Health Care Service  Corporation

134,724

3,180

111 East Wacker

(9)

South Carolina State Government

204,623

3,068 

(10)

(10)

Forman, Perry, Watkins,  Krutz & Tardy

173,355

2,672

(11)

(11)

Clear Channel Communications

73,193

2,593

(12)

(12)

Schlumberger Technology

155,324

2,491

Schlumberger

(13)

Honeywell

111,686

2,339

Honeywell Building

07/08

DHL Airways

101,330

2,211

One Commerce Green

11/07

Golin-Harris Communications,  Inc.

65,804

2,115

111 East Wacker

07/12

Extra Space Storage

91,200

2,066

Toyota Center

04/15

Bank of America, NA

193,107

2,059

(14)

(14)

Louisiana-Pacific Corporation

105,057

1,958

Bank of America Plaza

12/15

MeadWestvaco Corporation

100,457

1,917

Boulders Center

03/07

Motorola, Inc.

68,473 

1,867

233 North Michigan

03/11

Stein Mart, Inc.

100,685

1,858

Stein Mart Building

02/11

Federal Express

90,484

1,806

(15)

(15)

Shefsky & Froelich, Ltd.

68,936

1,732

111 East Wacker

05/15

URS Corporation

59,512 

1,641

(16)

(16)

3,673,568

$79,800 

Total Rentable Square  Footage (1)

13,258,871

Total Annualized Rental  Revenue (1)

$213,643 

(1)

Annualized  Rental Revenue represents the gross rental rate (including escalations) per  square foot as of January 1, 2007, multiplied by the number of square feet  leased by the customer.  Annualized rent for customers in 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 412,650 square feet in 15 properties under separate leases that  expire as follows:  189,316 square feet in November 2009, 50,586 square feet  in March 2008, 25,726 square feet in July 2010, 22,973 in January 2013,  22,925 square feet in December 2007, 21,384 square feet in May 2010, 20,618 square  feet in September 2012, 17,112 square feet in January 2010, 8,603 square feet  in June 2013, 6,286 square feet in June 2008, 5,471 square feet in October  2012, 5,370 square feet in March 2007, 5,155 square feet in November 2011,  3,878 square feet in June 2007, 3,043 square feet in April 2014, 1,848 square  feet in December 2015,  1,831 square feet in December 2016, and 525 square  feet in September 2007.  

(3)

Blue  Cross Blue Shield of Georgia, Inc. occupies 271,712 square feet expiring in  June 2014 with a cancellation option in June 2012 and 1,006 square feet  expiring in March 2007.

(4)

Cox  Enterprises, Inc. occupies 307,391 square feet in 2 properties under separate  leases that expire as follows:  198,002 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.

Page 15 of 88

(5)

Regions  Financial Corporation occupies 243,024 square feet in 3 properties under  separate leases that expire as follows: 218,464 square feet in March 2016,  16,538 square feet in October 2011, 3,916 square feet in November 2010, 1,983  square feet in September 2009 and 2,123 square feet in November 2009.

(6)

Young  & Rubicam occupies 122,078 square feet expiring in November 2011 with a  cancellation option on November 30, 2009. 

(7)

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

(8)

United  Healthcare Services occupies 79,549 square feet in 2 properties and the  leases expire as follows: 67,028 square feet in November 2009 and 12,521 square  feet in April 2009. 

(9)

Health  Care Services Corporation occupies 134,724 square feet expiring in March 2017  with a cancellation option in March 2012.

(10)

South  Carolina Government Agencies occupy 204,623 square feet in 3 properties under  separate leases that expire as follows:  133,436 square feet in June 2010,  47,195 square feet in June 2009, 15,711 square feet in June 2011, 7,007 square  feet in December 2008, 924 square feet in August 2007 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 occupies 173,355 square feet in 2  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  beginning July 2007. The customer also has certain cancellation rights  pending changes in litigation legislation.

(12)

Clear  Channel Communications occupies 73,193 square feet expiring as follows:   69,016 square feet expiring in July 2015 and 3,902 square feet expiring 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)

Bank  of America, NA occupies 193,107 square feet in 2 properties under separate  leases that expire as follows:  180,530 square feet in March 2012 and 12,577 square  feet in June 2014.

(15)

Federal  Express occupies 90,484 square feet in 4 properties and the leases expire as  follows: 53,774 square feet in September 2008, 34,568 square feet in October  2015, 1,380 square feet in August 2008 and 762 square feet in December 2009.  

(16)

URS  Corporation occupies 59,512 square feet in 2 properties and the leases expire  as follows: 56,164 square feet in November 2008 and 3,348 square feet in February  2011.

**Non-CoreAssets**

       Since January 1, 1996, Parkway haspursued a strategy of liquidating its non-core assets and using the proceedsfrom such sales to acquire office properties, pay down short-term debt andrepurchase its own stock.  The Company defines non-core assets as all assetsother than office and parking properties, which at December 31, 2006 consistedof undeveloped land.  The book value of the land, which is available for sale,was $1.5 million as of December 31, 2006 with a carrying cost of approximately$5,000 annually.  

**ITEM 3.  *Legal Proceedings.***

       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.

Page 16 of 88

**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, 2007,was 2,560.

       As of March 1, 2007, the lastreported sales price per common share on the New York Stock Exchange was $53.22. 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, 2006**

** **

**December 31, 2005**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**    High**

**Low**

**Distributions**

March 31

$45.89

$40.66

$0.65

$50.57

$46.20

$0.65

June 30

45.50

38.70

0.65

50.01

45.43

0.65

September 30

49.02

44.85

0.65

53.58

44.60

0.65

December 31

53.20

46.26

0.65

47.01

40.14

0.65

$2.60

$2.60

       Common stock distributions during 2006and 2005 ($2.60 per share) were taxable as follows for federal income taxpurposes:

** **

**Year  Ended**

** **

**December  31**

** **

**2006**

**2005**

Ordinary income

$0.99

$1.98

Post May 5, 2003  capital gain

1.17

0.13

Unrecaptured Section  1250 gain

0.44

0.03

Return of capital

-

0.46

       

$2.60

$2.60

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

       Additionally, through the Company'sDividend Reinvestment and Stock Purchase Plan ("DRIP Plan"), 8,329 commonshares were sold during 2006.  Net proceeds received on the issuance of shareswere $407,000, which equates to an average net price per share of $48.87 at adiscount of 1%.  The proceeds were used to reduce amounts outstanding under theCompany's short-term lines of credit.

       The following table shows the highand low Series D preferred share prices and per share distributions paid foreach quarter of 2006 and 2005 reported by the New York Stock Exchange.

** **

**Year  Ended**

** **

**Year  Ended**

** **

**December  31, 2006**

** **

**December  31, 2005**

**Quarter Ended**

**High**

**Low**

**Distributions**

** **

**High**

**Low**

**Distributions**

March 31

$26.20

$25.00

$0.50

$26.80

$25.40

$0.50

June 30

26.00

25.00

0.50

26.70

25.35

0.50

September 30

26.60

25.30

0.50

26.75

26.01

0.50

December 31

26.40

25.42

0.50

26.60

25.60

0.50

$2.00

$2.00

Page 17 of 88

       Asof January 1, 2007, there were five holders of record of the Company's 2.4million outstanding shares of Series D preferred stock.  Series D preferred stockdistributions during 2006 and 2005 were taxable as follows for federal incometax purposes:

**Year  Ended December 31**

**2006**

**2005**

Ordinary  income

$0.76

$1.88

Post  May 5, 2003 capital gain

0.90

0.10

Unrecaptured  Section 1250 gain

0.34

0.02

$2.00

$2.00

      In 2001, the Company issued 2,142,857shares of 8.34% Series B Cumulative Convertible Preferred stock to FiveArrows.  In addition to the issuance of Series B preferred stock, Parkwayissued a warrant to Five Arrows to purchase 75,000 shares of the Company'scommon stock at a price of $35 for a period of seven years.  During 2006,803,499 shares of Series B preferred stock were converted into Parkway commonstock and Five Arrows exercised 75,000 warrants to purchase Parkway commonstock for a total price of $2.6 million.  As of December 31, 2006, there were noshares of Series B preferred stock authorized and outstanding.  Dividends of $1.8million and $2.3 million were declared on the stock in 2006 and 2005,respectively.   

**Purchase of Equity Securities**

**    ** On February 9, 2006, the Board of Directors authorized the repurchase of upto 1 million shares of Parkway's outstanding common stock in the open market orin privately negotiated transactions, and at times (through August 2006) and inamounts deemed appropriate by the Company.  In 2006, the Company purchased71,400 shares of Parkway common stock for $2.8 million, which equates to anaverage price of $39.41 per share. 

**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 88

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

**Year  Ended  12/31/06**

**Year  Ended  12/31/05**

**Year  Ended  12/31/04**

**Year  Ended  12/31/03**

**Year  Ended  12/31/02**

(In thousands, except per share data)

**Operating  Data**:

Revenues

     Income  from office and parking properties

$    210,007 

$    188,486 

$  152,829 

$  134,906 

$  146,219 

     Management  company income

5,329 

2,997 

3,832 

2,136 

1,197 

Total revenues

215,336 

191,483 

156,661 

137,042 

147,416 

Expenses

     Property  operating expenses

99,130 

88,254 

70,450 

60,370 

63,481 

     Depreciation  and amortization

64,655 

51,046 

35,666 

27,116 

26,582 

     Operating  expense for other real estate properties

5 

5 

22 

37 

34 

     Management  company expense

1,141 

607 

359 

391 

416 

     General  and administrative and other

4,651 

4,468 

4,464 

4,201 

5,029 

Operating income

45,754 

47,103 

45,700 

44,927 

51,874 

Other income and expense

     Interest  and other income

40 

255 

37 

1,718 

1,621 

     Equity in  earnings of unconsolidated joint ventures

751  

1,496 

1,697 

2,212 

824 

     Gain  (loss) on note receivable, joint venture interests,       real estate and other assets

17,646 

1,039 

4,309 

10,661 

(2,068)

     Interest  expense

(44,632)

(35,444)

(25,817)

(19,718)

(26,486)

Income before minority interest and  discontinued operations

19,559 

14,449 

25,926 

39,800 

25,765 

Minority interest - unit holders

(1)

(2)

(2)

(3)

(2)

Minority interest - real estate  partnerships

485 

(187)

127 

- 

- 

Income from continuing operations

20,043 

14,260 

26,051 

39,797 

25,763 

     Income  from discontinued operations

556 

2,366 

3,464 

3,384 

2,979 

     Gain on  sale of real estate from discontinued operations

5,083 

4,181 

- 

- 

770 

Net income

25,682 

20,807 

29,515 

43,181 

29,512 

Change in market value of interest rate  swaps

(73)

1,131 

(226)

170 

1,524 

Change in unrealized loss on equity  securities

75 

(79)

- 

- 

- 

Comprehensive income

$     25,684 

$     21,859 

$    29,289 

$    43,351 

$    31,036 

Net income available to common  stockholders:

Net Income

$     25,682 

$     20,807 

$    29,515 

$    43,181 

$    29,512 

Original issue costs associated with  redemption of   preferred stock

- 

- 

(2,619)

- 

Dividends on preferred stock

(4,800)

(4,800)

(4,800)

(5,352)

(5,797)

Dividends on convertible preferred stock

(1,773)

(2,346)

(5,186)

(6,091)

(6,257)

Net  income available to common stockholders

$     19,109 

$     13,661 

$    19,529 

$    29,119 

$    17,458 

Net  income per common share:

     Basic:

     Income  from continuing operations 

$         0.95 

$         0.50 

$        1.42 

$        2.52 

$        1.47 

     Discontinued  operations

0.39 

0.47 

0.31 

0.33 

0.40 

     Net income

$         1.34 

$         0.97 

$        1.73 

$        2.85 

$        1.87 

     Diluted:

**     **Income from continuing operations

$         0.93 

$         0.50 

$        1.40 

$        2.46 

$        1.44 

     Discontinued  operations

0.39 

0.46 

0.30 

0.33 

0.40 

     Net income

$         1.32 

$         0.96 

$        1.70 

$        2.79 

$        1.84 

Book value per common share (at end of  year)

$       27.42 

$       27.42 

$      26.44 

$      26.09 

$      25.10 

Dividends per common share

$         2.60 

$         2.60 

$        2.60 

$        2.60 

$        2.56 

Weighted average shares outstanding:

     Basic

14,306 

14,065 

11,270 

10,224 

9,312 

     Diluted

14,487 

14,233 

11,478 

10,453 

9,480 

**Balance Sheet Data**:

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

$1,306,281 

$1,040,929 

$  820,807 

$  728,695 

$  706,551 

**     **Investment in  unconsolidated joint ventures

11,179 

12,942 

25,294 

20,026 

15,640 

**     **Total assets

1,512,346 

1,188,342 

931,188 

802,308 

763,937 

     Notes  payable to banks

152,312 

150,371 

104,618 

110,075 

141,970 

     Mortgage  notes payable

696,012 

483,270 

353,975 

247,190 

209,746 

     Total  liabilities

931,724 

701,010 

511,802 

394,287 

387,116 

     Preferred  stock

57,976 

57,976 

57,976 

57,976 

66,250 

     Convertible  preferred stock

- 

28,122 

28,122 

68,000 

75,000 

     Stockholders'  equity

490,306 

474,516 

415,648 

407,980 

376,821 

** **

Page 19 of 88

**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 January 1, 2007Parkway owned or had an interest in 66 office properties located in 11 stateswith an aggregate of approximately 13.3 million square feet of leasable space. Included in the portfolio are 17 properties totaling 2.5 million square feetthat are owned jointly with other investors, representing 19% 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 1.2million square feet for third party owners as of January 1, 2007.  The Companygenerates revenue primarily by leasing office space to its customers andproviding management and leasing services to third-party office property owners(including joint venture interests).  The primary drivers behind Parkway'srevenues are occupancy, rental rates and customer retention.  

*Occupancy.*  Parkway's revenues are dependent on the occupancy of itsoffice buildings.  As a result of job losses and over supply of officeproperties during 2001 through 2003, vacancy rates increased nationally and inParkway's markets.  In 2004, the office sector began to recover from highvacancy rates due to improving job creation.  As of January 1, 2007, occupancyof Parkway's office portfolio was 90.8% compared to 91% as of October 1, 2006and 88.9% as of January 1, 2006.  Not included in the January 1, 2007 occupancyrate are 21 signed leases totaling 132,000 square feet, which commence duringthe first through third quarters of 2007 and will raise Parkway's percentageleased to 91.8%.  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 91% during atime when the national occupancy rate is approximately 87%.  Parkway projectsoccupancy ranging from 91% to 94% during 2007 for its office properties.

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

*Customer Retention.*  Keeping existing customers is important as highcustomer retention leads to increased occupancy, less downtime between leases,and reduced leasing costs.  Parkway estimates that it costs five to six timesmore to replace an existing customer with a new one than to retain the customer. In making this estimate, Parkway takes into account the sum of revenue lostduring downtime on the space plus leasing costs, which rise as market vacanciesincrease.  Therefore, Parkway focuses a great deal of energy on customerretention.  Parkway's operating philosophy is based on the premise that it isin the customer retention business.  Parkway seeks to retain its customers bycontinually focusing on operations at its office properties.  The Companybelieves in providing superior customer service; hiring, training, retainingand empowering each employee; and creating an environment of open communicationboth internally and externally with customers and stockholders.  Over the past tenyears, Parkway maintained an average 73.7% customer retention rate.  Parkway'scustomer retention for the year ending December 31, 2006 was 73% compared to 70%for the year ending December 31, 2005.  

****

Page 20 of 88

*Strategic Planning.*  Wecontinue to see Parkway defined as a focused office REIT with a hands-on,service-oriented approach, a disciplined asset allocation program and awillingness to recycle assets.  However, we see the future transformation takingParkway from being an owner-operator to being an operator-owner.  On January 1,2006, the Company initiated a new three-year operating plan referred to as the"GEAR UP" Plan that will serve as the spring board to transform Parkway frombeing first an owner of real estate and secondarily an operator of real estatefor others to being first an operator of real estate for others that also ownsan interest in the real estate.  The goals of the GEAR UP Plan are as follows:
- *Great People* .      Great customer service starts with hiring great people, training them well     and retaining them.  It will take great people to accomplish the ambitious     goals of the Plan.
- *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.

?    ***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%.  For theyear ended December 31, 2006, Parkway's customer retention rate was 73%.

•     ***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 AdjustedFAD for 2006 exceeded the amount projected by the Company by $.29 per dilutedshare.  Additionally, Parkway established a self-imposed limit for the modifiedfixed charge coverage ratio of 2.5 times as a pledge not to use leverage toachieve Company goals.  

     For the GEAR UP Plan Parkway is notabandoning Funds from Operations, but rather carrying it a step further toinclude accountability for capital items and removing the accounting adjustmentswhich are 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 operations whilebeing mindful of capital expenses and ultimately the funds available to 

Page 21 of 88

cover the dividend.   Cumulative Adjusted FAD iscalculated as the sum of Adjusted FAD for each of the three years of the plan.   The adjustments that will be made to FAD reported each quarter principallyinclude charges for impairment of value and expenses related to the earlyextinguishment of debt.  

Parkway has made progress on its ***Asset Recycling*** and ***EquityOpportunities*** goals in 2006 as follows:
- Dispositions.    Parkway     sold eight office properties for a gross sales price totaling $94.8     million and recorded a total gain on the sales for financial reporting     purposes in the amount of $22.8 million. 
- Fund Acquisitions.   The     Fund with Ohio PERS purchased seven office properties at an aggregate     contract purchase price of $183.7 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.

       Inaccordance with the GEAR UP Plan, the Company projects the following acquisitionsand dispositions in 2007.  

•        Fee simple office property purchases totaling $150 million;

•        Fund office property purchases totaling $170 million;

•        One fee simple sale of an asset in Columbia, South Carolinavalued at $9 million is projected to take place May 1, 2007; and

•        Contributions of asset to funds or similar ventures where theCompany will retain a 25% ownership interest are projected to be made as shownbelow:

o       Assets in Knoxville, Tennessee totaling 549,000 square feet withan estimated value of $59 million on July 1, 2007;

o       Assets in Virginia totaling 883,000 square feet with an estimatedvalue of $97 million on July 1, 2007;

o       Two assets in Columbia, South Carolina totaling 759,000 squarefeet with an estimated value of $97 million on October 1, 2007; and

o       In connection with the proposed ventures, Parkway may incur debtprepayment penalties and expense of $2.8 million.  

*Discretionary Fund.*  OnJuly 6, 2005, Parkway, through affiliated entities, entered into a limitedpartnership agreement forming a $500 million discretionary fund with Ohio PERSfor the purpose of acquiring high-quality multi-tenant office properties.  OhioPERS is a 75% investor and Parkway is a 25% investor in the Fund, which will becapitalized with approximately $200 million of equity capital and $300 millionof non-recourse, fixed-rate first mortgage debt.  The Fund targets acquisitionsin the existing core Parkway markets of Memphis, Houston, Phoenix, Atlanta, Chicago, Charlotte, Orlando, Tampa/St. Petersburg, Ft. Lauderdale and Jacksonville.  Thereis approximately $275 million remaining capacity for Fund office investments. The remaining office investments are expected to be funded by approximately $165million in mortgage debt and $110 million in equity contributions frompartners.

