Parkway Properties 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

R	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For Quarterly Period Ended September 30, 2012
	or
0	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Transition Period fromto

Commission File Number 1-11533

Parkway Properties, Inc.

(Exact name of registrant as specified in its charter)

Maryland	74-2123597
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

Bank of America Center, Suite 2400

390 North Orange Avenue

Orlando, Florida 32801

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (407) 650-0593

Registrant's web site www.pky.com

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R No £

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

Large accelerated filer £	Accelerated filer R	Non-accelerated filer £	Smaller reporting company £
		(Do not check if a smaller reporting company)

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

Yes £ No R

41,191,461 shares of Common Stock, $.001 par value, were outstanding at November 1, 2012.

PARKWAY PROPERTIES, INC.

FORM 10-Q

TABLE OF CONTENTS

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

		Page
Part I. Financial Information
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets, September 30, 2012 and December 31, 2011	3
	Consolidated Statements of Operations and Comprehensive Income for the Three Months and
	Nine Months Ended September 30, 2012 and 2011	4
	Consolidated Statement of Changes in Equity for the Nine Months Ended
	September 30, 2012	5
	Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
Part II. Other Information
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	44
Signatures
Authorized Signatures		45

Page 2 of 45

PARKWAY PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and per share data)

	September 30 2012			December 31 2011
	(Unaudited)
Assets
Real estate related investments:
Office and parking properties	$	1,442,759		$	1,084,060
Accumulated depreciation		(190,154	)		(162,123	)
		1,252,605			921,937
Land available for sale		250			250
Mortgage loans		-			1,500
		1,252,855			923,687
Receivables and other assets		109,874			109,427
Intangible assets, net		114,018			95,628
Assets held for sale		7,031			382,789
Management contracts, net		47,010			49,597
Cash and cash equivalents		53,556			75,183
Total assets	$	1,584,344		$	1,636,311
Liabilities
Notes payable to banks	$	125,000		$	132,322
Mortgage notes payable		549,429			498,012
Accounts payable and other liabilities		79,868			90,341
Liabilities related to assets held for sale		361			285,599
Total liabilities		754,658			1,006,274
Equity
Parkway Properties, Inc. stockholders' equity:
8.00% Series D Preferred stock,  $.001 par value, 5,421,296      shares authorized, issued and outstanding in 2012 and 2011		128,942			128,942
Common stock, $.001 par value, 98,578,704 and 64,578,704       shares authorized in 2012 and 2011, respectively, and 41,191,461       and 21,995,536 shares issued and outstanding in 2012 and 2011, respectively		41			22
Common stock held in trust, at cost, 9,964 and 8,368 shares      in 2012 and 2011, respectively		(186	)		(220	)
Additional paid-in capital		719,031			517,309
Accumulated other comprehensive loss		(4,711	)		(3,340	)
Accumulated deficit		(278,923	)		(271,104	)
Total Parkway Properties, Inc. stockholders' equity		564,194			371,609
Noncontrolling interests		265,492			258,428
Total equity		829,686			630,037
Total liabilities and equity	$	1,584,344		$	1,636,311

See notes to consolidated financial statements.

Page 3 of 45

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
	(Unaudited)						(Unaudited)
Revenues
Income from office and parking properties	$	54,998		$	42,245		$	149,995		$	104,739
Management company income		4,591			6,120			14,996			9,990
Total revenues		59,589			48,365			164,991			114,729
Expenses and other
Property operating expense		21,257			18,471			58,803			43,285
Depreciation and amortization		21,766			17,471			59,046			38,342
Impairment loss on mortgage loan receivable		-			9,235			-			9,235
Change in fair value of contingent consideration		-			(12,000	)		216			(12,000	)
Management company expenses		4,205			4,242			12,966			8,196
General and administrative		3,749			4,104			11,266			11,569
Acquisition costs		159			25			1,491			16,754
Total expenses and other		51,136			41,548			143,788			115,381
Operating income (loss)		8,453			6,817			21,203			(652	)
Other income and expenses
Interest and other income		64			87			205			849
Equity in earnings of unconsolidated joint ventures		-			5			-			101
Gain on sale of real estate		48			743			48			743
Recovery of losses on mortgage loan receivable		500			-			500			-
Interest expense		(8,521	)		(8,876	)		(26,301	)		(22,953	)
Income (loss) before income taxes		544			(1,224	)		(4,345	)		(21,912	)
Income tax benefit (expense)		7			174			(143	)		(50	)
Income (loss) from continuing operations		551			(1,050	)		(4,488	)		(21,962	)
Discontinued operations:
Income (loss) from discontinued operations		(330	)		(131,800	)		2,538			(138,571	)
Gain on sale of real estate from discontinued operations		995			2,275			9,767			6,567
Total discontinued operations		665			(129,525	)		12,305			(132,004	)
Net income (loss)		1,216			(130,575	)		7,817			(153,966	)
Net loss attributable to noncontrolling interest – real estate partnerships		896			77,546			1,789			84,112
Net loss attributable to noncontrolling interests – unit holders		17			1			1			2
Net income (loss) for Parkway Properties, Inc.		2,129			(53,028	)		9,607			(69,852	)
Change in market value of interest rate swaps		(405	)		(2,517	)		(1,371	)		(2,701	)
Comprehensive income (loss)	$	1,724		$	(55,545	)	$	8,236		$	(72,553	)
Net income (loss) for Parkway Properties, Inc.	$	2,129		$	(53,028	)	$	9,607		$	(69,852	)
Dividends on preferred stock		(2,711	)		(2,710	)		(8,132	)		(7,341	)
Dividends on convertible preferred stock		-			-			(1,011	)		-
Net income (loss) attributable to common stockholders	$	(582	)	$	(55,738	)	$	464		$	(77,193	)
Net income (loss) per common share attributable to Parkway Properties, Inc.:
Basic and Diluted:
Loss from continuing operations attributable to Parkway Properties, Inc.	$	(0.02	)	$	(0.02	)	$	(0.28	)	$	(1.07	)
Discontinued operations		-			(2.57	)		0.30			(2.52	)
Basic and diluted net income (loss) attributable to Parkway Properties, Inc.	$	(0.02	)	$	(2.59	)	$	0.02		$	(3.59	)
Weighted average shares outstanding:
Basic		36,487			21,502			27,199			21,489
Diluted		36,487			21,502			27,199			21,489
Amounts attributable to Parkway Properties, Inc. common stockholders:
Loss from continuing operations attributable to Parkway Properties, Inc.	$	(702	)	$	(523	)	$	(7,622	)	$	(23,029	)
Discontinued operations		120			(55,215	)		8,086			(54,164	)
Net income (loss) attributable to common stockholders	$	(582	)	$	(55,738	)	$	464		$	(77,193	)