****

Page 22 of 88

       TheFund targets properties with an anticipated cash on cash return greater than 7%and an anticipated leveraged internal rate of return of greater than 11%. Parkway serves as the general partner of the Fund and provides assetmanagement, property management, leasing and construction management servicesto the Fund, for which it will be paid market-based fees.  After each partnerhas received a 10% annual cumulative preferred return and a return of investedcapital, 20% of the excess cash flow will be paid to the general partner and80% will be paid to the limited partners.    Through its general partner andlimited partner ownership interests, Parkway may receive a distribution of thecash flow equivalent to 40%.  Parkway will have three years from the inceptiondate of the Fund to identify and acquire properties (the "Commitment Period"),with funds contributed as needed to close acquisitions.  Parkway willexclusively represent the Fund in making acquisitions within the target marketsand within certain predefined criteria.  Parkway will not be prohibited frommaking fee-simple or joint venture acquisitions in markets outside of thetarget markets, acquiring properties within the target markets that do not meetthe Fund's specific criteria or selling or joint venturing any currently ownedproperties.  The term of the Fund will be seven years from the expiration ofthe Commitment Period, with provisions to extend the term for two additionalone-year periods. 

**Financial Condition**

***Comments are for the balance sheet dated December 31, 2006 compared tothe balance sheet dated December 31, 2005.***

       *Office and Parking Properties. * In2006, 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, 2006, total assetsincreased $324 million or 27%, and office and parking properties (beforedepreciation) increased $296.9 million or 24%.

**Purchases and Improvements**

       Parkway's investment in consolidated officeand parking properties increased $265.4 million net of depreciation, to acarrying amount of $1.3 billion at December 31, 2006 and consisted of 60 officeand parking properties.  During the year ending December 31, 2006, Parkwayand/or the Fund purchased eight office properties and an additional 75%interest in one office property as follows (in thousands):

** **

** **

** **

**Square**

**Date**

**Purchase**

**Office Property**

**Location**

**Feet**

**Purchased**

**Price**

Fee  Simple Purchase:

One  Illinois Center

Chicago, Illinois

1,003 

07/11/06

 $198,000 

Fund  Purchases (a):

Bellsouth Building

Jacksonville, Florida

92 

05/15/06

13,378 

Centurion  Centre

Jacksonville, Florida

88 

05/15/06

10,622 

Chatham Centre

Schaumburg, Illinois

206 

12/01/06

28,250 

Renaissance Center

Memphis, Tennessee

190 

12/20/06

38,100 

Overlook  II

Atlanta, Georgia

262 

12/27/06

44,650 

100  Ashford Center and Peachtree Ridge

Atlanta, Georgia

313 

12/27/06

48,700 

183,700 

Purchase  Additional 75% Interest:

Moore Building Associates, LP (Toyota Center)

Memphis, Tennessee

175 

03/07/06

1,400 

Total  Purchases

 $383,100 

        (a)  Sevenoffice properties were purchased by the discretionary fund formed with OhioPERS.  Parkway's ownership interest is 25% and these properties are included inParkway's consolidated financial statements.

       During the year ending December 31,2006, the Company capitalized building improvements and additional purchaseexpenses of $23.7 million and recorded depreciation expense of $49.7 millionrelated to its office and parking properties.

Page 23 of 88

**Dispositions**

       Duringthe year ending December 31, 2006, Parkway sold seven office properties asfollows (in thousands):

** **

** **

** **

** **

**Square**

** **

**Date**

** **

**Gross Sales**

**Office Property**

** **

**Location**

** **

**Feet**

** **

**Sold**

** **

**Price**

**Gain**

Central Station Building (a)

St.    Petersburg, Florida

133

08/02/06

$    15,000 

$    211 

Richmond Centre (a)

Houston, Texas

92

11/29/06

6,906 

2,018 

Ashford  II (a)

Houston, Texas

59

12/07/06

5,250 

2,854 

Hightower  Centre, Pavilion Center 

     and Roswell North

Atlanta, Georgia

181

12/14/06

17,236 

1,613 

Charlotte  Park

Charlotte, North    Carolina

187

12/20/06

18,800 

2,567 

**Total  Dispositions**

** **

** **

652

** **

** **

$    63,192 

$  9,263 

       (a)In accordance with GAAP, the gain and all current and prior period income fromthese properties has been classified as discontinued operations.

       *Investmentin Unconsolidated Joint Ventures*.  Parkway is committed to forming jointventures with best partners for the purpose of acquiring office assets in theSoutheastern and Southwestern United States and Chicago.  We believe theseinvestments result in a higher return on equity than 100% owned assets.  Parkwaywill operate, manage and lease the properties on a day-to-day basis, provideacquisition and construction management services to the joint venture, andreceive fees for providing these services.   The joint venture partner willprovide 70% to 90% of the joint venture capital, with Parkway to provide thebalance. In 2006, investment in unconsolidated joint ventures decreased $1.8million or 13.6%.  The decrease is primarily due to the sale of the Viad Corporate Center, of which Parkway owned 30%, on June 23, 2006.  The Company and itsjoint venture partner sold the Viad Corporate Center in Phoenix, Arizona for$105.5 million.  The buyer assumed the existing mortgage debt of $50 million inthe sale.  The Company received cash proceeds from the sale of approximately$15.4 million and recognized a gain of $13.6 million.  In addition to the gain,Parkway recognized management and incentive fees of $4.2 million as a result ofthe economic returns generated above an IRR hurdle rate achieved over the lifeof the Viad joint venture and incurred $325,000 in costs associated with theloan transfer.

       *RentsReceivable and Other Assets.*  Rents receivable and other assets increased $37.7million or 54.2% for the year ending December 31, 2006.  The increase isprimarily attributable to the increase in escrow bank account balances of $22.1million and unamortized lease costs due to the purchase of office properties in2006.  In 2006, the total purchase price allocated to lease costs was $14.7million.  The increase in escrow bank account balances of $22.1 million isprimarily due to additional escrow deposit requirements with the new mortgageplaced in connection with the purchase of One Illinois Center on July 11, 2006and current period escrow deposit requirements for consolidated properties.  The  One Illinois Center escrow funds will be released based on actualexpenditures incurred in leasing and operating the building and as predefinedin the loan agreement.

       *Intangible Assets, Net.*  Forthe year ending December 31, 2006, intangible assets net of relatedamortization increased $21.6 million or 36% and was primarily due to theallocation of the purchase price of 2006 office property acquisitions to abovemarket in-place leases and the value of in-place leases offset by annualamortization.  In 2006, the total purchase price allocated to above marketin-place leases and the value of in-place leases was $6.9 million and $27.2million, respectively.  Parkway accounts for its acquisitions of real estate inaccordance with Statement of Financial Accounting Standards No. 141, "BusinessCombinations", which requires the fair value of the real estate acquired to beallocated to acquired tangible and intangible assets.

       *Notes Payable to Banks*.  Notespayable to banks increased $1.9 million or 1.3% for the year ending December31, 2006.  At December 31, 2006, notes payable to banks totaled $152.3 millionand resulted primarily from advances under bank lines of credit to purchaseadditional properties and to make improvements to office properties.

     On April 27, 2006 the Company closed a new $200 million credit facility led byWachovia Bank and syndicated to nine other banks. This line replaced theprevious $190 million revolver, which was to mature in February 2007.  Thefacility is comprised of a $60 million term loan maturing in April 2011 and a$140 million revolving loan maturing in April 2010. The interest rate on the$200 million line is based on LIBOR plus 80 to 130 basis points, depending uponoverall Company leverage.  The Company 

Page 23 of 88

paid afacility fee of $200,000 (10 basis points) and origination fees of $688,000(34.4 basis points) upon closing of the loan agreement.  Additionally, 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.  This new line affords the Company greater financialflexibility and lower interest cost.

       The Company's $200 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, 2006 theCompany was in compliance with these financial covenants.

       *Mortgage Notes Payable.* Mortgagenotes payable increased $212.7 million or 44% during the year ending December31, 2006, as a result of the following (in thousands):

**Increase**

**(Decrease)**

Assumption of first mortgage on  Fund property purchases

$  48,108 

Placement of mortgage debt by  discretionary fund

31,500 

Placement of mortgage debt

148,500 

Placement of mezzanine loan

33,700 

Payments on mezzanine loan

(33,700)

Scheduled principal payments

(15,366)

$212,742 

       The purchase of One Illinois Centeron July 11, 2006 was funded by a 10-year, $148.5 million non-recourse firstmortgage.  The loan bears interest at a fixed rate of 6.29%, with interest onlypayments for five years and principal payments based on a 30-year amortizationthereafter.  In connection with the first-mortgage, the Company delivered $11.3million in letters of credit to satisfy the various escrow requirements made bythe lender.  These letters of credit expire June 30, 2007.  Additional purchasefunding was provided by a $33.7 million secured recourse mezzanine loan with asix-month term at an interest rate of LIBOR plus 130 basis points, and amountsdrawn under existing lines of credit.  As of December 31, 2006, the balance ofthe mezzanine loan was zero and was paid using funds received from the sale ofthe Central Station building and funds received from the December 2006 stockoffering.  

       During2006, the Fund placed or assumed the following mortgage notes payable inconnection with 2006 office property purchases:
- On May 19,     2006, the Fund placed a $14.4 million 10-year non-recourse first mortgage     at a fixed rate of 5.90% in connection with the purchase of the BellSouth Building     and Centurion Centre.  Payments during the first five years of the     mortgage term will be on an interest-only basis and the loan matures June     10, 2016.
- On December 20,     2006, the Renaissance Center was acquired subject to an existing     non-recourse first mortgage with an outstanding balance of approximately     $17.2 million, which matures June 1, 2012 and carries a fixed interest     rate of 5.23%.  In accordance with generally accepted accounting     principles ("GAAP"), the mortgage was recorded at $17 million to reflect     the fair value of the instrument based on the market rate of 5.469% on the     date of purchase.
- On December 22,     2006, the Fund placed a $17.1 million ten-year non-recourse first mortgage     at a fixed rate of 5.56% in connection with the purchase of the Chatham     Centre.   Payments during the mortgage term will be on an interest-only     basis and the loan matures January 10, 2017.
- On December 27,     2006, the acquisition of 100 Ashford Center and Peachtree Ridge was     subject to an existing non-recourse first mortgage with an outstanding     balance of approximately $30.9 million, which matures January 8, 2016 and     carries a fixed interest rate of 5.68%.  In accordance with GAAP, the     mortgage was recorded at $31.1 million to reflect the fair value of the     instrument based on the market rate of 5.606% on the date of purchase.

       TheCompany expects to continue seeking fixed-rate, non-recourse mortgage financingwith maturities from five to ten years typically amortizing over 25 to 30 yearson select office building investments as additional capital is needed.  TheCompany targets a debt to total market capitalization rate at a percentage inthe range of 45% to 50%. This rate may vary at times pending acquisitions,sales and/or equity offerings.  In addition, volatility in the price of theCompany's common stock may affect the debt to total market capitalizationratio.  However, over time the Company plans to maintain a percentage in the rangeof 45% to 50%.  The Company calculates this ratio by including itsproportionate share of any debt on assets held in funds and partnerships.  Inaddition to this debt ratio, the Company monitors interest, fixed charge andmodified fixed charge coverage ratios.  The interest coverage ratio is computedby comparing the cash interest accrued to earnings before interest, taxes,depreciation and amortization ("EBITDA"). The fixed charge coverage ratiois computed by comparing the cash interest accrued, principal payments made onmortgage loans and 

 Page 25 of 88

preferred dividends paid to EBITDA.  The modifiedfixed charge coverage ratio is computed by comparing cash interest accrued andpreferred dividends paid to EBITDA.  In accordance with the GEAR UP Plan,Parkway has established a self-imposed limit for the modified fixed chargecoverage ratio of 2.5 times as the Company's pledge not to use leverage toachieve Company goals.  Management believes the debt to market capitalization,interest coverage, fixed charge coverage and modified fixed charge coverageratios provide useful information on total debt levels as well as the Company'sability to cover interest, principal and/or preferred dividend payments with currentincome.

       The computation of the interest, fixedcharge and modified fixed charge coverage ratios and the reconciliation of netincome to EBITDA are as follows for the year ended December 31, 2006 and 2005(in thousands):

**Year Ended**

**December 31**

**2006**

** **

**2005**

**Net  income**

$  25,682 

$  20,807 

**Adjustments  to net income:**

        Interest  expense

43,532 

33,409 

        Amortization  of financing costs

1,100 

1,480 

        Prepayment  expenses - early extinguishment of debt

- 

555 

        Depreciation  and amortization

65,237 

52,096 

        Amortization  of share based compensation

863 

533 

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

(22,729)

(5,220)

        Tax  expense

30 

6 

        EBITDA  adjustments - unconsolidated joint ventures

2,203 

2,593 

        EBITDA  adjustments - minority interest in real estate partnerships

(3,803)

(2,378)

** **

**EBITDA  (1)**

$112,115 

$103,881 

** **

**Interest  coverage ratio:**

EBITDA

$112,115 

$103,881  

Interest  expense:

        Interest  expense

$  43,532 

$  33,409 

        Capitalized  interest

- 

52 

        Interest  expense - unconsolidated joint ventures

1,015 

1,400 

        Interest  expense - minority interest in real estate partnerships

(1,479)

(1,328)

Total  interest expense

$  43,068 

$  33,533 

**Interest  coverage ratio**

2.60 

3.10 

** **

**Fixed  charge coverage ratio:**

EBITDA

$112,115 

$103,881 

Fixed  charges:

        Interest  expense

$  43,068 

$  33,533 

        Preferred  dividends

6,573 

7,146 

        Preferred  distributions - unconsolidated joint ventures

- 

21 

        Principal  payments (excluding early extinguishment of debt)

15,366 

17,724 

        Principal  payments - unconsolidated joint ventures

45 

108 

        Principal  payments - minority interest in real estate partnerships

(222)

(497)

Total  fixed charges

$  64,830 

$  58,035 

**Fixed  charge coverage ratio**

1.73 

1.79 

** **

**Modified  fixed charge coverage ratio:**

EBITDA

$112,115 

$103,881 

Modified  Fixed charges:

        Interest  expense

$  43,068 

$  33,533 

        Preferred  dividends

6,573 

7,146 

        Preferred  distributions - unconsolidated joint ventures

- 

21 

Total  fixed charges

$  49,641 

$  40,700 

**Modified  fixed charge coverage ratio:**

2.26 

2.55 

Page 26 of 88

(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.

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

       Parkway views EBITDA primarily as aliquidity measure and, as such, the GAAP financial measure most directlycomparable to it is cash flows provided by operating activities.  Because EBITDAis not a measure of financial performance calculated in accordance with GAAP,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, 2006 and 2005 (in thousands):

**Year Ended**

**December 31**

**2006**

**2005**

EBITDA

$    112,115 

$   103,881 

Amortization of above market  leases

1,582 

1,970 

Operating distributions from  unconsolidated joint ventures

1,334 

2,587 

Interest expense

(43,532)

(33,409)

Prepayment expense - early  extinguishment of debt

- 

(555)

Tax expense

(30)

(6)

Increase in receivables and  other assets

(25,465)

(11,571)

Increase (decrease) in accounts  payable and other liabilities

7,118 

(1,320)

Adjustments for minority  interests

3,319 

2,567 

Adjustments for unconsolidated  joint ventures

(2,954)

(4,089)

Cash flows provided by  operating activities

$     53,487 

$     60,055 

       *Accounts Payable and Other Liabilities.* During 2006, accounts payable and other liabilities increased $16 million or 28.3%.The increase is primarily due to the allocation of purchase price of 2006office property acquisitions to below market in-place leases in the amount of $9.4million and the increase in accrued property taxes for the year in the amount of$7.1 million, which is mainly attributable to the purchase of One Illinois Centerin Chicago, Illinois in 2006.

       *Minority Interest - Real EstatePartnerships.* During the year ending December 31, 2006, minority interestassociated with real estate partnerships increased $77.5 million.  The increaseis attributable to Parkway's purchase, through affiliated entities, of thelimited partner's interest in MBALP on March 7, 2006, which raised Parkway'stotal effective ownership interest in MBALP to 75.025%, and Ohio PERS' minorityinterest share of additional investments made by the Fund.  Item 7."Management's Discussion and Analysis of Financial Condition and Results ofOperation - Financial Condition - Purchases and Improvements," includes adescription of Fund office property purchases during 2006. 

Page 27 of 88

       *Stockholders'Equity. *Stockholders' equity increased $15.8 million or 3.3% during theyear ended December 31, 2006 as a result of the following (in thousands):

**Increase**

**(Decrease)**

Net income

$  25,682 

Change in  market value of interest rate swap

(73)

Change in  unrealized loss on equity securities

75 

Comprehensive  income

25,684 

Common stock  dividends declared

(37,776)

Preferred  stock dividends declared

(6,573)

Purchase of  Company stock

(2,814)

Exercise of  stock options

6,034 

Shares  issued - stock offering

29,488 

Shares  issued - Directors' fees

170 

Share based  compensation expense

863 

Shares  distributed from deferred compensation plan

304 

Shares  issued through DRIP plan

407 

Employee  Stock Purchase Plan

3 

$  15,790 

       OnFebruary 9, 2006, the Board of Directors authorized the repurchase of up to 1million shares of Parkway's outstanding common stock in the open market or inprivately negotiated transactions, and at times (through August 2006) and inamounts deemed appropriate by the Company.  During 2006, the Company purchased71,400 shares of common stock for $2.8 million, which equates to an averageprice per share of $39.41.

       On December 18, 2006, the Companysold 600,000 shares of common stock to Banc of America Securities LLC at agross 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 repayindebtedness outstanding under a $19.3 million mezzanine loan incurred inconnection with the purchase of One Illinois Center and to purchase additionalinvestments in office properties.  

       During the year ended December 31,2006, 803,499 shares of Series B Convertible Preferred Stock were convertedinto an equal number of shares of common stock.   As of December 31, 2006 therewere no shares of Series B Convertible Preferred Stock authorized andoutstanding.

**Results of Operations**

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

       Netincome available to common stockholders for the year ended December 31, 2006,was $19.1 million ($1.34 per basic common share) as compared to net incomeavailable to common stockholders of $13.7 million ($0.97 per basic commonshare) for the year ended December 31, 2005.  Net gains of $22.7 million wereincluded in net income available to common stockholders for the year endedDecember 31, 2006.  Net gains of $5.2 million were included in net incomeavailable to common stockholders for the year 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.

Page 28 of 88

       Thefollowing table represents income from office and parking properties for theyears 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%

       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.  In 2007 Parkway projects that income from samestore properties will increase approximately 4% primarily due to an increase inoccupancy and rental rates.  

       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.  In 2007 Parkwayprojects that same store property operating expenses will increaseapproximately 4% primarily because of estimated increases in insurance premiumsand other normal inflationary expense increases.  

       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.

* *

Page 29 of 88

       *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, $533,000 and $783,000 was recognizedfor the years ended December 31, 2006, 2005 and 2004, respectively.  Totalcompensation expense related to nonvested awards not yet recognized was $3.8million as of December 31, 2006.  The weighted average period over which thisexpense is expected to be recognized is approximately 3.3 years.

       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 theshares that vest based on performance conditions.  Total potential compensationassociated with shares that vest based on performance conditions is $1.5million.

       OnJanuary 12, 2007, the Board of Directors approved the grant of 35,874 shares toofficers of the Company.  The shares are valued at $1.9 million and 34,875shares will vest four years from grant date and 999 shares will vest subject toachievement of the GEAR UP Plan, which will end December 31, 2008.  

       *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 Joint Venture Interests, Real Estate and Other Assets.* For the year ended December 31, 2006, Parkway recorded a gain on the sale ofthe Viad Corporate Center in the amount of $13.6 million, a gain on the sale ofthree buildings 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% jointventure interest in Maitland 200, an office building in Orlando, Florida, inthe amount of $1.3 million and recorded an impairment loss of $340,000 on 12acres of land in New Orleans, Louisiana.  Item 7. "Management's Discussion andAnalysis of Financial Condition and Results of Operations - Financial Condition- Office and Parking Properties and Investment in Unconsolidated JointVentures," includes a discussion of assets sold during 2006.

       *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%

Page 30 of 88

       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 in2005.  Item 7. "Management's Discussion and Analysis of Financial Condition andResults of Operations - Financial Condition - Mortgage Notes Payable," includesa discussion of mortgages placed or assumed in 2006.  The average interest rateon mortgage notes payable as of December 31, 2006 and 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 theyear ended December 31, 2006.  Additionally, the weighted average interest rateon bank 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.

       *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%

       Item7. "Management's Discussion and Analysis of Financial Condition and Results ofOperations - Financial Condition - Office and Parking Properties -Dispositions," includes a description of office properties sold during 2006that are classified as discontinued operations.

       In2005, the Company sold The Park on Camelback, an office property in Phoenix, Arizona,and 250 Commonwealth, an office property in Greenville, South Carolina, tounrelated third parties, and the Company recognized a net gain on the sales of$4.2 million in September 2005.  The net gains and all current and prior periodincome from these office properties has been classified as discontinuedoperations.

***Comments are for the year ended December 31, 2005 compared to the year endedDecember 31, 2004.***

       Net income available for commonstockholders for the year ended December 31, 2005 was $13.7 million ($.97 perbasic common share) as compared to $19.5 million ($1.73 per basic common share)for the year ended December 31, 2004.  Net income for the year ending December31, 2005 included a net gain from the sale of real estate and joint ventureinterest of $5.6 million and an impairment loss on land of $340,000.  Netincome for the year ending December 31, 2004 included gains on a notereceivable and the sale of a joint venture interest of $4.3 million.

       *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 as discontinuedoperations.  At December 31, 2005, same store properties consisted of 49properties comprising 8.6 million square feet.  Properties acquired in 2005that do not meet the definition of same store properties consisted of sevenproperties with 1.9 million square feet.

Page 31 of 88

       Thefollowing table represents income from office and parking properties for theyears ended December 31, 2005 and 2004 (in thousands):

**Year Ended  December 31**

** **

** **

**Increase**

**%**

**2005**

**2004**

**(Decrease)**

**Change**

Income from office and parking  properties:

      Same store properties

$140,320

$139,356

$        964  

0.7%

      Properties acquired in  2004    

8,867

1,349

7,518 

557.3%

      Properties acquired in  2005

38,563

-

38,563 

 0.0%

      Properties disposed

736

12,123

(11,387)

-93.9%

Total income from office and 

      parking properties

$188,486

$152,828

$  35,658 

23.3%

       Income from office and parking properties for samestore properties increased $964,000 or .7% for the year ended December 31, 2005compared to the same period for 2004.  The primary reason for the increase isdue to an increase in same store occupancy for same store properties for theyear ended December 31, 2005 compared to December 31, 2004.  Average same storeoccupancy was 89.8% and 87.9% for the year ended December 31, 2005 and 2004,respectively.  

       The following table representsproperty operating expenses for the years ended December 31, 2005 and 2004 (inthousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2005**

**2004**

**(Decrease)**

**Change**

Property operating expenses:

      Same store properties

$   66,769

$   65,482

$         1,287 

2.0%

      Properties acquired in  2004

3,364

463

2,901 

626.6%

      Properties acquired in  2005

17,686

-

17,686 

0.0%

      Properties disposed

435

4,505

(4,070)

-90.3%

Total property 

      operating expenses

$   88,254

$   70,450

$       17,804 

25.3%

               Propertyoperating expenses for same store properties increased $1.3 million or 2% forthe year ended December 31, 2005 compared to the same period for 2004 and isprimarily attributable to normal inflationary expense increases.  

       Depreciation andamortization expense attributable to office and parking properties increased$15.4 million or 43.1% for the year ended December 31, 2005 compared to thesame period for 2004 and is due to the increase in the net investment in officeand parking properties due to additional purchases and improvements toproperties.

       *InterestExpense. *Interest expense, including amortization, increased $9.6 millionor 37.3% for the year ended December 31, 2005 compared to the same period for2004 and is comprised of the following (in thousands):

Page 32 of 88

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2005**

**2004**

**(Decrease)**

**Change**

Interest expense:

      Mortgage interest  expense

$  26,043

$   19,788

$   6,255

31.6%

      Bank line interest  expense

6,614

3,796

2,818

74.2%

      Subsidiary redeemable

            preferred  membership interest

752

725

27

3.7%

      Debt prepayment expense

555

511

44

8.6%

      Mortgage loan cost  amortization

976

556

420

75.5%

      Bank loan cost   amortization

504

441

63

14.3%

Total interest expense

$  35,444

$   25,817

$   9,627

37.3%

       Mortgageinterest expense increased $6.3 million or 31.6% for the year ended December31, 2005 compared to the same period for 2004 and is due to the net effect ofthe early extinguishment of two mortgages in 2004, new loans placed or assumedin 2005 and 2004, the transfer of a mortgage in connection with the sale of ajoint venture interest in 2005 and the refinancing of the Teachers Insuranceand Annuity Association mortgage in 2005.  The average interest rate onmortgage notes payable as of December 31, 2005 and 2004 was 5.7% and 6%,respectively.  

       Bankline interest expense increased $2.8 million or 74.2% for the year endedDecember 31, 2005 compared to the same period for 2004.  The change isprimarily due to the increase in the weighted average interest rate on banklines of credit from 3.1% during the year ended December 31, 2004 to 4.6%during the same period in 2005.  

       *DiscontinuedOperations.*  Discontinued operations is comprised of the following for theyears ended December 31, 2005 and 2004 (in thousands):

**Year  Ended December 31**

** **

** **

**Increase**

**%**

**2005**

**2004**

**(Decrease)**

**Change**

Discontinued operations:

      Income from  discontinued operations

$  2,366

$   3,464

$      (1,098)

-31.7%

      Gain on sale of real  estate

            from  discontinued operations

4,181

- 

4,181 

0.0%

Total discontinued operations 

$  6,547

$   3,464

$   3,083 

89.0%

       Item7. "Management's Discussion and Analysis of Financial Condition and Results ofOperations - Financial Condition - Office and Parking Properties -Dispositions," includes a description of office properties sold during 2006that are classified as discontinued operations.

       In2005, the Company sold The Park on Camelback, an office property in Phoenix, Arizona,and 250 Commonwealth, an office property in Greenville, South Carolina, to unrelatedthird parties, and the Company recognized a net gain on the sales of $4.2million in September 2005.  In accordance with GAAP, the net gains and allcurrent and prior period income from these office properties has beenclassified as discontinued operations.

**Liquidity and CapitalResources**

       *Statement of Cash Flows.  *Cashand cash equivalents were $4.5 million and $3.4 million at December 31, 2006and December 31, 2005, respectively.  Cash flows provided by operatingactivities for the year ended December 31, 2006 were $53.5 million compared to$60.1 million for the same period of 2005.  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 $286.6 million for the year ended December 31,2006 compared to cash used in investing activities of $172.8 million for thesame period of 2005.  The increase in cash used by investing activities of$113.7 million is primarily due to the net effect of increased office propertypurchases and sales in 2006 and an increase in distributions fromunconsolidated joint ventures, which is attributable to the sales proceedsreceived for the sale of the Viad Corporate Center in June 2006.

       Cashprovided by financing activities was $234.2 million for the year ended December31, 2006 compared to cash provided by financing activities of $115 million forthe same period of 2005.  The increase in cash provided by financing activitiesof $119.1 million is primarily due to additional mortgage placements in 2006and contributions from minority interest partners to fund office propertypurchases. 

** **       *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 sale of non-core assets and officeproperties, proceeds from the sale of portions of owned assets through jointventures, possible sales of securities and cash balances to fund thoseacquisitions.  

Page 33 of 88

       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 three-year unsecured revolving credit facilityand two one-year unsecured lines of credit.

       AtDecember 31, 2006, Parkway had a total of $152.3 million outstanding under afour-year $140 million unsecured revolving credit facility and a five-year $60million unsecured term loan, both led by Wachovia Bank and syndicated to nineother banks (the "$200 million line"), a $15 million unsecured line of creditwith PNC Bank (the "$15 million line") and a $9 million unsecured line ofcredit with Trustmark National Bank (the "$9 million line").  The interestrates on the $200 million line and the $15 million line were equal to the30-day LIBOR rate plus 80 to 130 basis points, depending upon overall Companyleverage.  The interest rate on the $9 million line was equal to the 30-dayLIBOR rate plus 132.5 basis points.  The weighted average interest rate onunsecured lines of credit was 6.3% and 5.3% at December 31, 2006 and 2005,respectively.

       OnApril 27, 2006 the Company closed the new $200 million unsecured creditfacility led by Wachovia Bank and syndicated to nine other banks. The $200million line replaced the previous $190 million line, which was to mature inFebruary 2007.  The new facility is comprised of a $60 million term loanmaturing in April 2011 and a $140 million revolving loan maturing in April2010. The interest rate on the $200 million line is based on LIBOR plus 80 to130 basis points depending upon overall Company leverage (with the current rateset at 130 basis points as of December 31, 2006).  The Company paid a facilityfee of $200,000 (10 basis points) and origination fees of $688,000 (34.4 basispoints) upon closing of the loan agreement.  Additionally, the Company pays anannual administration fee of $35,000 and fees on the unused portion of therevolver ranging between 12.5 and 20 basis points based upon overall Companyleverage (with the rate set at 12.5 basis points at December 31, 2006).  Theincreased size of the line affords the Company greater financial flexibilityand capacity while accommodating the Company's growth.

       The$15 million line matures January 29, 2008, 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, 2006.  The Company paid a facility feeof $15,000 (10 basis points) upon closing of the loan agreement.  Under the $15million line, the Company does not pay annual administration fees or fees onthe unused portion of 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, 2007.  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 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, 2006 and 2005 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December 31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2006**

**2005**

Swap

$40,000

06/30/06

1-Month LIBOR

3.530%

$         -

$    245

Swap

$40,000

12/31/08

1-Month LIBOR

4.360%

525

426

Swap

$20,000

12/31/08

1-Month LIBOR

4.245%

307

234

$    832

$    905

    At December 31, 2006, theCompany had $696 million in mortgage notes payable with an average interest rateof 5.8% secured by office properties and $152.3 million drawn under bank linesof credit.  Parkway's pro rata share of unconsolidated joint venture debtwas $9.9 million with an average interest rate of 5.2% at December 31, 2006. Based on the Company's total market capitalization of approximately $1.7 billionat December 31, 2006 (using the December 31, 2006 closing price of $51.01 percommon share), the Company's debt represented approximately 47.9% of its totalmarket capitalization. The Company targets a debt to total market capitalizationrate at a percentage in the range of 45% to 50%. This rate may vary at timespending acquisitions, sales and/or equity offerings.  In addition,volatility in the price of the Company's common stock may affect the debt tototal market capitalization ratio.  However, over time the Company plans tomaintain a percentage in the range of 45% to 50%.

 Page 34 of 88

       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 year ended December 31, 2006 and 2005 was 2.60 and 3.10times, 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 year ended December 31,2006 and 2005 was 1.73 and 1.79 times, respectively.   The modified fixedcharge coverage ratio is computed by comparing the cash interest accrued andpreferred dividends paid to EBITDA.  This ratio for the year ended December 31,2006 and 2005 was 2.26 and 2.55 times, respectively.    In accordance with theGEAR UP Plan, Parkway established a self-imposed limit for the modified fixedcharge coverage ratio of 2.5 times as the Company's pledge not to use leverageto achieve Company goals.  Management believes the debt to marketcapitalization, interest coverage, fixed charge coverage and modified fixed chargecoverage ratios provide useful information on total debt levels as well as theCompany's ability to cover interest, principal and/or preferred dividendpayments with current income.

       The table below presents the principal payments due andweighted average interest rates for the mortgage notes payable as of December31, 2006.

**Average**

**Mortgage Notes Payable**

**Interest Rate**

**(In thousands)**

2007

5.8%

$    34,159 

2008

5.8%

57,120 

2009

6.0%

37,471 

2010

5.9%

98,840 

2011

6.2%

113,129 

Thereafter

6.7%

355,293 

Total

$  696,012 

 

Fair  value at 12/31/06

$  707,185 

       TheCompany presently has plans to make additional capital improvements at itsoffice properties in 2007 of approximately $33 million.  These expenses includetenant improvements, capitalized acquisition costs and capitalized buildingimprovements.  Approximately $13.9 million of these improvements relate toupgrades on properties acquired in recent years that were anticipated at thetime of purchase.  All such improvements are expected to be financed by cashflow from the properties, advances on the bank lines of credit or contributionsfrom partners.

       In2006, the Company announced the proposed development of a 194,000 square footClass A+ office building in Jackson, Mississippi known as The Pinnacle at Jackson  Place, adjacent to the Company's headquarters building.  The estimated costof the development is $39 million and it is expected to be completed in thefall of 2008.  The Company has received commitments to lease approximately 73%of the new office space from four major customers.  Parkway will be seekingpartners for an 80% ownership interest in the development.  There can be noassurance that the development or joint venture of The Pinnacle will occur.

        In accordance withParkway's strategic plan, GEAR UP, the Company projects the followingacquisitions and dispositions in 2007.  Item 7.  "Management's Discussion andAnalysis of Financial Condition and Results of Operations - Overview - StrategicPlanning," includes a full discussion of the Gear Up Plan.  

•      Fee simple office property purchases totaling $150 million, whichwill be funded with proceeds from sales and/or bank lines of credit.

•     Fund office property purchases totaling $170 million.  Parkway'sequity contribution will be approximately $17 million and will be funded withproceeds from sales and/or bank lines of credit.

Page 35 of 88

•        One fee simple sale of an asset in Columbia, South Carolinavalued at $9 million is projected to take place May 1, 2007; and

•        Contributions of asset to funds or similar ventures where theCompany will retain a 25% ownership interest are projected to be made as shownbelow:

o       Assets in Knoxville, Tennessee totaling 549,000 square feet withan estimated value of $59 million on July 1, 2007;

o       Assets in Virginia totaling 883,000 square feet with an estimatedvalue of $97 million on July 1, 2007; 

o       Two assets in Columbia, South Carolina totaling 759,000 squarefeet with an estimated value of $97 million on October 1, 2007; and

o       In connection with the proposed ventures, Parkway may incur debtprepayment penalties and expense of $2.8 million.  

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

**Off-Balance Sheet Arrangements**

       As of December 31, 2006, the Companywas invested in four unconsolidated real estate joint ventures. These jointventures are accounted for using the equity method of accounting, as Parkwaydoes not control any of these joint ventures and is not the primarybeneficiary, as that term is defined in FIN46R.  As a result, the assets andliabilities of the joint ventures are not included in Parkway's consolidatedbalance sheet.  Information relating to the unconsolidated joint ventures atDecember 31, 2006 is detailed below.

** **

** **

** **

**Parkway's**

** **

** **

** **

**Ownership**

**Joint Ventures**

**Property Name**

**Location**

**Interest**

** **

** **

** **

** **

Wink-Parkway Partnership

Wink Building

New Orleans, Louisiana

50.0%

Parkway Joint Venture, LLC 

UBS Building/River Oaks

Jackson, Mississippi

20.0%

RubiconPark I, LLC 

Lakewood/Falls Pointe

Atlanta, Georgia

20.0%

Carmel Crossing

Charlotte, North Carolina

RubiconPark II, LLC 

Maitland 200

Orlando, Florida

20.0%

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

       Thefollowing information summarizes the financial position at December 31, 2006for the investments in which we held an interest at December 31, 2006 (inthousands):

** **

** **

**Mortgage**

** **

**Parkway's**

**Summary of  Financial Position**

**Total Assets**

**Debt (1)**

**Total Equity**

**Investment**

Phoenix OfficeInvest, LLC

$       190

$         -

$      164

$         - 

Parkway Joint Venture, LLC

17,514

12,600

4,421

(150)

Wink-Parkway Partnership

1,470

275

1,082

541 

RubiconPark I, LLC

74,408

52,000

21,075

5,676 

RubiconPark II, LLC

29,643

19,061

10,093

5,112 

$123,225

$83,936

$36,835

$11,179 

Page 36 of 88

** **

       (1)  The mortgage debt, all of whichis non-recourse, is collateralized by the individual real estate property orproperties within each venture, the net book value of which totaled $114.7million at December 31, 2006.  Parkway's proportionate share of thenon-recourse mortgage debt totaled $9.9 million at December 31, 2006.

       The following information summarizesthe results of operations for the year ended December 31, 2006 for investmentswhich impacted our 2006 results of operations (in thousands):

** **

** **

** **

**Parkway's Share**

**Parkway's Share**

** **

** **

** **

** **

**of Equity in Earnings**

**of Gain on**

** **

** **

**Total**

**Net**

**of Unconsolidated**

**Sale of**

**Parkway's Share**

**Summary of Operations**

**Revenue**

**Income**

**Joint Ventures**

**Real Estate**

**of Net Income**

Phoenix OfficeInvest, LLC (1)

$  5,835

$41,973

$  (217)

$13,584

$13,367

Parkway  Joint Venture, LLC

2,664

82

17 

-

17

Wink-Parkway  Partnership

333

126

63 

-

63

RubiconPark  I, LLC

9,923

1,701

502 

-

502

RubiconPark  II, LLC

4,332

1,071

386 

-

386

$23,087

$44,953

$   751 

$13,584

$14,335

       (1)  On June 23, 2006, the Company and its joint venture partner sold Viad Corporate Center in Phoenix, Arizona for $105.5 million.  The buyer assumed the existingmortgage debt of $50 million in the sale.  The Company received net cashproceeds of $15.4 million and recognized a gain of $13.6 million from thesale.  In addition to the gain, the Company recognized management and incentivefees of $4.2 million as a result of the economic returns generated over thelife of the Phoenix OfficeInvest joint venture.  In accordance with Parkway'saccounting policy for incentive management fees, the additional incentive andmanagement fees were recorded at the closing of the sale of Viad Corporate Center,at which time the fees were earned.  Parkway also incurred $325,000 in costsassociated with the loan transfer.

**Contractual Obligations**

       We have contractual obligationsincluding mortgage notes payable and lease obligations.  The table below presentstotal payments due under specified contractual obligations by year throughmaturity as of December 31, 2006 (in thousands):

**Payments Due By Period**

**Contractual  Obligations**

**Total**

**2007**

**2008**

**2009**

**2010**

**2011**

**Thereafter**

Long-Term Debt (Mortgage  Notes Payable) 

$946,348

$73,558

$94,816

$72,239

$130,976

$138,303

$436,456

Capital  Lease Obligations

69

32

32

5

-

-

-

Operating  Leases

692

452

240

-

-

-

-

Purchase  Obligations

6,870

6,201

21

295

9

344

-

Other  Long-Term Liabilities

10,741

10,741

-

-

-

-

-

Total

$964,720

$90,984

$95,109

$72,539

$130,985

$138,647

$436,456

       The amounts presented above formortgage notes payable include principal and interest payments.  The amountspresented for purchase obligations represent the remaining tenant improvement allowancesfor leases in place and commitments for building improvements as of December 31,2006.

       The amounts presented above as otherlong-term liabilities represents subsidiary redeemable preferred membershipinterests issued to the seller in connection with the Capital City Plazapurchase in 2004. The preferred membership interests pay the seller a 7% couponrate and were issued to accommodate their tax planning needs.  The seller currentlyhas the right to redeem the remaining balance of the membership interests.  Parkwayhas the right to retire the preferred interest in July 2007.

       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.