See notes to consolidated financial statements.

Page 4 of 45

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except share and per share data)

(Unaudited)

	Parkway Properties, Inc. Stockholders
	Preferred Stock		Common Stock		Common Stock Held in Trust			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total Equity
Balance at December 31, 2011	$	128,942	$	22	$	(220	)	$	517,309		$	(3,340	)	$	(271,104	)	$	258,428		$	630,037
Net income (loss)		-		-		-			-			-			9,607			(1,790	)		7,817
Change in fair value of interest rate swaps		-		-		-			-			(1,371	)		-			(2,843	)		(4,214	)
Common dividends declared-$0.2625 per share		-		-		-			-			-			(8,283	)		-			(8,283	)
Preferred dividends declared-$1.50 per share		-		-		-			-			-			(8,132	)		-			(8,132	)
Convertible preferred dividends declared-$0.075 per share		-		-		-			-			-			(1,011	)		-			(1,011	)
Share-based compensation		-		-		-			371			-			-			-			371
26,047 shares issued in lieu of Director's fees		-		-		-			263			-			-			-			263
12,864 shares issued pursuant to the TPG Management         Services Agreement		-		-		-			150			-			-			-			150
Issuance of 4.3 million shares of common stock		-		4		-			44,841			-			-			-			44,845
Conversion of 13,484,444 convertible preferred shares to     common stock		-		13		-			141,160			-			-			-			141,173
12,169 shares withheld to satisfy withholding obligation     in connection with the vesting of restricted stock		-		-		-			(173	)		-			-			-			(173	)
Contribution of 3,721 shares of common stock to     deferred compensation plan		-		-		(38	)		-			-			-			-			(38	)
Distribution of 2,125 shares of common stock     from deferred compensation plan		-		-		72			-			-			-			-			72
Issuance of 1.8 million operating partnership units		-		-		-			-			-			-			18,216			18,216
Issuance of 1,493,297 shares of common stock upon redemption of operating partnership units		-		2		-			15,110			-			-			(15,112	)		-
Contribution of capital by noncontrolling interest		-		-		-			-			-			-			17,447			17,447
Distribution of capital to noncontrolling interest		-		-		-			-			-			-			(675	)		(675	)
Sale of noncontrolling interest in Parkway Properties     Office Fund, L.P.		-		-		-			-			-			-			(8,179	)		(8,179	)
Balance at September 30, 2012	$	128,942	$	41	$	(186	)	$	719,031		$	(4,711	)	$	(278,923	)	$	265,492		$	829,686

See notes to consolidated financial statements.