Page 37 of 88
       OnJuly 11, 2006, the Company purchased One Illinois Center in Chicago, Illinois. The purchase was funded by a 10-year $148.5 million non-recourse firstmortgage, a $33.7 million secured recourse mezzanine loan with a six-month termand advances under bank lines of credit.  In connection with the firstmortgage, the Company delivered $11.3 million in letters of credit to satisfythe various escrow requirements made by the lender.  The letters of creditexpire June 30, 2007.
**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 States  of 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 oflong-lived assets;       (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 $119,000 in 2006 and an impairmentloss on 12 acres of land in New Orleans, Louisiana in the amount of $340,000 in2005.  No impairment losses were recorded in 2004.

Page 38 of 88

*       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.

*       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 belowmarket debt 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 resultindifferent 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 receivables forwhich collection is considered doubtful.  Actual results may differ from theseestimates under different assumptions or conditions, which could result in anincrease 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 marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among suchcompanies more meaningful.  FFO as reported by Parkway may not be comparable toFFO reported by other REITs that do not define the term in accordance with thecurrent NAREIT definition.  Funds from operations do not represent cashgenerated from operating activities in accordance with accounting principlesgenerally accepted in the United States and is not an indication of 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 39 of 88

       Thefollowing table presents a reconciliation of the Company's net income to FFOfor the years ended December 31, 2006 and 2005 (in thousands, except per sharedata):

 
**Total  Dollar Amount**
**Diluted  Per Share**
 
**Year  Ended**
**Year  Ended**
 
**December  31**
**December  31**
 
**2006**
**2005**
**2006**
**2005**
Net income
$  25,682 
$  20,807 
$  1.77 
$  1.46 
Adjustments to derive funds from operations:
 
 
 
 
     Depreciation  and amortization

64,655 

51,046 
4.28 

3.39 

     Depreciation  and amortization - discontinued operations

582 

1,050 
0.04 

0.07 

     Minority  interest depreciation and amortization

(2,275)

(1,019)
(0.15)

(0.07)

     Adjustments  for unconsolidated joint ventures

815 

1,057 
0.05 

0.07 

     Preferred  dividends
(4,800)
(4,800)
(0.33)
(0.34)
     Convertible  preferred dividends

(1,773)

(2,346)
(0.12)

(0.16)

     Gain  on real estate and joint venture interests

(22,848)

(5,512)
(1.51)

(0.37)

     Minority  interest - unit holders

1 

2 
- 

- 

     Diluted  share adjustment for convertible preferred stock
- 
- 
0.07 
0.11 
Funds from operations applicable to  common shareholders
$  60,039 
$  60,285 
$  4.10 
$   4.16 
**Inflation**

       Except for insurance and utilities,inflation has not had a significant impact on the Company because of therelatively low inflation rate in the Company's geographic areas of operation. Additionally, most of the leases require the customers to pay their pro ratashare of operating expenses, including common area maintenance, real estatetaxes, utilities and insurance, thereby reducing the Company's exposure toincreases in operating expenses resulting from inflation.  The Company's leasestypically have three to seven year terms, which may enable the Company toreplace existing leases with new leases at market base rent, which may behigher 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 beenvolatile.  The Company's current property and casualty insurance policyfor most properties has been in place since November 30, 2005 and is scheduledto renew April 1, 2007, at which time these lines of coverage will be renewedunder the market conditions that exist at that time.  The Company expectsthat the cost of property coverage in some of its markets could increasecompared to the current cost.  There may also be a reduced capacity byinsurance providers to fully cover the replacement value of properties incertain geographic regions.  Any increase in insurance costs directlyrelated to each property will be passed through to customers to the extentallowed by the lease terms.

       *Utilities.* Energy costs in most of our markets have increased over the past 12 months at ahigher rate than the overall rate of inflation.  The Company hasundertaken several initiatives to conserve energy and to educate our customerson the importance of conservation in controlling the operating cost of ourproperties.  The increase in energy costs have been passed through tocustomers to the extent allowed by the terms of each customer's leaseagreement.  The Company estimates that approximately 50% of the increasein energy costs is paid by the customers.  

**Forward-Looking Statements**

       In additionto historical information, certain sections of this Form 10-K may containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, such asthose that are not in the present or past tense, that discuss the Company'sbeliefs, expectations or intentions or those pertaining to the Company's capitalresources, profitability and portfolio performance and estimates of marketrental rates.  Forward-looking statements involve numerous risks anduncertainties. The following factors, among others discussed herein and in theCompany's filings under the Securities Exchange Act of 1934, could cause actualresults and future events to differ materially from those set forth orcontemplated in the forward-looking statements:  defaults or non-renewal ofleases, increased interest rates and operating costs, failure to obtainnecessary outside financing, difficulties in identifying properties to acquireand in effecting acquisitions, failure to qualify as a real estate investmenttrust under the Internal Revenue Code of 1986, as amended, environmentaluncertainties, risks related to natural disasters, financial marketfluctuations, changes in real estate and zoning laws and increases in realproperty tax rates.  The success of the Company also 

Page 40 of 88

****depends upon the trends of the economy, including interestrates, income tax laws, governmental regulation, legislation, population changesand 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 assumesno obligation 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, 2006, totaloutstanding debt was $848.3 million of which $152.3 million or 18%, is variablerate debt.  If market rates of interest on the variable rate debt fluctuate by10% (or approximately 63 basis points), the change in interest expense on thevariable rate debt would increase or decrease future earnings and cash flows byapproximately $952,000 annually.

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

**Index to Consolidated  Financial Statements**

**Page**
      
Report  of Independent Registered Public Accounting Firms

42

Consolidated Balance Sheets -  as of December 31, 2006 and 2005

44

Consolidated Statements of  Income - for the years ended December 31, 2006, 2005 and 2004

45

Consolidated Statements of  Stockholders' Equity - for the years ended December 31, 2006, 2005 and 2004

46

Consolidated Statements of Cash  Flows - for the years ended December 31, 2006, 2005 and 2004

47

Notes to Consolidated Financial  Statements

48

Schedule  II - Valuations and Qualifying Accounts

77

Schedule  III - Real Estate and Accumulated Depreciation

78

Note  to Schedule III - Real Estate and Accumulated Depreciation

81

** **

Page 41 of 88

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Shareholders and Board of Directors 

Parkway Properties, Inc. 

We have audited the accompanying consolidated balance sheets of ParkwayProperties, Inc. as of December 31, 2006 and 2005, and the related consolidatedstatements of income, stockholders' equity, and cash flows for each of thethree years in the period ended December 31, 2006.  Our audits also included the financial statement schedules listed in the index at Item 15(a)2.  Thesefinancial statements and financial statement schedules are the responsibilityof the Company's management.  Our responsibility is to express an opinion onthese financial statements and financial statement schedules based on ouraudits. We did not audit the financial statements of Parkway Properties OfficeFund, LP, a consolidated joint venture, which statements reflect total assetsof $225 million as of December 31, 2006 and total revenues of $6.8 million,for the year then ended.  Those statements were audited by other auditors whosereport has been furnished to us, and our opinion, insofar as it relates to theamounts included for Parkway Properties Office Fund, LP, is based solely on thereport of the other auditors.

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, the financialstatements referred to above present fairly, in all material respects, the consolidatedfinancial position of Parkway Properties, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the relatedfinancial statement schedules, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Parkway Properties, Inc.'s internalcontrol over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March16, 2007 expressed an unqualified opinion thereon.

 

 

 

/s/ Ernst & Young LLP

 

New Orleans, LouisianaMarch 16, 2007

**  **

Page 42 of 88

 

 

 

 

**Report of Independent Registered Public AccountingFirm**

 

The Partners ofParkway Properties Office Fund, LP:

We have audited the consolidatedhistorical‐cost balance sheet of Parkway Properties Office Fund, LP (thePartnership) as of December 31, 2006, and the related consolidatedhistorical-cost statements of operations, changes in partners' capital and cashflows for the year then ended, not included herein. We also have audited thesupplemental consolidated current-value balance sheet of the Partnership as ofDecember 31, 2006, and the related supplemental consolidated current-valuestatements of operations and changes in partners' capital for the year thenended, not included herein. These consolidated financial statements are theresponsibility of the Partnership's management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.

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

In our opinion, the consolidatedhistorical-cost financial statements referred to above present fairly, in allmaterial respects, the financial position of Parkway Properties Office Fund, LPas of December 31, 2006, and the results of its operations and its cash flowsfor the year then ended, in conformity with U.S. generally accepted accountingprinciples.

As described in note 12, 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 generally accepted accounting principles.In addition, the supplemental consolidated current-value financial statementsdo not purport to present the net realizable, liquidation, or market value ofthe Partnership as a whole. Furthermore, amounts ultimately realized by thePartnership from the disposal of properties may vary significantly from thecurrent 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 12.

Our audit was made for thepurpose of forming an opinion on the consolidated historical-cost andconsolidated current-value financial statements taken as a whole. Theconsolidating information included in Schedules I and II is presented forpurposes of additional analysis of the consolidated current-value financialstatements rather than to present the financial position and results ofoperations of the individual companies. The consolidating information has beensubjected to the auditing procedures applied in the audit of the consolidatedcurrent-value financial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the consolidated current-value financialstatements taken as a whole.

As discussed in note 3, theconsolidated historical-cost and consolidated current-value financialstatements and the consolidating information in Schedules I and II, as of andfor the year ended December 31, 2006, have been restated.

 

 

 

                                                                                                                /s/ KPMG LLP

 

February 28, 2007, except for note 3,

which is as of March 15, 2007

Jackson, Mississippi

Page 43 of 88

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

**December 31**

**December 31**

**2006**

**2005**

**Assets**

Real estate related investments:

     Office and parking  properties

$1,517,468 

$1,220,565 

     Accumulated depreciation

(211,187)

(179,636)

1,306,281 

1,040,929 

     Land available for sale

1,467 

1,467 

     Investment in unconsolidated  joint ventures

11,179 

12,942 

1,318,927 

1,055,338 

Rents receivable and other assets

107,145 

69,480 

Intangible assets, net

81,800 

60,161 

Cash and cash equivalents

4,474 

3,363 

$1,512,346 

$1,188,342 

**Liabilities**

** **

** **

Notes payable to banks

$    152,312 

$  150,371 

Mortgage notes payable 

696,012 

483,270 

Accounts payable and other liabilities

72,659 

56,628 

Subsidiary redeemable preferred membership interests

10,741 

10,741 

931,724 

701,010 

**Minority Interest**

** **

** **

Minority Interest - unit holders

36 

38 

Minority Interest - real estate partnerships

90,280 

12,778 

** **

90,316 

12,816 

**Stockholders' Equity**

** **

** **

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

     2,142,857 shares authorized  in 2005, 803,499 shares issued and outstanding

     in 2005 

- 

28,122 

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

     issued and outstanding

57,976 

57,976 

Common stock, $.001 par value, 67,600,000 and 65,457,143  shares authorized 

     in 2006 and 2005,  respectively, 15,764,799 and 14,167,292 shares issued 

     and outstanding in 2006 and 2005,  respectively

16 

14 

Common stock held in trust, at cost, 115,000 and 124,000  shares in 2006

     and 2005, respectively  

(3,894)

(4,198)

Additional paid-in capital

449,141 

389,971 

Unearned compensation

- 

(3,101)

Accumulated other comprehensive income

828 

826 

Retained earnings (deficit)

(13,761)

4,906 

490,306 

474,516 

$1,512,346 

$1,188,342 

Seenotes to consolidated financial statements.

Page 44 of 88

**PARKWAYPROPERTIES, INC.**

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

**Year Ended December 31**

**2006**

**2005**

**2004**

**Revenues**

Income  from office and parking properties

$210,007 

$188,486 

$152,828 

Management company income

5,329 

2,997 

3,832 

      Total  revenues

215,336 

191,483 

156,660 

** **

**Expenses**

Property  operating expense

99,130 

88,254 

70,450 

Depreciation  and amortization

64,655 

51,046 

35,666 

Operating  expense for other real estate properties

5 

5 

22 

Management  company expenses

1,141 

607 

358 

General  and administrative

4,651 

4,468 

4,464 

169,582 

144,380 

110,960 

** **

**Operating  income**

45,754 

47,103 

45,700 

** **

**Other  income and expenses**

      Interest  and other income

40 

255 

37 

      Equity in earnings of unconsolidated joint ventures

751 

1,496 

1,697 

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

17,646 

1,039 

4,309 

       Interest expense

(44,632)

(35,444)

(25,817)

** **

**Income  before minority interest and discontinued operations**

19,559 

14,449 

25,926 

Minority  interest - unit holders

(1)

(2)

(2)

Minority  interest - real estate partnerships

485 

(187)

127 

** **

**Income  from continuing operations**

20,043 

14,260 

26,051 

Discontinued  operations:

      Income  from discontinued operations

556 

2,366 

3,464 

      Gain  on sale of real estate from discontinued operations

5,083 

4,181 

- 

** **

**Net  income**

25,682 

20,807 

29,515 

Change  in market value of interest rate swaps

(73)

1,131 

(226)

Change  in unrealized gain (loss) on equity securities

75 

(79)

- 

**Comprehensive  income**

$  25,684 

$  21,859 

$  29,289 

** **

**Net  income available to common stockholders:**

** **

** **

** **

Net  income

$  25,682 

$  20,807 

$  29,515 

Dividends  on preferred stock

(4,800)

(4,800)

(4,800)

Dividends  on convertible preferred stock

(1,773)

(2,346)

(5,186)

**Net  income available to common stockholders**

$  19,109 

$  13,661 

$  19,529 

** **

**Net  income per common share:**

Basic:

      Income  from continuing operations

$     0.95 

$     0.50 

$     1.42 

      Discontinued  operations

0.39 

0.47 

0.31 

      Net  income

$     1.34 

$     0.97 

$     1.73 

Diluted:

      Income  from continuing operations

$     0.93 

$     0.50 

$     1.40 

      Discontinued  operations

0.39 

0.46 

0.30 

      Net  income

$     1.32 

$     0.96 

$     1.70 

** **

**Dividends per common share**

$     2.60 

$     2.60 

$     2.60 

** **

**Weighted  average shares outstanding:**

      Basic  

14,306 

14,065 

11,270 

      Diluted

14,487 

14,233 

11,478 

Seenotes to consolidated financial statements.

Page 45 of 88

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

**Year Ended December 31**

**2006**

**2005**

**2004**

** **

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

     Balance  at beginning of year

$  28,122 

$  28,122 

$  68,000 

          Conversion  of preferred stock to common stock

(28,122)

- 

(39,878)

     Balance  at end of year

- 

28,122 

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

14 

12 

11 

          Shares  issued - stock offering

1 

2 

- 

          Shares  issued - other

1 

- 

1 

     Balance  at end of year

16 

14 

12 

**Common stock held in  trust**

     Balance  at beginning of year

(4,198)

(4,400)

(4,321)

          Shares  distributed from (contributed to) deferred compensation plan

304 

202 

(79)

     Balance  at end of year

(3,894)

(4,198)

(4,400)

** **

** **

** **

** **

**Additional paid-in  capital**

** **

** **

** **

     Balance  at beginning of year

389,971 

310,455 

252,695 

          Stock  options and warrants exercised

6,034 

2,104 

5,964 

          Conversion  of preferred stock to common stock

28,121 

- 

39,877 

          Shares  issued in lieu of Directors' fees

170 

193 

138 

          Restricted  shares issued (forfeited)

- 

(679)

70 

          Deferred  incentive share units issued

- 

191 

201 

          Shares  issued - DRIP Plan

407 

1,899 

11,515 

          Shares  issued - stock offerings

29,487 

75,808 

(5)

          Employee  Stock Purchase Plan

3 

- 

- 

          Purchase  of Company stock

(2,814)

- 

- 

          Share  based compensation expense

863 

- 

- 

          Reclassification  upon the adoption of SFAS No. 123R

(3,101)

- 

- 

     Balance  at end of year

449,141 

389,971 

310,455 

** **

**Unearned compensation**

     Balance  at beginning of year

(3,101)

(4,122)

(4,634)

          Restricted  shares (issued) forfeited

- 

679 

(70)

          Deferred  incentive share units issued

- 

(191)

(201)

          Share  based compensation expense

- 

533 

783 

          Reclassification  upon the adoption of SFAS No. 123R

          3,101 

          - 

- 

**     **Balance at end of year

- 

(3,101)

(4,122)

** **

** **

** **

** **

**Accumulated other  comprehensive income (loss)**

** **

** **

** **

     Balance  at beginning of year

826 

(226)

- 

          Change  in market value of interest rate swaps

(73)

1,131 

(226)

          Change  in unrealized gain (loss) on equity securities

75 

(79)

- 

     Balance  at end of year

828 

826 

(226)

** **

** **

** **

** **

**Retained earnings  (deficit)**

** **

** **

** **

     Balance  at beginning of year

4,906 

27,831 

38,253 

          Net  income

25,682 

20,807 

29,515 

          Preferred  stock dividends declared

(4,800)

(4,800)

(4,800)

          Convertible  preferred stock dividends declared

(1,773)

(2,346)

(5,186)

          Common  stock dividends declared

(37,776)

(36,586)

(29,951)

     Balance  at end of year

(13,761)

4,906 

27,831 

**Total stockholders'  equity**

$490,306 

$474,516 

$415,648 

See notes to consolidated financial statements.

Page 46 of 88

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

**Year  Ended December 31**

**2006**

**2005**

**2004**

**Operating activities**

     Net income

$    25,682 

$    20,807 

$    29,515 

     Adjustments  to reconcile net income to cash

          provided  by operating activities:

          Depreciation  and amortization

64,655 

51,046 

35,666 

          Depreciation  and amortization - discontinued operations

582 

1,050 

1,177 

          Amortization  of above market leases

1,582 

1,970 

139 

          Amortization  of loan costs

1,100 

1,480 

997 

          Share  based compensation expense

863 

533 

783 

          Operating  distributions from unconsolidated 

               joint  ventures

1,334 

2,587 

2,573 

          Income  (loss) allocated to minority interests

(484)

189 

(125)

          Net  gain on sale of real estate, joint venture interests 

               and  other assets

(22,729)

(5,220)

(4,309)

          Equity  in earnings of consolidated joint ventures

(751)

(1,496)

(1,697)

          Changes  in operating assets and liabilities:

               Increase  in receivables and other assets

(25,465)

(11,571)

(2,559)

               Increase  (decrease) in accounts payable and 

                    other  liabilities

7,118 

(1,320)

1,177 

     **Cash  provided by operating activities**

53,487 

60,055 

63,337 

** **

**Investing activities**

     Payments  received on mortgage loans

- 

- 

775 

     Distributions  from unconsolidated joint ventures

15,395 

1,845 

- 

     Investments  in unconsolidated joint ventures

(113)

(45)

(286)

     Purchases  of real estate related investments

(328,909)

(163,238)

(56,625)

     Proceeds  from sales of real estate and joint venture interests

61,228 

24,153 

58,223 

     Real  estate development

- 

(3,087)

(4,434)

     Improvements  to real estate related investments

(34,160)

(32,441)

(30,596)

**     Cash  used in investing activities**

(286,559)

(172,813)

(32,943)

** **

**Financing activities**

     Principal  payments on mortgage notes payable

(49,066)

(79,120)

(24,421)

     Proceeds  from long-term financing

213,700 

103,160 

28,950 

     Net  proceeds from (payments on) bank borrowings

1,868 

46,884 

(5,683)

     Debt  financing costs

(2,215)

(1,044)

(2,054)

     Stock  options and warrants exercised

6,034 

2,104 

5,964 

     Purchase  of Company stock

(2,814)

- 

- 

**     **Dividends  paid on common stock

(37,480)

(36,356)

(29,582)

     Dividends  paid on preferred stock

(7,160)

(7,623)

(10,341)

     Contributions  from minority interest partners

82,621 

9,864 

- 

     Distributions  to minority interest partners

(1,203)

(534)

(141)

     Employee  stock purchase plan

3 

- 

- 

     Proceeds  from DRIP Plan

407 

1,899 

11,515 

     Redemption  of subsidiary preferred membership

          interests

- 

- 

(4,750)

     Proceeds  from stock offerings

29,488 

75,810 

(5)

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

234,183 

115,044 

(30,548)

 **    Impact  on cash of consolidation of MBALP**

- 

- 

763 

**     Change  in cash and cash equivalents**

1,111 

2,286 

609 

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

3,363 

1,077 

468 

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

$     4,474 

$     3,363 

$     1,077 

See notes to consolidated financial statements.