Page 5 of 45

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	September 30
	2012			2011
	(Unaudited)
Operating activities
Net income (loss)	$	7,817		$	(153,966	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		59,046			38,342
Depreciation and amortization – discontinued operations		926			45,964
Amortization of above market leases		3,837			1,743
Amortization of below market leases – discontinued operations		(38	)		(1,349	)
Amortization of loan costs		1,384			1,573
Amortization of loan costs – discontinued operations		74			(400	)
Share-based compensation expense		371			1,389
Deferred income tax benefit		(717	)		(364	)
Operating distributions from unconsolidated joint ventures		-			507
Gain on sale of real estate investments and recovery of mortgage loan receivable		(10,314	)		(7,310	)
Non-cash impairment loss on real estate-discontinued operations		-			128,707
Non-cash impairment loss on mortgage loan receivable		-			9,235
Equity in earnings of unconsolidated joint ventures		-			(101	)
Equity in loss of unconsolidated joint ventures-discontinued operations		19			36
Change in fair value of contingent consideration		216			(12,000	)
Increase in deferred leasing costs		(7,103	)		(11,434	)
Changes in operating assets and liabilities:
Change in receivables and other assets		2,224			(20,990	)
Change in accounts payable and other liabilities		(6,187	)		5,445
Net cash provided by operating activities		51,555			25,027
Investing activities
Proceeds received from mortgage loan receivable		2,000			-
Distributions from unconsolidated joint ventures		120			3,201
Investment in real estate		(396,893	)		(488,279	)
Investment in other assets		-			(3,500	)
Investment in management company		-			(32,400	)
Proceeds from sale of real estate		117,637			200,193
Improvements to real estate		(19,288	)		(29,120	)
Net cash used in investing activities		(296,424	)		(349,905	)
Financing activities
Principal payments on mortgage notes payable		(22,390	)		(103,792	)
Proceeds from mortgage notes payable		73,500			222,013
Proceeds from bank borrowings		277,380			241,822
Payments on bank borrowings		(284,702	)		(238,809	)
Debt financing costs		(3,126	)		(4,828	)
Purchase of Company stock		(172	)		(336	)
Dividends paid on common stock		(8,335	)		(4,884	)
Dividends paid on convertible preferred stock		(1,011	)		-
Dividends paid on preferred stock		(10,843	)		(6,818	)
Contributions from noncontrolling interest partners		17,447			251,168
Distributions to noncontrolling interest partners		(675	)		(43,520	)
Proceeds from stock offerings, net of transaction costs		186,169			26,143
Net cash provided by financing activities		223,242			338,159
Change in cash and cash equivalents		(21,627	)		13,281
Cash and cash equivalents at beginning of period		75,183			19,670
Cash and cash equivalents at end of period	$	53,556		$	32,951

See notes to consolidated financial statements.

Page 6 of 45

Parkway Properties, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2012

Note A – Basis of Presentation

The consolidated financial statements include the accounts of Parkway Properties, Inc. ("Parkway" or "the Company"), its wholly owned subsidiaries and joint ventures in which the Company has a controlling interest.  The other partners' equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the consolidated financial statements.  Parkway also consolidates subsidiaries where the entity is a variable interest entity ("VIE") and Parkway is the primary beneficiary and has the power to direct the activities of the VIE and has the obligation to absorb losses or the right to receive the benefits from the VIE that could be potentially significant to the VIE.  At September 30, 2012 and December 31, 2011, Parkway did not have any VIEs that required consolidation.  All significant intercompany transactions and accounts have been eliminated in the accompanying financial statements.

The Company also consolidates certain joint ventures where it exercises significant control over major operating and management decisions, or where the Company is the sole general partner and the limited partners do not possess kick-out rights or other substantive participating rights.  The equity method of accounting is used for those joint ventures that do not meet the criteria for consolidation and where Parkway exercises significant influence but does not control these joint ventures.

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

The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Operating results for the three months and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.  The financial statements should be read in conjunction with the 2011 annual report and the notes thereto.

The balance sheet at December 31, 2011 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which changes the wording used to describe the requirements in U.S. GAAP for measuring fair value, changes certain fair value measurement principles and enhances disclosure requirements for fair value measurements.  The FASB does not intend for ASU 2011-04 to result in a change in the application of the requirements in ASC 820.  The requirements of ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011.  At March 31, 2012, the Company had implemented ASU 2011-04.

In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income", which modifies reporting requirements for comprehensive income in order to increase the prominence of items reported in other comprehensive income in the financial statements.  ASU 2011-05 requires presentation of either a single continuous statement of comprehensive income or two separate, but consecutive statements in which the first statement presents net income and its components followed by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income.  The requirements of ASU 2011-05 are effective for interim and annual periods beginning after December 15, 2011.  At March 31, 2012, the Company had implemented ASU 2011-05.

The Company has evaluated all subsequent events through the issuance date of the financial statements.

Page 7 of 45

Note B – Net Income (Loss) Per Common Share

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

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

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012		2011
Numerator:
Basic and diluted net income (loss)           attributable to common stockholders	$	(582	)	$	(55,738	)	$	464	$	(77,193	)
Basic weighted average shares		36,487			21,502			27,199		21,489
Dilutive weighted average shares		36,487			21,502			27,199		21,489
Diluted net income (loss) per share attributable to Parkway Properties, Inc.	$	(0.02	)	$	(2.59	)	$	0.02	$	(3.59	)

The computation of diluted EPS for the three months and nine months ended September 30, 2012 and 2011 did not include the effect of employee stock options, deferred incentive share units, and restricted shares as their inclusion would have been anti-dilutive.

During the nine months ended September 30, 2012, the Company issued or converted 17.8 million shares of common stock related to the investment by TPG and its affiliates ("TPG") in the Company.  For more information on TPG's investment see "Note M – TPG Securities Purchase Agreement".

Note C – Supplemental Cash Flow Information and Schedule of Non-Cash Investing and Financing Activity

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

	Nine Months Ended September 30
	2012			2011
	(in thousands)
Supplemental cash flow information:
Cash paid for interest	$	28,312		$	43,250
Cash paid for income taxes		431			24
Supplemental schedule of non-cash investing and financing activity:
Mortgage note payable transferred to purchaser		(254,095	)		-
Restricted shares and deferred incentive share units issued (forfeited)		(862	)		2,240
Mortgage loan assumed in purchase		-			87,225
Contingent consideration related to the contribution of the Management          Company		-			19,000
Shares issued in lieu of Director's fees		263			319
Shares issued pursuant to Management Services Agreement		150			-
Operating partnership units converted to common stock		15,112			-

Note D – Acquisitions

On January 11, 2012, Parkway Properties Office Fund II, LP ("Fund II") purchased The Pointe, a 252,000 square foot Class A office building in the Westshore submarket of Tampa, Florida.  The gross purchase price for The Pointe was $46.9 million and Parkway's ownership share is 30%.  Parkway's equity contribution of $7.0 million was funded through availability under the Company's senior unsecured revolving credit facility.