Page 47 of 88

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2006**

****

**NOTE A - Summary ofSignificant Accounting Policies**

**Basis of Presentation and Principles of Consolidation**

        Theaccompanying financial statements are prepared following U.S. generallyaccepted 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.  Third party equity interests inthe consolidated joint ventures are reflected as minority interests in theconsolidated financial statements.  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").  All significant intercompany transactions andaccounts have been eliminated.

        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 under these pronouncements. 

**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.

**Cash Equivalents**

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

**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.

****

Page 48 of 88

**Investment in Unconsolidated Joint Ventures**

       As of December 31, 2006, Parkway has fourinvestments in unconsolidated joint ventures, which are accounted for using theequity method of accounting.  Parkway's investments in unconsolidated jointventures consist of a 50% interest in Wink-Parkway Partnership, a 20% interestin Parkway Joint Venture LLC, a 20% interest in RubiconPark I, LLC and a 20%interest in RubiconPark II, LLC.  The Company has a non-controlling interest inthese investments and accounts for the interest using the equity method ofaccounting.  Therefore, Parkway reports its share of income and losses based onits economic interest in these entities, as measured by its ownership interestor expected cash distributions if materially different than distributions basedon ownership interest.  Parkway classifies its interests as non-controllingwhen it holds less than a majority voting interest in the entity and does nothave the sole ability, based on the terms of the joint venture agreements, to makedecisions about the entities' activities regarding items such as major leases,encumbering the entities with debt, major capital expenditures and whether todispose of the entities.

**Minority Interest**

*Minority Interest - Unit Holders*

       Minority interest in ParkwayProperties LP (the "Operating Partnership") represents the limited partner'sproportionate share of the equity in our operating partnership.  The operatingpartnership pays a regular quarterly distribution to the holders of operating units. Income is allocated to minority interest based on the weighted averagepercentage ownership during the year.  As of December 31, 2006, 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.  

       On March 7, 2006, Parkway, through affiliated entities, purchased the limitedpartner's interest in Moore Building Associates, LP ("MBALP"), which owns the Toyota Center in Memphis, Tennessee. This raises Parkway's total effective ownershipinterest in MBALP to 75.025%.  In acting as the general partner, Parkway iscommitted to providing additional funding to meet partnership operating deficitsup to an aggregate amount of $1 million.  Parkway receives income from MBALP inthe form of interest from a construction note receivable, incentive managementfees and property management fees.  Parkway also receives interest income on anote receivable from Parkway Moore, LLC ("PMLLC").  Any intercompany asset,liability, revenue and expense accounts between Parkway and MBALP and PMLLChave been eliminated.

       MBALP was established for the purposeof owning a commercial office building (the Toyota Center in Memphis,Tennessee) and is primarily funded with financing from a third party lender,which is secured by a first lien on the rental property of the partnership. The creditors of MBALP do not have recourse to Parkway.  In acting as thegeneral partner, Parkway is committed to providing additional funding to meetpartnership operating deficits up to an aggregate amount of $1 million.  MBALPhas a fixed rate non-recourse first mortgage in the amount of $12.5 million thatis secured by the Toyota Center, which has a carrying amount of $19.9 million.

       On July 6, 2005, Parkway, throughaffiliated entities, entered into a limited partnership agreement forming a$500 million discretionary fund ("the Fund") with Ohio Public EmployeesRetirement System ("Ohio PERS") for the purpose of acquiring high-qualitymulti-tenant office properties.  Ohio PERS has a 75% economic interest andParkway has a 25% economic interest in the Fund.  Parkway serves as the generalpartner of the Fund and provides asset management, property management, leasingand construction management services to the Fund, for which it is paidmarket-based fees. The Fund has fixed rate non-recourse mortgage debt totaling$96.7 million that is secured by nine office properties, which have a carryingvalue of $194.1 million. There is approximately $275 million remaining capacityfor fund office investments.  

       Since Parkway is the sole generalpartner and has the authority to make major decisions on behalf of the Fund, thereby giving Parkway a controllinginterest, Parkway is required to include the Fund in its consolidated financialstatements.

Page 49 of 88

      Minorityinterest in real estate partnerships represents the other partners'proportionate share of equity in the partnerships discussed above at December31, 2006.  Income is allocated to minority interest based on the weightedaverage percentage ownership during the year.

**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 term of the leaseinvolved.  Maintenance and repair expenses are charged to expense 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.

       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**

**2006**

**2005**

Building and  garage

40  years

$1,157,534

      $    957,553

Building  improvements

7  to 40 years

70,472

              64,600

Tenant  improvements

Lesser  of useful life or term of lease

145,742

            100,632

$1,373,748

       $1,122,785

       Depreciation expense related to theseassets of $49.7 million, $40.5 million and $31.3 million was recognized in 2006,2005 and 2004, 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,Parkway records assets held for sale at the lower of carrying amount or fairvalue less cost to sell.  With respect to assets classified as held andused, Parkway recognizes an impairment loss to the extent the carrying amount isnot recoverable and exceeds its fair value.  Fair value is based on theestimated and realizable contract sales price (if available) for the asset lessestimated costs to sell.  If a sales price is not available, the estimatedundiscounted cash flows of the asset for the remaining useful life are used todetermine if the carrying value is recoverable.  The cash flow estimatesare based on assumptions about employing the asset for its remaining usefullife.  Factors considered in projecting future cash flows include but arenot limited to:  existing leases, 

Page 50 of 88

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 D) iscarried at the lower of cost or fair value minus estimated cost to sell. Operating real estate held for investment is stated at the lower of cost of netrealizable value.

**Revenue Recognition**

       Revenue from real estate rentals isrecognized on a straight-line basis over the terms of the respective leases.   

       Property operating cost recoveriesfrom customers ("expense reimbursements") are recognized as revenue in theperiod in which the expenses are incurred.  The most common types of expensereimbursements in the Company's leases are common area maintenance expenses ("CAM")and real estate taxes, where the customer pays its share of operating andadministrative expenses and real estate taxes as computed in accordance withthe lease.

       The computation of expensereimbursements is dependent on the provisions of individual customer leases. Most customers make monthly fixed payments of estimated expense reimbursements. The Company makes adjustments, positive or negative, to expense reimbursementincome quarterly to adjust the recorded amounts to the Company's best estimateof the final property operating costs based on the most recent quarterlybudget.  After the end of the calendar year, the Company computes eachcustomer's final expense reimbursements and issues a bill or credit for thedifference between the actual amount and the amounts billed monthly during theyear.  These differences are recorded to expense reimbursement income in theperiod the final bills are prepared, usually beginning in February andcompleted by May in the subsequent fiscal year.  The net amounts of any suchadjustments were not material for the years ended December 31, 2006, 2005 and2004.  

       Management company income representsmarket based fees earned from providing management, construction, leasing,brokerage and acquisition services to third parties. Management fee income iscomputed and recorded monthly in accordance with the terms set forth in thestand alone management service agreements. Leasing and brokerage commissionsare recognized pursuant to the terms of the stand alone agreements at the timeunderlying leases are signed, which is the point at which the earnings processis complete and collection of the fees is reasonably assured. Fees relating tothe purchase or sale of property are recognized when the earnings process iscomplete and collection of the fees is reasonably assured, which usually occursat closing. All fees on Company-owned properties and consolidated jointventures are eliminated in consolidation.  The portion of fees earned onunconsolidated joint ventures attributable to Parkway's ownership interest iseliminated in consolidation. 

**Acquired Real Estate Assets**

       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 Companymay engage independent third-party appraisers to perform the valuations used todetermine the fair value of these identifiable tangible and intangible assets. These valuations and appraisals use commonly employed valuation techniques, suchas discounted cash flow analyses. Factors considered in these analyses includean estimate of carrying costs during hypothetical expected lease-up periodsconsidering current market conditions, and costs to execute similar leases.Parkway also considers information obtained about each property as a result ofits pre-acquisition due diligence, marketing and leasing activities inestimating the fair value of the tangible and intangible assets acquired. Inestimating carrying costs, the Company includes real estate taxes, insurance andother operating expenses and estimates of lost rentals at market rates duringthe expected lease-up periods depending on specific local market conditions anddepending on the type of property acquired. 

Page 51 of 88

 Additionally, Parkway estimatescosts to execute similar leases including leasing commissions, legal and otherrelated expenses to the extent that such costs are not already incurred inconnection with a new lease origination as part of the transaction.

       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 non-cancelable term of therespective leases. The capitalized below market lease values are amortized asan increase to rental income over the remaining non-cancelable term of therespective leases.   Total amortization for above and below market leases was anet reduction of rental income of $1.6 million, $2 million and $139,000 for theyears ending December 31, 2006, 2005 and 2004, 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

2007

$(1,821)

2008

(904)

2009

(340)

2010

(53)

2011

42 

       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 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.  The value of at market in-place leases is amortized as alease cost amortization expense over the expected life of the lease, includingexpected renewals.  Total amortization expense for the value of in-place leaseswas $8.4 million, $5.5 million and $2.4 million for the years ending December31, 2006, 2005 and 2004, respectively.

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

Amount

2007

$7,205

2008

7,193

2009

7,058

2010

6,505

2011

6,061

       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.

Page 52 of 88

**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 loancosts to 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**

       On 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.  Currently, 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.

       EffectiveJanuary 1, 2003, the stockholders of the Company approved Parkway's 2003 EquityIncentive Plan (the "2003 Plan") that authorized the grant of up to 200,000equity based awards to employees of the Company.  At present, it is Parkway'sintention to grant restricted shares and/or deferred incentive share unitsinstead of stock options.  Restricted shares and deferred incentive share unitsare valued based on the New York Stock Exchange closing market price of Parkwaycommon shares (NYSE ticker symbol, PKY) as of the date of grant.  Parkwayconsiders the grant date to be the same date on which shares are approved bythe Board of Directors. Compensation expense is recognized over the expectedvesting period, which is four to seven years from grant date for restrictedshares and four years from grant date for deferred incentive share units.  Theeffect of estimated forfeitures is included in the Company's calculation ofcompensation expense related to restricted shares and deferred incentive units.

       In 2006 certain restricted shareswere granted to officers of the Company where vesting is contingent uponachieving the cumulative goals of the GEAR UP Plan, which began January 1, 2006and ends December 31, 2008.  Compensation expense will not be recorded on theshares that vest based on performance conditions until the Company determinesthat it is probable that the goal will be achieved.  Therefore, no expense hasbeen recorded in 2006 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**

       EffectiveJanuary 1, 1997, the Company elected to be taxed as a realestate investment trust (REIT) under the Internal Revenue Code of 1986, asamended.  The Company completed its reorganization into the UPREIT(Umbrella Partnership REIT) structure effective January 1, 1998. The Company anticipates that the UPREIT structure will enable it to pursue additionalinvestment opportunities by having the ability to offer tax-advantagedoperating partnership units to property owners in exchange for properties.

Page 53 of 88

       Acorporate REIT is a legal entity that holds real estate assets, and throughdistributions to stockholders, is exempt from the payment of Federal incometaxes at the corporate level.  To maintain qualification as a REIT, the Companyis subject to a number of organizational and operational requirements,including a requirement that it currently distribute to stockholders at least90% of its annual 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 ifdilutive operating partnership units, dilutive employee stock options, deferredincentive share units and 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**

**2006**

**2005**

**2004**

(in thousands, except  per share data)

Numerator:

    Basic  and diluted net income

        available  to common stockholders

$19,109

$13,661

$19,529

Denominator:

    Basic  weighted average shares

14,306

14,065

11,270

    Effect  of employee stock options, deferred

        incentive  share units and warrants

181

168

208

    Diluted  weighted average shares

14,487

14,233

11,478

Diluted  earnings per share

$    1.32

$    0.96

$    1.70

       The computation of diluted EPS didnot assume the conversion of the 8.34% Series B cumulative convertiblepreferred stock because their inclusion would have been anti-dilutive.

**Reclassifications**

       Certainreclassifications have been made in the 2005 and 2004 consolidated financialstatements to conform to the 2006 classifications with no impact on previouslyreported net income or stockholders' equity.  The adjustments relate toreclassification of all current and prior period income for propertiesdesignated as discontinued operations in 2006 (See Note F - DiscontinuedOperations).

**New Accounting Pronouncements**

       In June 2006, the Financial AccountingStandards Board issued FASB Interpretation No. 48, "Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48).  FIN 48clarifies the accounting for uncertain income tax positions recognized in acompany's financial statements and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48becomes effective on January 1, 2007.  The Company expects that the adoption ofFIN 48 on January 1, 2007, will have little or no impact on its overallfinancial position or results of operation.

**Unaudited StatisticalInformation**

       Thesquare feet and percentage leased statistics presented in Notes B, C and F areunaudited.

Page 54 of 88

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

       Included in investment in officeand parking properties at December 31, 2006 are 60 office and parkingproperties located in nine states with an aggregate of 12.3 million square feet of leasable space.  This excludesoffice properties in unconsolidated joint ventures, which are outlined in NoteC - Investment in Unconsolidated Joint Ventures. The contract purchase price,excluding closing costs and other adjustments, of office properties acquiredduring the year ended December 31, 2006 is as follows:

** **

**Cost**

**Market Location**

**(in thousands)**

Chicago, Illinois

$226,250

Atlanta, Georgia

93,350

Memphis, Tennessee

39,500

Jacksonville, Florida

24,000

$383,100

       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*

On March 7, 2006, Parkway, through affiliated entities, purchased for$1.4 million the limited partner's interest in Moore Building Associates, LP("MBALP"), which owns the Toyota Center in downtown Memphis, Tennessee.  Thisraises Parkway's total effective ownership interest in MBALP to 75.025%. MBALPwas previously consolidated based on the guidance set forth in FIN 46R. Parkway will continue to include MBALP in its consolidated financial statementsas the acquisition is accounted for by the purchase method.

The discretionary fund (the Fund) with Ohio Public Employee RetirementSystem (Ohio PERS), of which Parkway owns 25%, purchased assets in Jacksonville, Florida; Memphis, Tennessee; Atlanta, Georgia and suburban Chicago, Illinoisduring 2006.  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 a controlling interest.  The assets are described below.
-  On May 15,     2006, the Fund purchased a two-building office portfolio in Jacksonville, Florida.      The two properties, BellSouth Building and Centurion Centre, total 180,000     square feet, and were acquired for a combined purchase price of $24     million.  The purchase was funded with a $14.4 million first mortgage     placement by the Fund and with equity contributions from the partners.
-  On December     1, 2006, the Fund purchased for $28.25 million Chatham Centre, a 206,000     square foot office building in Schaumburg, Illinois.  The purchase was     funded with a $17.1 million first mortgage placement by the Fund and with     equity contributions from the partners.
-  On December     20, 2006, the Fund purchased for $38.1 million Renaissance Center, a     190,000 square foot office building in Memphis, Tennessee.  The purchase     was funded with the assumption of an existing $17.2 million first mortgage     and equity contributions from the partners.
-  On December     27, 2006, the Fund purchased for $44.65 million Overlook II, a 262,000     square foot office property in Atlanta, Georgia.  The purchase was funded     with equity contributions from the partners.
-  On December     27, 2006, the Fund purchased for $48.7 million a two-building office     portfolio in Atlanta, Georgia.  The two properties, 100 Ashford Center and     Peachtree Ridge, total 313,000 square feet.  The purchase was funded with     the assumption of an existing $30.9 million first mortgage and equity     contributions from the partners.
 
Page 55 of 88

****       On July 11, 2006, the Companypurchased One Illinois Center, located at 111 E. Wacker Drive in Chicago, Illinoisfor $198 million plus $1.6 million in closing costs and transfer taxes and less$8.6 million received from the seller related to committed leasing costs andimprovements.  The purchase was funded by a 10-year, $148.5 millionnon-recourse first mortgage.  The loan bears interest at a fixed rate of 6.29%,with interest only payments for five years and principal payments based on a30-year amortization thereafter. Additional purchase funding was provided by a$33.7 million secured recourse mezzanine loan with a six-month term at ainterest rate of LIBOR plus 130 basis points, proceeds from the recent sale ofViad Corporate Center in Phoenix and amounts drawn under existing lines ofcredit. 

       The followingtable summarizes the fair value of the assets acquired and liabilities assumedwith the One Illinois Purchase (in thousands)

Real estate investments:

Land

$      23,285

Building

122,843

Tenant improvements

24,837

Total real estate investments acquired

170,965

Rents receivable and other assets

6,924

Lease costs

8,572

Intangible assets:

Above-market leases

4,758

Lease in place value

16,480

Total assets acquired

$    207,699

Liabilities assumed:

Accounts payable and other liabilities

$        2,988

Below-market leases

4,999

Total liabilities assumed

$        7,987

Net assets acquired

$    199,712

       Theweighted average amortization period is four years for tenant improvements, leasecosts and above and below market leases and ten years for lease in place value.

      The unaudited pro forma effect on the Company's results of operations for theOne Illinois Center purchase as if the purchase had occurred on January 1, 2005is as follows (in thousands, except per share data):

**Year Ended**

**December 31**

**2006**

** **

**2005**

Revenues

$ 225,420

$ 209,521 

Net income available to common  stockholders

$   10,199

$   (3,162)

Basic earnings per share

$       0.71

$     (0.22)

Diluted earnings per share

$       0.70

$     (0.22)

       Theallocation of purchase price for Chatham Centre, Renaissance Center, OverlookII, 100 Ashford Center and Peachtree Ridge is preliminary pending completion ofthe valuation of tangible and intangible assets.  The preliminary amount ofpurchase price allocated to intangible assets and (liabilities) and weightedaverage amortization period for each class of asset or liability is as followsfor 2006 office property acquisitions (in thousands):

** **

**Weighted**

**Amount**

**Average Life**

Lease in place value

$27,248 

9

Above market leases

6,869 

4

Below market leases

(9,412)

7

Page 56 of 88

*Summary of Dispositions*

On August 2,2006, the Company sold the Central Station building, a 133,000 square footoffice property, located in St. Petersburg, Florida for $15 million.  Parkwayrecognized a gain on the sale of $211,000 in 2006.  In accordance with GAAP,the gain on the sale and income from Central Station has been classified asdiscontinued operations for all current and prior periods.

On November 29,2006, the Company sold Richmond Centre, a 92,000 square foot office building in  Houston, Texas for $6.9 million.  The Company recorded a gain on the sale of$2 million in 2006.  In accordance with GAAP, the gain on the sale and incomefrom Richmond Centre has been classified as discontinued operations for allcurrent and prior periods.

On December 7,2006, the Company sold Ashford II, a 59,000 square foot office building in Houston, Texas for $5.25 million.  The Company recorded a gain on the sale of $2.9million in 2006.  In accordance with GAAP, the gain on the sale and income fromAshford II has been classified as discontinued operations for all current andprior periods.

On December 14,2006, the Company sold a three-building portfolio in Atlanta, Georgia for acombined sales price of $17.2 million.  The three properties, Hightower Centre,  Pavilion Center and Roswell North, total 181,000 square feet.  The Companyrecorded a gain on the sale of $1.6 million in 2006.

       OnDecember 20, 2006, the Company sold Charlotte Park, a 187,000 square footoffice park in Charlotte, North Carolina for a sales price of $18.8 million. The Company recorded a gain on the sale of $2.6 million in 2006.

*Contractual Obligations andMinimum Rental Receipts*

       Purchase obligations for tenantimprovement allowances for leases in place and commitments for buildingimprovements as of December 31, 2006 are as follows (in thousands):

2007

$6,201

2008

21

2009

295

2010

9

2011

344

Total

$6,870

       Minimumfuture operating lease payments for various equipment leased at the officeproperties is as follows for operating leases in place as of December 31, 2006(in thousands):

2007           

$     452

2008

240

Total

$     692

       The following is a schedule by yearof future approximate minimum rental receipts under noncancelable leasesfor office buildings owned as of December 31, 2006 (in thousands):

2007

$185,079

2008

164,222

2009

140,227

2010

113,231

2011

90,595

Thereafter

208,081

$901,435

Page 57 of 88

**Note C - 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 includedon Parkway's consolidated balance sheets as of December 31, 2006 and 2005. Information relating to these unconsolidated joint ventures is detailed below(in thousands).

** **

** **

** **

**Parkway's**

**Square**

**Percentage**

**Joint Venture Entity**

**Property Name**

**Location**

**Ownership %**

**Feet**

**Leased**

Wink-Parkway Partnership

Wink Building

New Orleans, LA

50.0%

32

100.0%

Parkway Joint Venture, LLC ("Jackson JV")

UBS/River Oaks

Jackson, MS

20.0%

167

91.0%

RubiconPark I, LLC ("Rubicon JV")

Lakewood/Falls Pointe

Atlanta, GA

20.0%

551

98.0%

Carmel  Crossing

Charlotte, NC

RubiconPark II, LLC ("Maitland JV")

Maitland 200

Orlando, FL

20.0%

203

93.2%

953

95.8%

       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.

       OnJune 23, 2006, the Company and its joint venture partner sold Viad Corporate Centerin Phoenix, Arizona for $105.5 million.  The buyer assumed the existingmortgage debt of $50 million in the sale.  The Company received net cashproceeds of $15.4 million and recognized a gain of $13.6 million from thesale.  In addition to the gain, the Company recognized management and incentivefees of $4.2 million as a result of the economic returns generated over thelife of the Viad Joint Venture.  The additional incentive and management feeswere recorded at the closing of the sale of Viad, at which time the fees wereearned.  Parkway also incurred $325,000 in costs associated with the loantransfer.

Page 58 of 88

       Balancesheet information for the unconsolidated joint ventures is summarized below asof December 31, 2006 and December 31, 2005 (in thousands):

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

**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 
      
**December 31, 2005**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**JV**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint**

** **

** **

** **

** **

** **

** **

**     Ventures (at 100%):**

** **

** **

** **

** **

** **

** **

Real Estate, Net

 $

58,247 

 $

1,237 

 $

16,728 

 $

68,792 

 $

29,408 

 $

174,412 

Other Assets

7,240 

169 

1,247 

6,933 

519 

16,108 

Total Assets

 $

65,487 

 $

1,406 

 $

17,975 

 $

75,725 

 $

29,927 

 $

190,520 

Mortgage Debt

 $

50,000 

 $

366 

 $

12,600 

 $

52,000 

 $

19,275 

 $

134,241 

Other Liabilities

1,783 

4 

568 

1,921 

720 

4,996 

Partners'/Shareholders'  Equity

13,704 

1,036 

4,807 

21,804 

9,932 

51,283 

Total Liabilities and

Partners'/Shareholders'  Equity

 $

65,487 

 $

1,406 

 $

17,975 

 $

75,725 

 $

29,927 

 $

190,520 

    

**Parkway's Share of**

**    Unconsolidated Joint  Ventures:**

Real Estate, Net

 $

17,474 

 $

618 

 $

3,346 

 $

13,758 

 $

5,882 

 $

41,078 

Mortgage Debt

 $

15,000 

 $

183 

 $

2,520 

 $

7,200 

 $

- 

 $

24,903 

Net Investment in Joint  Ventures

 $

2,236 

 $

518 

 $

(74)

 $

5,157 

 $

5,105 

 $

12,942 

Page 59 of 88

       Incomestatement information for the unconsolidated joint ventures is summarized belowfor the years ended December 31, 2006 and 2005 (in thousands):

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

**Year Ended December 31, 2006**

 
**233 North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

 
**Michigan**

**JV**

**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 

 
**Year Ended December 31, 2005**

**233 North**

**Viad**

**Wink**

**Jackson**

**Rubicon**

**Maitland**

**Combined**

**Michigan**

**JV**

**Partnership**

**JV**

**JV**

**JV**

**Total**

**Unconsolidated  Joint**

** **

** **

** **

** **

** **

** **

** **

**     Ventures (at 100%):**

Revenues

 $

1,134 

 $

11,739 

 $

303 

 $

2,781 

 $

9,821 

 $

2,361 

 $

28,139 

Operating  Expenses

(619)

(4,934)

(86)

(1,304)

(3,749)

(990)

(11,682)

Net  Operating Income

515 

6,805 

217 

1,477 

6,072 

1,371 

16,457 

Interest  Expense

(252)

(2,705)

(35)

(699)

(2,566)

(458)

(6,715)

Loan  Cost Amortization

(4)

(318)

(3)

(47)

(62)

(7)

(441)

Depreciation  and Amortization

(205)

(1,772)

(23)

(447)

(1,508)

(303)

(4,258)

Preferred  Distributions

(69)

- 

- 

- 

- 

- 

(69)

Net  Income (Loss)

 $

(15)

 $

2,010 

 $

156 

 $

284 

 $

1,936 

 $

603 

 $

4,974 
                        
**Parkway's  Share of**

** **

** **

** **

** **

** **

** **

** **

** Unconsolidated  Joint Ventures:**

Net  Income (Loss)

 $

(5)

 $

602 

 $

78 

 $

57 

 $

550 

 $

214 

 $

1,496 

Depreciation  and Amortization

 $

62 

 $

531 

 $

12 

 $

89 

 $

302 

 $

61 

 $

1,057 

Property  Management Fees

 $

76 

 $

385 

 $

- 

 $

208 

 $

359 

 $

64 

 $

1,092 

Interest  Expense

 $

75 

 $

812 

 $

18 

 $

138 

 $

357 

 $

- 

 $

1,400 

Loan Cost Amortization

 $

1 

 $

96 

 $

1 

 $

9 

 $

8 

 $

- 

 $

115 

Preferred  Distributions

 $

21 

 $

- 

 $

- 

 $

- 

 $

- 

 $

- 

 $

21 
                     
**Other  Supplemental Information:**

Distributions from Unconsolidated

     Joint Ventures

 $

64 

 $

2,754 

 $

40 

 $

150 

 $

1,259 

 $

165 

 $

4,432 

Page 60 of 88

       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, 2006 and 2005 (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**

**12/31/06**

**12/31/05**

Mortgage Notes Payable:

     Viad JV

Interest Only

LIBOR + 2.150%

05/12/07

30.00%

$          - 

$          -

$15,000   

     Wink Partnership

Amortizing

8.625%

07/01/09

50.00%

5 

137

183   

     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 

$  9,857

$24,903   
                  
**Weighted Average Interest Rate at End of Year**

       5.167%

        5.838%

****       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 31,2006 are as follows (in thousands) *(unaudited)*:

**Wink**

**Maitland**

**Rubicon**

**Jackson**

**Schedule  of Mortgage Maturities by Year:**

**Partnership**

**JV**

**JV**

**JV**

**Total**

2007

$   50

$         -

$       -

$        -

$     50

2008

54

-

-

-

54

2009

33

-

100

13

146

2010

-

-

114

33

147

2011

-

-

119

35

154

Thereafter

-

-

6,867

2,439

9,306

$ 137

$         -

$7,200

$2,520

$9,857

**Note D - Land Available for Sale**

       At December 31, 2006, Parkway'sinvestment in land available for sale consisted of 12 acres of land in New  Orleans, Louisiana with a book value of $1.5 million or .1% of total assets.

**Note E - Notes Payable**

**Notes Payable to Banks**

       At December 31, 2006, the Company hada total of $153.2 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

6.7%

12/07/07

 $         9,000 

$15 Million Unsecured Line of  Credit

PNC Bank

6.6%

01/29/07

            6,144 

$140 Million Unsecured Line of  Credit

Wachovia Bank

6.6%

04/27/10

          77,168 

$60 Million Unsecured Term Loan  (1)

Wachovia Bank

5.6%

04/27/11

          60,000 

6.3%

 $     152,312 

(1)  The interest rate on the $60Million Term Loan represents the weighted average interest rate of two interestrate swaps that expire 12/31/08.

Page 61 of 88

       OnApril 27, 2006 the Company closed a new $200 million unsecured credit facility(the "$200 million line") led by Wachovia Bank and syndicated to nine otherbanks. The $200 million line replaces the previous $190 million unsecuredrevolving credit facility, which was to mature February 2007.  The new facilityis comprised of a $60 million term loan maturing in April 2011 and a $140million revolving loan maturing in April 2010. The interest rate on the $200million line is based on LIBOR plus 80 to 130 basis points, depending uponoverall Company leverage with the current rate set at 130 basis points.  TheCompany paid a facility fee of $200,000 (10 basis points) and origination feesof $688,000 (34.4 basis points) upon closing of the loan agreement. Additionally, the Company pays an annual administration fee of $35,000 and feeson the unused portion of the revolver ranging between 12.5 and 20 basis pointsbased upon overall Company leverage with the current rate set at 12.5 basispoints.

     The Company's $200 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, 2006 the Company wasin compliance with these financial covenants.

     The $15 million line matures January 29, 2008, isunsecured and is expected to fund the daily cash requirements of the Company'streasury management system.  The $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 interest only, has a current interest rate equal to the 30-dayLIBOR rate plus 132.5 basis points and matures December 7, 2007.  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 2005 and 2004.  The Company designated the swaps as cash flow hedgesof the variable interest rates on the Company's borrowings under the $200million line.  These swaps are considered to be fully effective and changes inthe fair value of the swaps are recognized in accumulated other comprehensiveincome.  The Company's interest rate hedge contracts as of December31, 2006 and 2005 are summarized as follows (in thousands):

** **

** **

** **

** **

** **

**Fair**

** **

** **

** **

** **

** **

**Market  Value**

**Type of**

**Notional**

**Maturity**

** **

**Fixed**

**December  31**

**Hedge**

**Amount**

**Date**

**Reference Rate**

**Rate**

**2006**

**2005**

Swap

$40,000

06/30/06

1- Month  LIBOR

3.530%

$                       -

$                      245 

Swap

$40,000

12/31/08

1- Month  LIBOR

4.360%

525

426 

Swap

$20,000

12/31/08

1- Month  LIBOR

4.245%

307

234 

 $

 832

 $

905 

Page 62 of 88

**Mortgage notes payable**

       A summary of fixed rate mortgagenotes payable at December 31, 2006 and 2005 which are non-recourse to theCompany, is as follows (in thousands):

** **

** **

** **

** **

**Carrying**

** **

** **

** **

** **

** **

**Amount**

**Note Balance**

** **

**Interest**

**Monthly**

**Maturity**

**of**

**December 31**

**Office Property**

**Rate**

**Payment**

**Date**

**Collateral**

**2006**

**2005**

Citrus Center

6.000%

$    164

08/01/07

$  33,238

$  18,164

$  19,011

Capital City   Plaza

3.670%

298

09/01/08

60,040

44,167

46,065

John Hancock Facility (3 properties)

4.830%

138

03/01/09

28,380

23,006

23,536

John Hancock Facility (3 properties)

5.270%

112

05/01/10

22,422

18,581

18,800

Moore Building Associates LP

7.895%

124

06/01/10

19,943

12,517

12,988

Capitol Center

8.180%

165

09/01/10

34,811

18,910

19,320

One Jackson Place

7.850%

152

10/10/10

16,293

11,609

12,487

Squaw Peak 

4.920%

261

12/01/10

42,134

36,693

37,981

Forum I

5.250%

91

06/01/11

17,959

12,192

12,630

Wells Fargo

4.390%

53

07/01/11

11,903

9,567

9,675

233 N. Michigan

4.940%

763

07/11/11

162,890

104,374

108,272

400 North  Belt

8.250%

65

08/01/11

10,221

2,990

3,506

Woodbranch

8.250%

32

08/01/11

4,201

1,440

1,688

Bank of America   Plaza

7.100%

146

05/10/12

33,456

18,840

19,237

Renaissance Center  (3)

5.469%

97

06/01/12

34,054

17,015

-

One Park 10  Plaza

7.100%

64

06/01/12

6,213

9,092

9,201

Maitland 100

4.920%

36

10/07/12

13,637

8,820

8,820

555    Winderley Place

4.920%

34

10/07/12

12,476

8,340

8,340

First Tennessee   Plaza

7.170%

136

12/15/12

27,958

7,954

8,978

Teachers  Insurance and

    Annuity  Association (5 properties)

6.210%

565

01/01/16

107,436

84,644

86,000

100 Ashford  Center/Peachtree Ridge (5)

5.606%

151

01/08/16

44,439

31,073

-

BellSouth  Building/Centurion Centre (1)

5.900%

71

06/10/16

21,925

14,400

-

111 East  Wacker, LLC (2)

6.290%

804

07/11/16

167,255

148,500

-

Chatham  Centre (4)

5.560%

79

01/10/17

25,994

17,100

-

Morgan Keegan   Tower

7.620%

163

10/01/19

29,203

16,024

16,735

$4,764

$988,481

$696,012

$483,270

(1)   OnMay 19, 2006, the Fund placed a $14.4 million 10-year non-recourse mortgage ata fixed interest rate of 5.90% in connection with the purchase of the BellSouth Building and Centurion Centre.  Payments during the first five years of themortgage term will be on an interest-only basis.  Parkway's proportionate shareof this mortgage is 25%.

(2)   OnJuly 11, 2006, Parkway purchased One Illinois Center, located at 111 East Wacker Drive in Chicago, Illinois.  The purchase was funded by a 10-year,$148.5 million non-recourse first mortgage.  The loan bears interest at a fixedrate of 6.29%, with interest only payments for five years and principalpayments based on a 30-year amortization thereafter.

(3)   TheRenaissance Centre mortgage in the amount of $17.2 million was assumed by theFund with the purchase of the building on December 20, 2006.  The mortgage,which has a stated rate of 5.23%, was recorded at $17 million to reflect thefair value of the financial instrument based on the rate of 5.469% on the dateof purchase.  Parkway's proportionate share of this mortgage is 25%.

(4)   Inconnection with the purchase of Chatham Centre, on December 22, 2006, the Fundplaced a $17.1 million 10-year non-recourse mortgage at a fixed interest rateof 5.56%.  Payments during the term of the mortgage term will be on aninterest-only basis.  Parkway's proportionate share of this mortgage is 25%.

Page 63 of 88

(5)     The100 Ashford Center and Peachtree Ridge mortgage in the amount of $30.9 millionwas assumed by the Fund with the purchase of the buildings on December 27,2006.  The mortgage, which has a stated rate of 5.68%, was recorded at $31.1million to reflect the fair value of the financial instrument based on the rateof 5.606% on the date of purchase.  Parkway's proportionate share of thismortgage is 25%.

       The aggregateannual maturities of mortgage notes payable at December 31, 2006 are as follows(in thousands):

2007

$  34,159

2008

57,120

2009

37,471

2010

98,840

2011

113,129

Subsequently

355,293

$696,012

       In connection with the purchase ofOverlook II, on February 9, 2007, the Fund placed a $31.5 million 10-yearnon-recourse mortgage at a rate of 5.61%.  Payments during the term of themortgage will be on an interest-only basis.  Parkway's proportionate share of thismortgage is 25%.

       On February 26, 2007, the Companypaid off the $18.2 million Citrus Center mortgage note with advances under banklines of credit.

**Note F - Discontinued Operations**

       Allcurrent and prior period income from the following office property dispositionsare included in discontinued operations for the years ended December 31, 2006,2005 and 2004 (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.  

       The amount of revenue and expense forthese five office properties reported in discontinued operations for the yearsended December 31, 2006, 2005 and 2004 is as follows (in thousands):

** **

** **

**Year Ended  December 31**

** **

**2006**

** **

**2005**

** **

**2004**

Revenues

Income from office and parking properties

 $

3,043

 $

6,084

 $

7,678

** **

3,043

6,084

7,678

Expenses

Office and parking properties:

        Operating expense

1,905

2,668

3,037

        Depreciation and amortization

582

1,050

1,177

** **

2,487

3,718

4,214

Income from discontinued operations

556

2,366

3,464

Gain on sale of real estate from discontinued operations

5,083

4,181

-

Total discontinued operations

 $

5,639

 $

6,547

 $

3,464

Page 64 of 88

**Note G - 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,substantially all interests in the Operating Partnership are owned by theCompany and a wholly-owned subsidiary.

       At December 31, 2006, the Company hadnet operating loss ("NOL") carryforwards for federal income taxpurposes of $7 million which expire at various dates beginning in 2007 through2018.  The Company expects to utilize the remaining NOL by December 2007.  Theutilization of these NOLs can cause the Company to incur a small alternativeminimum tax liability.

       The Company's income differs for incometax and financial reporting purposes principally because real estate ownedhas a different basis for tax and financial reporting purposes, producingdifferent gains upon disposition and different amounts of annualdepreciation.  The following reconciles GAAP net income to taxable income forthe years ending December 31, 2006, 2005 and 2004 (in thousands):

**2006**

**2005**

**2004**

**Estimate**

**Actual**

**Actual**

GAAP net income from REIT  operations (1) 

$25,682 

$20,807 

$29,515 

GAAP to tax adjustments:

     Depreciation and  amortization

15,209 

16,086 

8,623 

     Gains and losses from  capital transactions

4,298 

(2,684)

(1,504)

     Share based compensation  expense

863 

533 

783 

     Stock options exercised

(1,615)

(1,166)

(3,604)

     Deferred compensation  distributions

(466)

(351)

- 

     Other differences

38 

(664)

(745)

Taxable income before  adjustments

44,009 

32,561 

33,068 

Less:  NOL carryforward

(303)

- 

- 

Adjusted taxable income subject  to 90% dividend requirement

$43,706 

$32,561 

$33,068 

(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, 2006, 2005 and 2004 (in thousands):

**2006**

**2005**

**2004**

**Estimate**

**Actual**

**Actual**

Cash distributions paid

$44,009 

$43,502 

$39,568 

Less:  Dividends on deferred  compensation plan shares

(303)

(330)

(337)

Less:  Return of capital

- 

(10,611)

(6,163)

Dividends paid deduction

$43,706 

$32,561 

$33,068 

Page 65 of 88

       Thefollowing characterizes distributions paid per common share for the yearsending December 31, 2006, 2005 and 2004:

**2006**

**2005**

**2004**

**Amount**

**Percentage**

**Amount**

**Percentage**

**Amount**

**Percentage**

Ordinary income

$0.99

38.1%

$1.98

76.2%

$2.00

76.9%

Post May 5, 2003 capital gain

1.17

45.0%

0.13

5.0%

0.04

1.5%

Unrecaptured Section 1250 gain

0.44

16.9%

0.03

1.1%

0.14

5.4%

Return of capital

- 

- 

0.46

17.7%

0.42

16.2%

$2.60

100.0%

$2.60

100.0%

$2.60

100.0%

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

       On January 1, 2006, Parkway adoptedFASB Statement No. 123R, "Share-Based Payment"**("FAS 123R")**usingthe modified-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.  Currently, 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.

       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 35,370 and 35,256 shares in 2006 and 2005, respectively),provided that the number of shares available for grant under this plan and the2001 Directors' Plan shall not exceed 11.5% of the shares outstanding (less therestricted shares issued and outstanding) plus shares issuable on theconversion of outstanding convertible debt and equity securities or theexercise of warrants or other rights to purchase common shares.  The 2003 Planhas a ten-year term.