On February 10, 2012, Fund II purchased Hayden Ferry Lakeside II ("Hayden Ferry II"), a 300,000 square foot Class A+ office building located in the Tempe submarket of Phoenix, and directly adjacent to Hayden Ferry Lakeside I ("Hayden Ferry I"), which was purchased by Fund II in the second quarter of 2011.

Page 8 of 45

The gross purchase price was $86.0 million and Parkway's ownership share is 30%.  Parkway's equity contribution of $10.8 million was initially funded through availability under the Company's existing senior unsecured revolving credit facility.  This investment completed the investment period of Fund II.

On June 6, 2012, Parkway purchased Hearst Tower, a 972,000 square foot office tower located in the central business district in Charlotte, North Carolina.  The gross purchase price was $250.0 million.  The purchase of Hearst Tower was financed with proceeds received from the investment in the Company by TPG VI Pantera Holdings, L.P. (together with its affiliates, ("TPG")), combined with borrowings on the Company's credit facility.  For more information on TPG's investment see "Note M – TPG Securities Purchase Agreement".

On August 31, 2012, Parkway purchased a 2,500 space parking garage, a 21,000 square foot office building and a vacant parcel of developable land (collectively the "Hayden Ferry Garage"), all adjacent to Parkway's currently owned Hayden Ferry I and Hayden Ferry II assets in Tempe, Arizona.  The gross purchase price was $18.2 million on behalf of Fund II.  Fund II increased its investment capacity to pursue the purchase, and Parkway's share in this investment is 30%.  Parkway's equity contribution of $5.5 million was funded using the Company's revolving credit facility.

The allocation of purchase price related to intangible assets and liabilities and weighted average amortization period (in years) for each class of asset or liability for The Pointe, Hayden Ferry II, and Hearst Tower is as follows (in thousands, except weighted average life):

	Amount			Weighted Average Life
Land	$	21,969			N/	A
Buildings & Garages		309,329			40
Tenant improvements		26,631			6
Lease commissions		10,141			6
Lease in place value		27,653			6
Above market leases		4,944			4
Below market leases		(3,729	)		7
Other intangibles		3,001			3

The allocation of purchase price for Hayden Ferry Garage was preliminary at September 30, 2012.

The unaudited pro forma effect on the Company's results of operations for the purchase of The Pointe, Hayden Ferry II, Hearst Tower, and Hayden Ferry Garage as if the purchase had occurred on January 1, 2011 is as follows (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012		2011
Revenues	$	59,757		$	58,986		$	179,774	$	146,604
Net income (loss) attributable to common stockholders	$	(568	)	$	(53,510	)	$	3,147	$	(71,482	)
Basic net income (loss) attributable to common stockholders	$	(0.02	)	$	(2.49	)	$	0.15	$	(3.33	)
Diluted net income (loss) attributable to common stockholders	$	(0.02	)	$	(2.49	)	$	0.15	$	(3.33	)

On October 5, 2012, Parkway entered into a purchase and sale agreement to acquire Westshore Corporate Center, a 170,000 square foot office property located in the Westshore submarket of Tampa, Florida, for a net purchase price of $22.5 million.  Parkway plans to assume the in-place first mortgage secured by the property, which has a current outstanding balance of approximately $14.5 million with a fixed interest rate of 5.8% and a maturity date of May 1, 2015.  Westshore Corporate Center is currently managed by Parkway Realty Services and was formerly part of the Eola Capital LLC ("Eola") portfolio before Eola merged with Parkway in May 2011.  Pursuant to the agreement formed between Parkway and the former Eola principals in December 2011, 100% of any proceeds received by the former principals will be granted to Parkway, and therefore Parkway will only be required to pay a purchase price of $22.5 million.  Closing is expected to occur by the end of the fourth quarter 2012 and is subject to lender approval of the assumption of the existing mortgage secured by the property and other customary closing conditions.  Parkway expects to fund this investment using excess cash and borrowings from its revolving credit facility.

Page 9 of 45

On October 31, 2012, the Company entered into a purchase and sale agreement to acquire NASCAR Plaza, a 390,000 square foot office tower located in the central business district (CBD) of Charlotte, North Carolina, for a purchase price of approximately $100 million.  Parkway plans to assume the first mortgage secured by the property, which has a current outstanding balance of approximately $42.3 million with a current interest rate of 4.7% and a maturity date of March 30, 2016; however, Parkway intends to amend and restate the loan upon assumption to current market terms.  Closing is expected to occur by the end of the fourth quarter 2012 and is subject to customary closing conditions.  Parkway expects to fund this investment using excess cash and borrowings from its revolving credit facility.

For details regarding dispositions during the nine months ended September 30, 2012, and to date through November 1, 2012, please see Note E – Discontinued Operations.

Page 10 of 45

Note E – Discontinued Operations

4

All current and prior period income from the following office property dispositions and properties held for sale is included in discontinued operations for the three months and nine months ended September 30, 2012 and 2011 (in thousands).