       On June 27, 2006, the Board ofDirectors granted 67,500 restricted shares to officers of the Company.  Half ofthe shares will vest four years from July 1, 2006.  The remaining half willvest if Parkway achieves the strategic goals of the GEAR UP Plan, which willend December 31, 2008.  The Company will record compensation expense for theshares that vest based solely on service conditions beginning July 1, 2006 overa four year period.  Compensation expense will not be recorded on the sharesthat vest based on achievement of the GEAR UP Plan until the Company determinesthat it is probable that the goal will be achieved.  Therefore, no expense hasbeen recorded in 2006 for the shares that vest based on performanceconditions.  

       On December 31, 2006, 188,500 sharesof restricted stock have been granted to officers of the Company in connection withthe VALUE SQUARE and GEAR UP Plans.  The shares are valued at $7.3 million ($38.60per share) with 121,000 shares vesting seven years from the grant date, 33,750shares vesting on July 1, 2010 and the remaining 33,750 shares vesting uponachievement of the goals of the GEAR UP Plan.  The value, including estimatedforfeitures, of restricted shares that vest based on service conditions will beamortized to compensation expense ratably over the vesting period for eachgrant of stock.  The value of restricted shares that vest based on performanceconditions, in this case achievement of the GEAR UP Plan goals, will beamortized to expense over the applicable vesting period once the Companydetermines that it is probable that the goal will be achieved.  As of December31, 2006, 18,806 deferred incentive share units were granted to employees ofthe Company.  The deferred incentive share units are valued at $871,000 ($46.33per share) and the units vest at the end of four years.  Compensation expenserelated to the restricted stock and deferred incentive units of $863,000,$533,000 and $783,000 was recognized in 2006, 2005 and 2004, respectively.  Totalcompensation expense related to nonvested awards subject to service conditions notyet recognized was $3.8 million as of December 31, 2006.  The weighted averageperiod over which this expense is expected to be recognized is approximately3.3 years.  Total potential compensation associated with shares that vest basedon performance conditions is $1.5 million.

       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 66 of 88

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

** **

**Weighted**

**Deferred**

**Weighted**

**Restricted**

**Average**

**Incentive**

**Average**

**Shares**

**Price**

**Share Units**

**Price**

**Outstanding at December 31, 2003**

142,000 

$35.86

5,246 

$44.84

Granted

1,500 

46.72

5,875 

46.72

Forfeited

- 

-

(1,634)

45.02

**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

       Pro forma information regarding netincome and net income per share is required by FAS 123R, and has beendetermined as if the Company had accounted for its employee stock options underthe fair value method of that Statement.  The fair value for these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted-average assumptions for 2005 and 2004: risk-freeinterest of 4.3% and 4.5%, respectively; dividend yield of 5.55% and 5.71%,respectively; volatility factor of the expected market price of the Company'scommon stock of  .196 and .194, respectively; and a weighted-average expectedlife of the options of five years for the 1994 Stock Option Plan in 2005 and2004; five years for 2005 and 2004 for the 1991 Directors' Stock Option Plan;and five years for 2005 and 2004, for the 2001 Directors' Stock Option Plan.  Nooptions were granted during 2004, 2005 and 2006.

       The following table illustrates theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of FAS 123R**to stock-based employeecompensation for the years ended December 31, 2005 and 2004 (in thousands,except per share amounts):

**Year  Ended**

**December  31**

**2005**

**2004**

Net income available to common  stockholders, as reported

$   13,661 

$  19,529 

Add:  Stock based compensation  expense included in reported net income

533 

783 

Deduct:  Stock based  compensation expense assuming fair value method

      for  all awards

(641)

(1,032)

Pro forma net income available  to common stockholders

$   13,553 

$  19,280 

Earnings per common share:

      Basic  - as reported

$       0.97 

$       1.73 

      Basic  - pro forma

$       0.96 

$       1.71 

      Diluted  - as reported

$       0.96 

$       1.70 

      Diluted  - pro forma

$       0.95 

$       1.68 

Page 67 of 88

       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, 2003**

620,774 

$  29.52

43,500 

$  29.29

49,300 

$  37.05

Exercised                                  

(206,155)

27.32

(6,000)

32.56

(4,000)

34.05

Forfeited                                         

(21,262)

33.77

- 

-

- 

-

**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

**Vested and Exercisable at December 31, 2006**

191,471 

$  30.99

33,000 

$  30.90

39,300 

$  37.28

       The total intrinsic value of stockoptions exercised for the year ended December 31, 2006, 2005, and 2004 was $1.7million, $1.5 million and $3.9 million, respectively.

       Following is a summary of the statusof options outstanding at December 31, 2006:

**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**

$25.01 - $30.00

28,120

1.4  years

$27.41

$    500

$30.01 - $35.00

153,645

2.9  years

31.34

2,127

$35.01 - $40.00

9,706

5.9  years

35.81

91

** **

191,471

2.8  years

$30.99

$ 2,718

**1991 Directors Stock Option Plan**

$25.01 - $30.00

10,500

2.8  years

$28.78

$    172

$30.01 - $35.00

22,500

2.2  years

31.89

299

33,000

2.4  years

$30.90

$    471

**2001 Directors Stock  Option Plan**

$30.01 - $35.00

9,000

4.4  years

$30.70

$    130

$35.01 - $40.00

23,800

6.0  years

37.90

173

$40.01 - $45.00

6,500

6.8  years

44.10

7

39,300

5.8  years

$37.28

$    310

**Note I - 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.

** **

Page 68 of 88

**Standby Letters of Credit**

      In connection with the first-mortgageplaced on One Illinois Center, located at 111 East Wacker Drive in Chicago, Illinois,the Company delivered $11.3 million in letters of credit to satisfy the variousescrow requirements made by the lender.  The letters of credit expire June 30,2007.

**Note J - Related Party Transactions**

      Matthew W. Kaplan, a director of the Company,is a Portfolio Manager for Five Arrows Realty Securities III LLC ("FiveArrows"), which owned 100% of the 803,499 shares of Series B ConvertiblePreferred stock at December 31, 2005.  During 2006 Five Arrows elected toconvert 803,499 shares of Series B Convertible Preferred stock to commonstock.  The balance of Series B Convertible Preferred stock was zero and $28.1million at December 31, 2006 and 2005, respectively.

**Note K - Other Matters**

      Through the Company's DividendReinvestment and Stock Purchase Plan ("DRIP Plan"), 8,329 common shares weresold during 2006.  Net proceeds received on the issuance of shares were $407,000,which equates to an average net price per share of $48.87 at a discount of 1%. The proceeds were used to reduce amounts outstanding under the Company's unsecuredlines of credit.

      In 2001, the Company issued 2,142,857shares of 8.34% Series B Cumulative Convertible Preferred stock to Five Arrows. Effective after December 31, 2002, the holder has the right to convert eachshare of Series B Convertible Preferred into a share of Parkway common stock.  Inaddition to the issuance of Series B preferred stock, Parkway issued a warrantto Five Arrows to purchase 75,000 shares of the Company's common stock at aprice of $35 for a period of seven years.  During 2006, the 75,000 warrants topurchase common stock were exercised at $35 per share or a total or $2.6million and 803,499 shares of Series B preferred stock were converted into anequal number of shares of common stock.  As of December 31, 2006, there were noshares of Series B preferred stock authorized and outstanding.  Dividends of $1.8million and $2.3 million were declared on the stock in 2006 and 2005,respectively. 

      In connection with the Capital City Plazapurchase in 2004, the limited liability company that owns the building issued$15.5 million in preferred membership interests to the seller.  The preferredmembership interests pay the seller a 7% coupon rate and were issued toaccommodate their tax planning needs.  The seller has the right to redeem $5.5million of the membership interests within six months of closing and$10 million of the membership interests within nine months of closing. Parkway has the right to retire the preferred interest 40 months after closing. During the third quarter in 2004, the seller redeemed $4.8 million of thepreferred membership interests.  As of December 31, 2006 and 2005, the balanceof the subsidiary redeemable preferred interests was $10.7 million.

      On May 4, 2006, the stockholders of theCompany approved Parkway's 2006 Employee Stock Purchase Plan.  The plan giveseligible directors and employees an opportunity to purchase Parkway commonstock on a systematic basis at a 10% discount.  The plan is accounted for as acompensatory plan, and the Company records the discount as compensationexpense.  During 2006, 262 shares were issued under the plan.

      On December 18, 2006, the Company sold600,000 shares of common stock to Banc of America Securities LLC at a grossoffering price of $50.25 per share and a net price of $49.37 per share.  TheCompany used the net proceeds of approximately $29.6 million to repayindebtedness outstanding under a $19.3 million mezzanine loan incurred inconnection with the purchases of One Illinois Center and to purchase additionalinvestments in office properties.

      On February 9, 2006, the Board ofDirectors authorized the repurchase of up to 1 million shares of Parkway'soutstanding common stock through August 2006.  During 2006, the Companypurchased 71,400 shares for $2.8 million, which equates to an average price of$39.41 per share under the authorization.

**Supplemental Profit and Loss Information**

      Included in operating expenses are taxes,principally property taxes, of $29 million, $24.6 million and $15.7 million forthe years ended December 31, 2006, 2005 and 2004, respectively.

** **

Page 69 of 88

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

** **

** **

**Year Ended  December 31**

** **

**2006**

**2005**

**2004**

(In thousands)

**Supplemental cash flow  information:**

         Interest  paid

$42,807

$  33,374 

$24,474 

         Income  taxes paid (refunded)

13

(86)

(72)

**Supplemental schedule of  non-cash investing    **

**         and  financing activity:**

         Mortgages  assumed in purchases

47,795

124,530 

88,677 

         Mortgage  transferred to joint venture

-

(19,275)

- 

         Restricted  shares and deferred incentive

               share  units issued (forfeited)

1,585

(488)

271 

         Shares  issued in lieu of Directors' fees

170

193 

138 

         Issuance  of subsidiary redeemable

               preferred  membership interests

-

- 

15,491 

** Rents Receivable and OtherAssets**

** **

** **

**December 31**

** **

**2006**

**2005**

** **

(In thousands)

Rents receivable  

$    2,324 

$  2,473 

Allowance for doubtful accounts

(356)

(450)

Straight line rent receivable

18,441 

14,106 

Other receivables

5,470 

5,619 

Lease costs (net of accumulated  amortization of

     $16,583 and $12,246,  respectively)

33,354 

22,090 

Loan costs (net of accumulated  amortization of

     $2,861 and $2,695,  respectively)

4,833 

3,667 

Escrow and other deposits

38,617 

16,537 

Prepaid items

1,897 

3,104 

Other assets

2,565 

2,334 

$107,145 

$69,480 

**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**

** **

**2006**

**2005**

** **

(In thousands)

Lease in place value

$ 76,507 

$ 52,732 

    Accumulated  amortization

(11,081)

(6,105)

Above market lease value

23,629 

17,283 

    Accumulated  amortization

(7,255)

(3,749)

$ 81,800 

$ 60,161 

** **

Page 70 of 88

**Accounts Payable and OtherLiabilities**

** **

** **

**December 31**

** **

**2006**

**2005**

** **

                         (In thousands)

Office property payables:

     Accrued  expenses and accounts payable

$ 17,531 

$ 16,412 

     Accrued  property taxes

24,756 

17,614 

     Security  deposits

3,951 

3,371 

     Below  market lease value

18,517 

9,563 

     Accumulated  amortization - below market

          lease  value

(4,547)

(2,558)

Corporate payables

1,628 

1,378 

Deferred compensation plan  liability

5,401 

5,270 

Dividends payable

1,200 

1,787 

Accrued payroll

1,337 

1,639 

Interest payable

2,885 

2,152 

$ 72,659 

$ 56,628 

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

**Cash and cash equivalents**

       The carrying amounts for cashand cash equivalents approximated fair value at December 31, 2006 and 2005.

**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, 2006 was $707.2 million as compared to itscarrying amount of $696 million.  The aggregate fair value of the mortgagenotes payable without recourse at December 31, 2005 was $494 million ascompared to its carrying amount of $483.3 million.

**Note M - 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 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.

Page 71 of 88

       The management of the Companyevaluates the performance of the reportable office segment based on funds fromoperations applicable to common shareholders ("FFO").  Management believes thatfunds from operations available to common shareholders ("FFO") is anappropriate measure of performance for equity REITs and computes this measurein accordance with the National Association of Real Estate Investment Trusts'("NAREIT") definition of FFO.  Funds from operations is defined byNAREIT as net income (computed in accordance with generally accepted accountingprinciples "GAAP"), excluding gains or losses from sales of propertyand extraordinary items under GAAP, plus depreciation and amortization, andafter adjustments to derive the Company's pro rata share of FFO of consolidatedand unconsolidated joint ventures.  Further, the Company does not adjust FFO toeliminate the effects of non-recurring charges.  The Company believes that FFOis a meaningful supplemental measure of its operating performance becausehistorical cost accounting for real estate assets in accordance with GAAPimplicitly assumes that the value of real estate assets diminishes predictablyover time, as reflected through depreciation and amortization expenses. However, since real estate values have historically risen or fallen with marketand other conditions, many industry investors and analysts have consideredpresentation of operating results for real estate companies that use historicalcost accounting to be insufficient.  Thus, NAREIT created FFO as a supplementalmeasure of operating performance for real estate investment trusts thatexcludes historical cost depreciation and amortization, among other items, fromnet income, as defined by GAAP.  The Company believes that the use of FFO,combined with the required GAAP presentations, has been beneficial in improvingthe understanding of operating results of real estate investment trusts amongthe investing public and making comparisons of operating results among such companiesmore meaningful.  FFO as reported by Parkway may not be comparable to FFOreported 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 72 of 88

       Thefollowing is a reconciliation of FFO and net income available to commonstockholders for office properties and total consolidated entities for theyears ending December 31, 2006, 2005 and 2004.  Amounts presented as"Unallocated and Other" represent primarily income and expense associated withproviding management services,  acquisition fees, corporate general andadministration expense, interest expense on unsecured lines of credit andpreferred dividends.

** **

** 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  and joint venture interest

                  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 available to  common stockholders

 $                  36,646   

 $                (17,537)

 $                  19,109   

 

 

 

Total assets

 $             1,506,753   

 $                   5,593   

 $             1,512,346 

 

 

 

Office and parking  properties

 $             1,306,281   

 $                           - 

 $             1,306,281   

 

 

 

Investment in unconsolidated  joint ventures

 $                  11,179   

 $                          -  

 $                  11,179 

 

 

 

Capital expenditures

 $                  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 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".

Page 73 of 88

** 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  and joint venture interest

                    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 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

 $                     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 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".

Page 74 of 88

** As of or for the year ended December 31, 2004**

** Office**

** Unallocated **

** **

** Properties**

** and Other**

** Consolidated**

 (in thousands)  

Property operating revenues  (a)

 $                152,828 

 $                            -   

 $                152,828 

Property operating expenses  (b)

                 (70,450)

                           -   

                 (70,450)

Property net operating income  from continuing operations

                  82,378 

                           -   

                  82,378 

Management company income

                           -   

                    3,832   

                    3,832   

Other income

                           -   

                         37   

                         37   

Interest expense (c) 

                 (21,580)

                   (4,237)

                 (25,817)

Management company expenses

- 

                      (358)

                      (358)

General and administrative  expenses

- 

                   (4,464)

                   (4,464)

Other expense

- 

                        (22)

                        (22)

Equity in earnings of  unconsolidated joint ventures

                    1,697   

- 

                    1,697   

Adjustment for depreciation  and amortization - unconsolidated joint ventures

                    2,345   

- 

                    2,345   

Adjustment for depreciation  and amortization - discontinued operations

                    1,177   

- 

                    1,177   

Adjustment for minority  interest - real estate partnerships

                      (527)

- 

                      (527)

Income from discontinued  operations

                    3,464   

- 

                    3,464   

Gain on note receivable

                         -     

                       774   

                       774   

Dividends on preferred stock

- 

                   (4,800)

                   (4,800)

Dividends on convertible  preferred stock

                           -   

                   (5,186)

                   (5,186)

Funds from operations  available to common stockholders

                  68,954   

                 (14,424)

                  54,530   

 

 

 

Depreciation and amortization

                 (35,666)

- 

                 (35,666)

Depreciation and  amortization - unconsolidated joint ventures

                   (2,345)

- 

                   (2,345)

Depreciation and  amortization - discontinued operations

                   (1,177)

- 

                   (1,177)

Depreciation and  amortization - minority interest - real estate partnerships

                       654   

- 

                       654   

Gain on sale of real estate  and joint venture interest

                    3,535   

- 

                    3,535   

Minority Interest - unit holders

                           -   

                         (2)

                         (2)

Net income available to  common stockholders

 $                  33,955   

 $                 (14,426)

 $                  19,529   

 

 

 

Total assets

 $                920,780 

 $                  10,408 

 $                931,188 

 

 

 

Office and parking  properties

 $                820,807 

 $                            - 

 $                820,807 

 

 

 

Investment in unconsolidated  joint ventures

 $                  25,294 

 $                            - 

 $                  25,294 

 

 

 

Capital expenditures

 $                  35,030 

 $                            - 

 $                  35,030 

(a)  Included in property  operating revenues are rental revenues, customer reimbursements, parking  income and other income.

(b)  Included in property  operating expenses are real estate taxes, insurance, contract services,  repairs and maintenance and property operating expenses.

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

Page 75 of 88

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

       Summarized quarterly financial datafor the years ended December 31, 2006 and 2005 are as follows (in thousands,except per share data):

**                                               2006 (1)**

**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 
      
**                                                   2005 (1)**

**First**

** **

**Second**

** **

**Third**

** **

**Fourth**

Revenues (other than gains)

 $      46,440 

 $      48,265 

 $    47,349 

 $    49,429 

Expenses

     (33,429)

     (37,226)

     (35,181)

     (38,544)

Operating Income

      13,011 

      11,039 

      12,168 

      10,885 

Interest and other income

           135 

           106 

              5 

              9 

Interest expense

       (7,983)

       (8,784)

       (8,805)

       (9,872)

Equity in earnings of  unconsolidated joint ventures

           515 

           250 

           330 

           401 

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

             - 

           991 

            (26)

             74 

Minority interest - unit  holders

             - 

             - 

             (1)

             (1)

Minority interest - real  estate partnerships

          (305)

            (16)

             20 

           114 

Income from continuing  operations

        5,373 

        3,586 

        3,691 

        1,610 

Income from discontinued  operations

          903 

           492 

           628 

           343 

Gain on sale of real estate  from discontinued operations

             - 

             - 

        4,181 

             - 

Net income  

        6,276 

        4,078 

        8,500 

        1,953 

Dividends on preferred stock

       (1,200)

       (1,200)

       (1,200)

       (1,200)

Dividends on convertible  preferred stock

          (587)

          (586)

          (586)

          (587)

Net income available to  common stockholders

 $        4,489 

 $        2,292 

 $     6,714 

 $        166 

Net income per common share:

Basic

 $          0.32 

 $          0.16 

 $       0.48 

 $       0.01 

Diluted

 $          0.32 

 $          0.16 

 $       0.47 

 $       0.01 

Dividends per common share

 $          0.65 

 $          0.65 

 $       0.65 

 $       0.65 

Weighted average shares  outstanding:

Basic

      13,907 

      14,080 

      14,116 

      14,154 

Diluted

14,095 

14,250 

14,295 

14,281 

(1)  Certain reclassificationshave been made to the quarterly data to conform with the annual presentationwith no effect to net income or net income available to common stockholders.