Office Property	Location	Square Feet		Date of Sale	Net Sales Price		Net Book Value of Real Estate		Gain (Loss) on Sale
233 North Michigan	Chicago, IL		1,070	05/11/2011	$	156,546	$	152,254	$	4,292
Greenbrier I & II	Hampton Roads, VA		172	07/19/2011		16,275		15,070		1,205
Glen Forest	Richmond, VA		81	08/16/2011		8,950		7,880		1,070
Tower at Gervais	Columbia, SC		298	09/08/2011		18,421		18,421		-
Wells Fargo	Houston, TX		134	12/09/2011		-		-		-
Fund I Assets	Various		1,956	12/31/2011		256,823		250,699		11,258
2011 Dispositions (2)			3,711		$	457,015	$	444,324	$	17,825
Falls Pointe	Atlanta, GA		107	01/06/2012	$	5,824	$	4,467	$	1,357
111 East Wacker	Chicago, IL		1,013	01/09/2012		153,240		153,237		3
Renaissance Center	Memphis, TN		189	03/01/2012		27,661		24,629		3,032
Overlook II	Atlanta, GA		260	04/30/2012		29,467		28,689		778
Wink Building	New Orleans, LA		32	06/08/2012		705		803		(98	)
Ashford/Peachtree	Atlanta, GA		321	07/01/2012		29,440		28,074		1,366
Non-Core Assets	Various		1,932	Various		125,486		122,157		3,329
2012 Dispositions (3)			3,854		$	371,823	$	362,056	$	9,767

Office Property	Location	Square Feet		Date of Sale	Gross Sales Price
Properties Held for Sale and Expected to Close During Fourth Quarter 2012 (1)
Sugar Grove	Houston, TX		124	10/23/2012	$	11,425
Total Properties Held for Sale			124		$	11,425

(1) Gains on assets held for sale are expected to be finalized upon sale and reflected in the year ending December 31, 2012 financial statements.

(2) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2011 was $17.8 million, of which $9.8 million was Parkway's proportionate share.

(3) Total gain on the sale of real estate in discontinued operations recognized during the nine months ended September 30, 2012 was $9.8 million, of which $4.9 million was Parkway's proportionate share.

During the nine months ended September 30, 2012, the Company completed its previously disclosed dispositions as part of its strategic objective of becoming a leading owner of high-quality office assets in higher growth markets in the Sunbelt.  As previously disclosed, the Company entered into an agreement to sell its interest in 13 office properties totaling 2.7 million square feet owned by Parkway Properties Office Fund, L.P. ("Fund I") to its existing partner in the fund for a gross sales price of $344.3 million.  As of December 31, 2011, Parkway had completed the sale of 9 of these 13 assets.  During the nine months ended September 30, 2012, the Company completed the sale of the remaining four Fund I assets totaling 770,000 square feet.  Accordingly, income from all Fund I properties has been classified as discontinued operations for all current and prior periods.  These Fund I assets had a total of $292.0 million in mortgage loans, of which $82.4 million was Parkway's share, with a weighted average interest rate of 5.6% that were assumed by the buyer upon closing.  Parkway received net proceeds from the sales of the Fund I assets of $14.2 million, which were used to reduce amounts outstanding under the Company's credit facilities.

Additionally, during the nine months ended September 30, 2012, the Company completed the sale of the 15 properties included in its strategic sale of a portfolio of non-core assets, for a gross sales price of $147.7 million and generating net proceeds to Parkway of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was Parkway's share.  The 15 assets that were sold include five assets in Richmond, four assets in Memphis, and six assets in Jackson. Income from these non-core assets has been classified as discontinued operations for all current and prior periods.

Page 11 of 45

The Company completed the sale of three additional assets during the nine months ended September 30, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, and Falls Pointe, a 107,000 square foot office property located in Atlanta and owned by Parkway Properties Office Fund II, L.P. ("Fund II") for a gross sales price of $157.4 million.  Parkway received approximately $4.8 million in net proceeds from these sales, which were used to reduce amounts outstanding under the Company's revolving credit facility.  In connection with the sale of 111 East Wacker, the buyer assumed a $147.9 million mortgage loan upon sale.  Income from 111 East Wacker, the Wink building, and Falls Pointe has been classified as discontinued operations for all current and prior periods.

At September 30, 2012, assets and liabilities related to assets held for sale represented Sugar Grove, a 124,000 square foot office property in Houston, Texas.  On October 23, 2012, the Company sold Sugar Grove for $11.4 million and received $10.0 million in net proceeds, which will be used to fund future acquisitions.  Income from Sugar Grove has been classified as discontinued operations for all current and prior periods.  The assets and liabilities associated with Sugar Grove which have been classified as held for sale at September 30, 2012 are as follows (in thousands):

	September 30 2012
Balance Sheet:
Investment property	$	11,743
Accumulated depreciation		(5,071	)
Office property held for sale		6,672
Rents receivable and other assets		359
Total assets held for sale	$	7,031
Accounts payable and other liabilities	$	361
Total liabilities related to assets held for sale	$	361

Page 12 of 45

The amount of revenues and expenses for these office properties reported in discontinued operations for the three months and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Statement of Operations:
Revenues
Income from office and parking properties	$	836		$	30,517		$	13,857		$	107,098
		836			30,517			13,857			107,098
Expenses
Office and parking properties:
Operating expense		543			13,359			6,450			47,907
Management company expense		53			76			291			202
Interest expense		468			7,023			3,845			22,792
Non-cash adjustment for interest rate swap		-			-			(215	)		-
Depreciation and amortization		102			14,852			948			46,061
Impairment loss		-			127,007			-			128,707
		1,166			162,317			11,319			245,669
Income (loss) from discontinued operations		(330	)		(131,800	)		2,538			(138,571	)
Gain on sale of real estate from discontinued operations		995			2,275			9,767			6,567
Total discontinued operations per Statement of Operations		665			(129,525	)		12,305			(132,004	)
Net (income) loss attributable to noncontrolling     interest from discontinued operations		(545	)		74,310			(4,219	)		77,840
Total discontinued operations-Parkway's share	$	120		$	(55,215	)	$	8,086		$	(54,164	)

Note F – Mortgage Loans

In connection with the previous sale of One Park Ten, the Company had seller-financed a $1.5 million note receivable that bore interest at 7.3% per annum on an interest-only basis through maturity in June 2012.  On April 2, 2012, the borrower prepaid the note receivable and all accrued interest in full.

On April 10, 2012, the Company transferred its rights, title and interest in the B participation piece (the "B piece") of a first mortgage secured by an 844,000 square foot office building in Dallas, Texas known as 2100 Ross.  The B piece was purchased at an original cost of $6.9 million in November 2007.  The B piece was originated by Wachovia Bank, N.A., a Wells Fargo Company, and had a face value of $10.0 million, a stated coupon rate of 6.1% and a scheduled maturity in May 2012.  During 2011, the Company recorded a non-cash impairment loss on the mortgage loan in the amount of $9.2 million, thereby reducing its investment in the mortgage loan to zero.  Under the terms of the transfer, the Company is entitled to certain payments if the transferee is successful in obtaining ownership of 2100 Ross.  During the third quarter of 2012, the transferee successfully obtained ownership of 2100 Ross and as a result the Company received a $500,000 payment, which is classified as recovery of losses on a mortgage loan receivable on the Company's Consolidated Statements of Operations and Comprehensive Income.

Note G – Management Contracts

During 2011, as part of the Company's combination with Eola, Parkway purchased the management contracts associated with Eola's property management business.  At the purchase date, the contracts were valued by an independent appraiser at $52.0 million.  The value of the management contracts is based on the sum of the present value of future cash flows attributable to the management contracts, in addition to the value of tax savings as a result of the amortization of intangible assets.  During the nine months ended September 30, 2012, the Company recorded amortization expense of $2.6 million on the management contracts.  Also, in conjunction with the valuation of the management company, the Company recorded $26.2 million of goodwill, a $31.0 million liability related to contingent consideration and a deferred tax liability of $14.8 million.  At September 30, 2012, management contracts, net of accumulated amortization totaled $47.0 million, goodwill totaled $26.2 million and deferred tax liability totaled $13.6 million.  There is no remaining liability with respect to the contingent consideration.

Page 13 of 45

Note H - Capital and Financing Transactions

On March 30, 2012, the Company entered into an Amended and Restated Credit Agreement with a consortium of eight banks for its $190.0 million senior unsecured revolving credit facility.  Additionally, the Company amended its $10.0 million working capital revolving credit facility under substantially the same terms and conditions, with the combined size of the facilities remaining at $200.0 million (collectively, the "New Facilities").  The New Facilities provide for modifications to the existing facilities by, among other things, extending the maturity date from January 31, 2014 to March 29, 2016, with an additional one-year extension option with the payment of a fee, increasing the size of the accordion feature from $50 million to as much as $160 million, lowering applicable interest rate spreads and unused fees, and modifying certain other terms and financial covenants.  The interest rate on the New Facilities is based on LIBOR plus 160 to 235 basis points, depending on overall Company leverage (with the current rate set at 160 basis points).  Additionally, the Company pays fees on the unused portion of the New Facilities ranging between 25 and 35 basis points based  upon usage of the aggregate commitment (with the current rate set at 25 basis points).  Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Book Runners on the senior facility.  In addition, Wells Fargo Bank, N.A. acted as Administrative Agent and Bank of America, N.A. acted as Syndication Agent.  KeyBank, N.A., PNC Bank, N.A. and Royal Bank of Canada all acted as Documentation Agents.  Other participating lenders include JPMorgan Chase Bank, Trustmark National Bank, and Seaside National Bank and Trust.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

On September 27, 2012, the Company closed a $125 million unsecured term loan.  The term loan has a maturity date of September 27, 2017, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million.  Interest on the term loan is based on LIBOR plus an applicable margin of 150 to 225 basis points depending on overall Company leverage (with the current rate set at 150 basis points.)  The term loan has substantially the same operating and financial covenants as required by the Company's current unsecured revolving credit facility.  Keybanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Bookrunners on the term loan.  In addition, Keybank National Association acted as Administrative Agent; Bank of America, N. A. acted as Syndication Agent; and Wells Fargo Bank, National Association acted as Documentation Agent.  Other participating lenders include Royal Bank of Canada, PNC Bank, National Association, U. S. Bank National Association, and Trustmark National Bank.

On October 10, 2012, the Company exercised $25 million of the $160 million accordion feature of its existing unsecured revolving credit facility which matures in March 2016 and increased capacity from $190 million to $215 million with the additional borrowing capacity being provided by U.S. Bank National Association, bringing the total number of participating lenders to nine.  The interest rate on the credit facility is currently LIBOR plus 160 basis points.  Other terms and conditions under the credit facility remain unchanged.