Page 76 of 88

**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, 2006

450

-

494 

(588)

- 

356

December 31, 2005

353

210

34 

(137)

(10)

450

December 31, 2004

376

131

169 

(312)

(11)

353

Page 77 of 88

** **

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

**DECEMBER 31, 2006**

(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

$    36,693

$      5,800

$       35,169

$      4,724

$       45,693

        Mesa Corporate  Center

-

3,353

15,197

862

19,412

    Florida

        Hillsboro  Center V

10,827

1,325

12,249

2,302

15,876

        Hillsboro Center I-IV

7,382

1,129

7,734

1,964

10,827

        Bellsouth Building

14,400

3,477

7,821

1,381

12,679

        Centurion  Centre

-

2,951

6,263

745

9,959

        Stein Mart Building

-

1,653

16,636

3,131

21,420

        Riverplace  South

-

2,316

5,412

1,174

8,902

        Maitland  100

8,820

2,667

10,156

1,558

14,381

        555 Winderley Place

8,340

2,100

9,655

1,282

13,037

        Citrus Center

18,164

4,000

26,712

6,395

37,107

        Wachovia Plaza

-

785

18,071

2,592

21,448

    Georgia

        100  Ashford Center

31,073

6,085

15,001

1,141

22,227

        Peachtree  Ridge

-

2,204

18,855

1,324

22,383

        Overlook  II

-

5,403

33,782

2,561

41,746

        Waterstone

6,325

859

7,207

1,834

9,900

        Meridian

-

994

9,547

2,032

12,573

        Peachtree  Dunwoody Pavilion

31,003

9,373

24,580

5,866

39,819

        Capital City Plaza

44,167

3,625

57,218

2,873

63,716

    Illinois 

        Chatham Centre

17,100

3,350

19,871

2,959

26,180

        233  North Michigan

104,374

18,181

133,595

25,082

176,858

        111  East Wacker

148,500

23,285

122,844

26,608

172,737

     Mississippi

        One Jackson Place

11,609

1,799

19,730

9,077

30,606

        City  Centre

-

1,662

20,050

10,262

31,974

        111  Capitol Building

-

915

10,830

6,317

18,062

    South Carolina 

        Tower  at 1301 Gervais

-

316

20,350

4,239

24,905

        Atrium  at Stoneridge

-

572

7,775

1,437

9,784

        Capitol Center

18,910

973

37,234

5,702

43,909

    Tennessee 

        First Tennessee Plaza

7,954

457

29,162

7,494

37,113

        Cedar  Ridge

-

741

8,631

2,172

11,544

        Renaissance Center

17,015

4,373

28,213

1,593

34,179

        Forum  II & III

-

2,634

13,886

2,283

18,803

        Morgan Keegan Tower

16,024

-

36,549

2,420

38,969

        Falls Building

-

190

7,628

1,776

9,594

        Moore Building

12,517

727

22,716

69

23,512

        Toyota Garage

-

-

7,939

207

8,146

        Forum  I

12,192

4,737

12,484

1,687

18,908

        Bank  of America Plaza

18,840

1,464

28,712

8,173

38,349

     Texas

        One  Park Ten Plaza

9,092

606

6,149

3,424

10,179

        400  North Belt

2,990

419

9,495

3,618

13,532

        Woodbranch

1,440

303

3,805

2,409

6,517

        Sugar  Grove

6,919

364

7,385

2,904

10,653

        Honeywell

-

856

15,175

1,472

17,503

        Schlumberger

-

1,013

11,102

3,597

15,712

        One  Commerce Green

20,669

489

37,104

3,737

41,330

        Comerica Bank Building

14,763

1,921

21,222

3,069

26,212

        550 Greens Parkway

5,337

1,006

8,014

291

9,311

        1717  St.  James

4,937

430

6,340

1,315

8,085

        5300  Memorial Building

10,305

682

11,712

2,213

14,607

        Town  and Country

7,764

436

7,674

2,514

10,624

        Wells  Fargo

9,567

2,600

8,247

2,289

13,136

    Virginia 

        Lynnwood Plaza

-

985

8,306

2,465

11,756

        Town Point Center

-

-

10,719

3,140

13,859

        Greenbrier Tower I

-

584

7,503

1,698

9,785

        Greenbrier  Tower II

-

573

7,354

1,869

9,796

        Glen Forest

-

537

8,503

1,461

10,501

        Moorefield  II

-

469

4,752

806

6,027

        Moorefield  III

-

490

5,135

967

6,592

        Boulders Center

-

1,265

11,825

2,376

15,466

        Winchester Building

-

956

10,852

2,453

14,261

        Moorefield  I

-

260

3,698

829

4,787

**Total  Real Estate Owned**

$  696,012

$  143,719

$  1,157,535

$  216,214

$  1,517,468

 Page 78 of 88
****
**SCHEDULE  III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (Continued)**

**DECEMBER  31, 2006**

**(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 (Years)**

**Office  and Parking Properties:**

    Arizona

        Squaw Peak Corp Center

$      5,800

$    39,893

$    45,693

$      3,559

$    42,134

2004

1999/2000

(3)

        Mesa Corporate  Center

3,353

16,059

19,412

732

18,680

2005

2000

(3)

     Florida

        Hillsboro  Center V

1,325

14,551

15,876

3,914

11,962

1998

1985

(3)

        Hillsboro Center I-IV

1,129

9,698

10,827

2,530

8,297

1998

1985

(3)

        Bellsouth Building

3,477

9,202

12,679

399

12,280

2006

1996

(3)

        Centurion  Centre

2,951

7,008

9,959

239

9,720

2006

1993

(3)

        Stein Mart Building

1,653

19,767

21,420

1,312

20,108

2005

1985

(3)

        Riverplace  South

2,316

6,586

8,902

764

8,138

2005

1981

(3)

        Maitland  100

2,667

11,714

14,381

694

13,687

2005

1981

(3)

        555 Winderley Place

2,100

10,937

13,037

541

12,496

2005

1985

(3)

        Citrus Center

4,000

33,107

37,107

3,914

33,193

2003

1971

(3)

        Wachovia Plaza

785

20,663

21,448

5,009

16,439

1998

1985

(3)

     Georgia

        100  Ashford Center

6,085

16,142

22,227

17

22,210

2006

1987

(3)

        Peachtree  Ridge

2,204

20,179

22,383

20

22,363

2006

1986

(3)

        Overlook  II

5,403

36,343

41,746

30

41,716

2006

1985

(3)

        Waterstone

859

9,041

9,900

3,091

6,809

1995

1987

(3)

        Meridian

994

11,579

12,573

3,311

9,262

1997

1985

(3)

        Peachtree  Dunwoody Pavilion

9,373

30,446

39,819

3,651

36,168

2003

1976/1980

(3)

        Capital City Plaza

3,625

60,091

63,716

4,545

59,171

2004

1989

(3)

     Illinois

        Chatham Centre

3,350

22,830

26,180

99

26,081

2006

1989

(3)

        233  North Michigan

18,181

158,677

176,858

14,220

162,638

2005

1972

(3)

        111  East Wacker

23,285

149,452

172,737

5,069

167,668

2006

1970

(3)

    Mississippi

        One Jackson Place

1,799

28,807

30,606

14,313

16,293

1986

1986

(3)

        City  Centre

1,662

30,312

31,974

6,877

25,097

1995

(2) 1987

(3)

        111  Capitol Building

915

17,147

18,062

4,989

13,073

1998

1983

(3)

     North Carolina

        Tower  at 1301 Gervais

316

24,589

24,905

5,894

19,011

1997

1973

(3)

        Atrium  at Stoneridge

572

9,212

9,784

2,401

7,383

1998

1986

(3)

        Capitol Center

973

42,936

43,909

9,095

34,814

1999

1987

(3)

    Tennessee

        First Tennessee Plaza

457

36,656

37,113

9,492

27,621

1997

1978

(3)

        Cedar  Ridge

741

10,803

11,544

2,937

8,607

1998

1982

(3)

        Renaissance Center

4,373

29,806

34,179

44

34,135

2006

2000

(3)

        Forum  II & III

2,634

16,169

18,803

4,603

14,200

1997

1985

(3)

        Morgan Keegan Tower

-

38,969

38,969

9,766

29,203

1997

1985

(3)

        Falls Building

190

9,404

9,594

2,295

7,299

1998

(2) 1982/84/90

(3)

        Moore Building

727

22,785

23,512

4,003

19,509

2000

2000

(3)

        Toyota Garage

-

8,146

8,146

1,394

6,752

2000

2000

(3)

        Forum  I

4,737

14,171

18,908

953

17,955

2005

1982

(3)

        Bank  of America Plaza

1,464

36,885

38,349

4,892

33,457

2001

1977

(3)

    Texas     

        One  Park Ten Plaza

606

9,573

10,179

3,966

6,213

1996

1982

(3)

        400  North Belt

419

13,113

13,532

3,472

10,060

1996

1982

(3)

        Woodbranch

303

6,214

6,517

2,284

4,233

1996

1982

(3)

        Sugar  Grove

364

10,289

10,653

3,211

7,442

1997

1982

(3)

        Honeywell

856

16,647

17,503

3,940

13,563

1997

1983

(3)

        Schlumberger

1,013

14,699

15,712

4,164

11,548

1998

1983

(3)

        One  Commerce Green

489

40,841

41,330

10,559

30,771

1998

1983

(3)

        Comerica Bank Building

1,921

24,291

26,212

5,971

20,241

1998

1983

(3)

        550 Greens Parkway

1,006

8,305

9,311

1,140

8,171

2001

1999

(3)

        1717  St.  James

430

7,655

8,085

1,113

6,972

2002

1975/94

(3)

        5300  Memorial Building

682

13,925

14,607

2,109

12,498

2002

1982

(3)

        Town  and Country

436

10,188

10,624

1,718

8,906

2002

1982

(3)

        Wells  Fargo

2,600

10,536

13,136

1,233

11,903

2003

1978

(3)

Page 79 of 88

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

**DECEMBER  31, 2006**

**(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 (Years)**

**Office  and Parking Properties:**

     Virginia

        Lynnwood Plaza

985

10,771

11,756

2,811

8,945

1998

1986

(3)

        Town Point Center

-

13,859

13,859

3,604

10,255

1998

1987

(3)

        Greenbrier Tower I

584

9,201

9,785

2,514

7,271

1997

1985/87

(3)

        Greenbrier  Tower II

573

9,223

9,796

2,510

7,286

1997

1985/87

(3)

        Glen Forest

537

9,964

10,501

2,612

7,889

1998

1985

(3)

        Moorefield  II

469

5,558

6,027

1,220

4,807

1998

1985

(3)

        Moorefield  III

490

6,102

6,592

1,587

5,005

1998

1985

(3)

        Boulders Center

1,265

14,201

15,466

3,644

11,822

1998

1986

(3)

        Winchester Building

956

13,305

14,261

3,155

11,106

1998

1987

(3)

        Moorefield  I

260

4,527

4,787

1,042

3,745

1999

1984

(3)

**Total  Real Estate Owned**

$143,719

$1,373,749

$1,517,468

$211,187

$1,306,281

(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.

Page 80 of 88

**NOTE TO SCHEDULEIII**

**As of December 31,2006 and 2005**

(In thousands)

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

**December 31**

**2006**

**2005**

**Real  Estate:**

** **

** **

**Office and Parking Properties:**

** **

** **

     Balance at beginning of year

 $

1,220,565 

 $

963,713 

     Additions:

          Acquisitions  and improvements

365,477 

292,908 

          Parking  development

- 

3,087 

     Reclassification of land  available for sale

- 

1,721 

     Cost of real estate sold or  disposed

(68,574)

(19,272)

     Joint venture of office  properties

- 

(21,592)

     Balance at end of year

 $

1,517,468 

 $

1,220,565 

** **

**Accumulated Depreciation:**

     Balance at beginning of year

 $

179,636 

 $

142,906 

     Depreciation expense

49,147 

40,155 

     Depreciation expense -  discontinued operations

545 

323 

     Real estate sold or disposed

(18,141)

(2,744)

     Joint venture of office  properties

- 

(1,004)

     Balance at end of year

 $

211,187 

 $

179,636 

**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, 2006.  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, 2006. There were no changes in the Company's internal control over financialreporting during the fourth quarter of 2006 that has materially affected, or isreasonably likely to affect, the Company's internal control over financial reporting.

      The Company'sinternal control system was designed to provide reasonable assurance to thecompany's management and board of directors regarding the preparation and fairpresentation of published financial statements. All internal control systems, nomatter how well designed, have inherent limitations.  Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to the financial statement preparation and presentation.

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

      TheCompany's management, with the participation of the Company's Chief ExecutiveOfficer and Chief Financial Officer, is responsible for establishing andmaintaining adequate internal control over financial reporting.  The Company'smanagement has assessed the effectiveness of the company's internal controlover financial reporting as of December 31, 2006.  In making this assessment, weused the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control - Integrated Framework*. Based on our assessment we have concluded that, as of December 31, 2006, thecompany's internal control over financial reporting is effective based on thosecriteria.  Our independent registered public accounting firm, Ernst & YoungLLP, have provided an attestation report on management's assessment of theCompany's internal control over financial reporting as of December 31, 2006.

Page 81 of 88

**Report of Independent Registered Public Accounting Firm**

Shareholders and Board of Directors

Parkway Properties, Inc.

       We have audited management'sassessment, included in the accompanying Management's Report on InternalControl Over Financial Reporting, that Parkway Properties, Inc. (the Company)maintained effective internal control over financial reporting as of December31, 2006, based on criteria established in *Internal Control - IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (the COSO criteria).  Parkway Properties, Inc.'s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting.  Our responsibility is to express an opinion onmanagement's assessment and an opinion on the effectiveness of the Company'sinternal control over financial reporting based on our audit.

       We conducted our audit in accordancewith 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,evaluating management's assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe thatour audit provides a reasonable basis for our opinion.

       A company's internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financialstatements 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 inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

       In our opinion, management'sassessment that Parkway Properties, Inc. maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the COSO criteria.  Also, in our opinion, ParkwayProperties, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based on the COSOcriteria.

       We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Parkway Properties, Inc. as ofDecember 31, 2006 and 2005, and the related consolidated statements of income,shareholders' equity, and cash flows for each of the three years in the periodended December 31, 2006 of Parkway Properties, Inc. and our report dated March16,2007 expressed an unqualified opinion thereon.

                                                                                                                                     /s/  Ernst& Young LLP

New Orleans, Louisiana

March 16, 2007

Page 82 of 88

**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 ("2007 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 10, 2007.  The 2007 Proxy Statementwill be filed within 120 days after the end of the Company's fiscal year ended December 31, 2006.

      The information regarding executiveofficers is incorporated herein by reference from the section entitled"Proposal 1: Election of Directors − Executive Officers" in theCompany's 2007 Proxy Statement.

      The information regarding compliance withSection 16(a) of the Securities and Exchange Act of 1934 is incorporated hereinby reference from the section entitled "Proposal 1: Election of Directors− Section 16(a) Beneficial Ownership Reporting Compliance" in theCompany's 2007 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 2007 Proxy Statement. 

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

      The information included under thefollowing captions in the Company's 2007 Proxy Statement is incorporated hereinby reference: "Proposal 1: Election of Directors - CompensationDiscussion and Analysis, − Summary Compensation Table, − 2006 Grantsof Plan-Based Awards, − Outstanding Equity Awards at 2006 Fiscal Year-End, - 2006 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 2007 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 and securities authorized for issuanceunder equity compensation plans is incorporated herein by reference from thesections entitled "Security Ownership of Certain Beneficial Owners,""Proposal 1: Election of Directors − Security Ownership ofManagement and Directors" in the Company's 2007 Proxy Statement.

Page 83 of 88

**Equity Compensation Plans**

      The following table sets forth thesecurities authorized for issuance under Parkway's equity compensation plans asof December 31, 2006:

 

(a)

(b)

(c)

** **

** **

** **

**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

282,577

$29.79

325,516

Equity compensation plans  

not approved by security

holders

-

-

-

Total

282,577

$29.79

325,516

 

**Performance Graph**

 

       Thefollowing graph provides a comparison of cumulative stockholder return for theperiod from December 31, 2001 through December 31, 2006 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.  

       The performance graph and relatedinformation shall not be deemed "soliciting material" or deemed to be "filed"with the SEC, nor shall such information be incorporated by reference into anyfuture filing, except to the extent that the Company specifically incorporatesit by reference into such filing. 

 

 

** **

**Year Ended  December 31**

** **

**2001**

**2002**

**2003**

**2004**

**2005**

**2006**

Parkway

$100.00

$113.51

$143.32

$184.72

$154.52

$207.56

NAREIT Equity

$100.00

$103.82

$142.37

$187.33

$210.11

$283.77

S & P 500

$100.00

$  77.90

$100.25

$111.15

$116.61

$135.02

** **

Page 84 of 88

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

       Theinformation regarding director independence is incorporated herein by referencefrom the subsection entitled "Proposal 1: Election of Directors − Independence"in the Company's 2007 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 IndependentAccountants" in the Company's 2007 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, 2006 and 2005

                      Consolidated Statements ofIncome-for the years ended December 31, 2006, 2005 and 2004

                      Consolidated Statements ofCash Flows-for the years ended December 31, 2006, 2005 and 2004

                      Notes to ConsolidatedFinancial Statements

2           ConsolidatedFinancial Statement Schedules

Schedule II - Valuations and Qualifying Accounts

                      Schedule III - Real Estateand Accumulated Depreciation

                      Notes to Schedule III

                  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 Parkway Company's proxymaterial for its July 18, 1996 Annual Meeting).

        3.2         Bylaws, as amended, of the Company (filedherewith).

        3.3        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).

        3.4        Articles Supplementary of Parkway Properties, Inc.filed with the State Department of Assessments and Taxation of the State ofMaryland on December 21, 2006 reclassifying 2,142,857 authorized shares ofSeries B Convertible Cumulative Preferred Stock into the same number ofauthorized but unissued shares of Common Stock (incorporated by reference toExhibit 3.1 to the Company's Form 8-K filed December 27, 2006).

        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 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 (filed herewith).

        10.6*     Parkway Properties, Inc. 2003 Equity Incentive Plan,as amended (filed herewith).

Page 85 of 88

        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*  Performance measures for the Company's 2007 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 19,2007).

        10.15     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).

        10.16    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).

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

        10.20    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).

        10.21    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).

        10.22   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).

        10.23    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).

        10.24    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).

        10.25*   Adoption Agreement for the Executive NonqualifedExcess Plan (filed herewith).

        10.26*   Appendix to Adoption Agreement for ParkwayProperties, Inc Deferred Compensation Plan, as amended (filed herewith).

        10.27*   Amendment to Change-in-Control Agreement that theCompany has entered into with the individuals listed in Exhibits 10.1 and 10.2above (filed herewith).

        10.28*  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).

        10.29*  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).

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        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.

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**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

March 16, 2007

/s/  William R. Flatt

William  R. Flatt

Chief  Financial Officer

March 16, 2007

/s/  Mandy M. Pope

Mandy  M. Pope

Chief  Accounting Officer

March 16, 2007

     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

March 16, 2007

March 16, 2007

/s/ Roger P. Friou

/s/  Joe F. Lynch

Roger P. Friou, Director

Joe F. Lynch, Director

March 16, 2007

March 16, 2007

/s/ Martin L. Garcia

/s/ Steven G. Rogers

Martin L. Garcia, Director

Steven G. Rogers

March 16, 2007

President, Chief Executive  Officer and Director

March 16, 2007

/s/ Matthew W. Kaplan

/s/ Leland R. Speed

Matthew W. Kaplan, Director

Leland R. Speed

March 16, 2007

Chairman of the Board and  Director

March 16, 2007

/s/  Lenore M. Sullivan

Lenore M. Sullivan, Director

March 16, 2007

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