At September 30, 2012, the Company did not have any amounts outstanding under its revolving credit facility and had $125.0 million outstanding under its term loan.  The Company was in compliance with all loan covenants under its revolving credit facilities and term loan.

Mortgage notes payable at September 30, 2012 totaled $549.4 million, with an average interest rate of 5.5% and were secured by office properties.

On January 9, 2012, in connection with the sale of 111 East Wacker for a gross sale price of $150.6 million, the buyer assumed the existing $147.9 million non-recourse mortgage loan secured by the property which had a fixed interest rate of 6.3% and maturity date of July 2016.

On January 11, 2012, in connection with the purchase of The Pointe in Tampa, Florida, Fund II obtained a $23.5 million non-recourse first mortgage loan, which matures in February 2019.  The mortgage has a fixed rate of 4.0% and is interest only for the first 42 months of the term.

On February 10, 2012, Fund II obtained a $50.0 million non-recourse mortgage loan, of which $15.0 million is Parkway's share, secured by Hayden Ferry II, a 300,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The mortgage loan matures in July 2018 and bears interest at LIBOR plus the applicable spread which ranges from 250 to 350 basis points over the term of the loan.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes LIBOR at 1.5% through January 25, 2018, which equates to a total interest rate ranging from 4.0% to 5.0%. The mortgage loan is cross-collateralized, cross-defaulted, and coterminous with the mortgage loan secured by Hayden Ferry I.

Page 14 of 45

On March 9, 2012, the Company repaid a $16.3 million non-recourse mortgage loan secured by Bank of America Plaza, a 337,000 square foot office property in Nashville, Tennessee.  The mortgage loan had a fixed interest rate of 7.1% and was scheduled to mature in May 2012.  The Company repaid the mortgage loan using available proceeds under the senior unsecured revolving credit facilities.

On May 31, 2012, in connection with the sale of Pinnacle at Jackson Place (the "Pinnacle") and Parking at Jackson Place, for a gross sales price of $29.5 million, the buyer assumed the existing $29.5 million non-recourse mortgage loan secured by the property with a weighted average interest rate of 5.2%.  The buyer also assumed the related $23.5 million interest rate swap which fixed a portion of the debt secured by the Pinnacle at an interest rate of 5.8%.

During the nine months ended September 30, 2012, in conjunction with the sale of four Fund I assets, the buyer assumed $76.7 million of non-recourse first mortgage loans, of which $19.2 million was Parkway's share.

The Company has entered into interest rate swap agreements.  The Company designated the swaps as cash flow hedges of the variable interest rates on the debt secured by 245 Riverside, Corporate Center Four, Cypress Center, Bank of America Center, Two Ravinia, Hayden Ferry I, Hayden Ferry II, and the $125 million unsecured term loan.  These swaps are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.

On February 10, 2012, Fund II entered into an interest rate swap with the lender of the loan secured by Hayden Ferry II in Phoenix, Arizona, for a $50 million notional amount that fixes LIBOR at 1.5% through January 25, 2018, which when combined with the applicable spread ranging from 250 to 350 basis points equates to a total interest rate ranging from 4.0% to 5.0% over the term of the loan.  The Company designated the swap as a cash flow hedge of the variable interest payments associated with the mortgage loan.

On May 31, 2012, in connection with the sale of the Pinnacle, the buyer assumed the interest rate swap, which had a notional amount of $23.5 million and fixed the interest rate on a portion of the debt secured by the Pinnacle at 5.8%.

On September 28, 2012, the Company executed two floating-to-fixed interest rate swaps for a notional amount totaling $125 million, associated with its term loan that fixes LIBOR at 0.7% for five years, which resulted in an initial all-in interest rate of 2.2%.  The interest rate swaps were effective October 1, 2012.

Page 15 of 45

The Company's interest rate hedge contracts at September 30, 2012, and 2011 are summarized as follows (in thousands):

									Fair Value
									Liability
Type of	Balance Sheet	Notional		Maturity		Fixed			September 30
Hedge	Location	Amount		Date	Reference Rate	Rate			2012			2011
Swap	Accounts payable and other liabilities	$	23,500	12/01/14	1-month LIBOR		5.8	%	$	-		$	(2,533	)
Swap	Accounts payable and other liabilities	$	12,088	11/18/15	1-month LIBOR		4.1	%		(639	)		(578	)
Swap	Accounts payable and other liabilities	$	50,000	09/28/17	1-month LIBOR		2.2	%		(61	)		-
Swap	Accounts payable and other liabilities	$	75,000	09/28/17	1-month LIBOR		2.2	%		(91	)		-
Swap	Accounts payable and other liabilities	$	33,875	11/18/17	1-month LIBOR		4.7	%		(3,498	)		(2,699	)
Swap	Accounts payable and other liabilities	$	22,000	01/25/18	1-month LIBOR		4.5	%		(2,029	)		(1,422	)
Swap	Accounts payable and other liabilities	$	48,750	01/25/18	1-month LIBOR		5.0	%		(1,688	)		-
Swap	Accounts payable and other liabilities	$	9,250	09/30/18	1-month LIBOR		5.2	%		(1,279	)		(1,039	)
Swap	Accounts payable and other liabilities	$	22,500	10/08/18	1-month LIBOR		5.4	%		(3,291	)		(2,723	)
Swap	Accounts payable and other liabilities	$	22,100	11/18/18	1-month LIBOR		5.0	%		(2,772	)		(2,108	)
									$	(15,348	)	$	(13,102	)

Note I – Noncontrolling Interests

Real Estate Partnerships

The Company has an interest in one joint venture that is included in its consolidated financial statements. Information relating to this consolidated joint venture as of September 30, 2012 is detailed below.

		Parkway's	Square Feet
Joint Venture Entity and Property Name	Location	Ownership %	(In thousands)
Fund II
Hayden Ferry Lakeside I	Phoenix, AZ	30.0%	204
Hayden Ferry Lakeside II	Phoenix, AZ	30.0%	300
Hayden Ferry Lakeside Garage/Retail/Land	Phoenix, AZ	30.0%	21
245 Riverside	Jacksonville, FL	30.0%	135
Bank of America Center	Orlando, FL	30.0%	421
Corporate Center Four at International Plaza	Tampa, FL	30.0%	250
Cypress Center I - III	Tampa, FL	30.0%	286
The Pointe	Tampa, FL	30.0%	252
Lakewood II	Atlanta, GA	30.0%	124
3344 Peachtree	Atlanta, GA	33.0%	485
Two Ravinia	Atlanta, GA	30.0%	438
Carmel Crossing	Charlotte, NC	30.0%	326
Two Liberty Place	Philadelphia, PA	19.0%	941
Total Fund II		27.9%	4,183

Fund II, a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012.  Fund II was structured such that Teacher Retirement System of Texas ("TRST") would be a 70% investor and Parkway a 30% investor in the fund, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Fund II acquired 13 properties totaling 4.2 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia.  In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Garage, a 2,500 space parking garage, a 21,000 square foot office property and a vacant parcel of development land, all adjacent to Hayden Ferry I and Hayden Ferry II in Phoenix.

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned.  Thereafter, 56% will be distributed to TRST and 44% to Parkway.  The term of Fund II will be seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the discretion of Parkway.

Page 16 of 45

As previously disclosed, the Company entered into an agreement to sell its interest in 13 office properties totaling 2.7 million square feet owned by Fund I to its existing partner in the fund for a gross sales price of $344.3 million.  As of July 1, 2012, the Company has completed the sale of all 13 Fund I assets.  Parkway received approximately $14.2 million in net proceeds for the completed sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under the Company's credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was Parkway's share.

Noncontrolling interest - real estate partnerships represents the other partners' proportionate share of equity in the partnerships discussed above at September 30, 2012. Income is allocated to noncontrolling interest based on the weighted average percentage ownership during the year.

Operating Partnership Units ("OP Units")

On December 30, 2011, Parkway and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all OP Units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made.  Based on the Management Company revenue for 2011, the target was achieved and all 1.8 million OP Units were earned and issued to Eola's principals on February 28, 2012.

OP Unit holders have redemption rights that enable them to cause the Company's operating partnership to redeem the OP Units for cash or, at the Company's option, for shares of common stock on a one-for-one basis.  During the second quarter of 2012, 1.5 million OP units were redeemed and the Company issued 1.5 million shares of common stock upon such redemption.  At September 30, 2012, there were 307,000 OP units outstanding which were issued to Eola's principals.

Note J - Share-Based and Long-Term Compensation Plans

Effective May 1, 2010, the stockholders of the Company approved Parkway's 2010 Omnibus Equity Incentive Plan (the "2010 Equity Plan") that authorized the grant of up to 600,000 equity based awards to employees and directors of the Company. The 2010 Equity Plan replaced the Company's 2003 Equity Incentive Plan and the 2001 Non-Employee Directors Equity Compensation Plan.  The 2010 Equity Plan has a ten-year term.

Compensation expense, including estimated forfeitures, for service-based awards is recognized over the expected vesting period.  The total compensation expense for the long-term equity incentive awards is based upon the fair value of the shares on the grant date, adjusted for estimated forfeitures.  Time-based restricted shares and deferred incentive share units are valued based on the New York Stock Exchange closing market price of Parkway common shares (NYSE ticker symbol, PKY) as of the date of grant.  The grant date fair value for awards that are subject to market conditions is determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

Restricted shares and deferred incentive share units are forfeited if an employee leaves the Company before the vesting date except in the case of the employee's death or permanent disability or upon termination following a change of control. Shares and/or units that are forfeited become available for future grant under the 2010 Equity Plan.

On February 14, 2012, 21,900 long-term equity incentive awards were granted to officers of the Company.  The long-term equity incentive awards are valued at $222,000 which equates to an average price per share of $10.15 and are time-based awards.  These shares are accounted for as equity-classified awards.

The time-based awards will vest ratably over four years from the date the shares are granted.  The market condition awards are contingent on the Company meeting goals for compounded annual total return to stockholders ("TRS") over the three year period beginning July 1, 2010.  The market condition goals are based upon (i) the Company's absolute compounded annual TRS; and (ii) the Company's absolute compounded annual

Page 17 of 45

TRS relative to the compounded annual return of the MSCI US REIT ("RMS") Index calculated on a gross basis, as follows:

	Threshold	Target	Maximum
Absolute Return Goal	10%	12%	14%
Relative Return Goal	RMS + 100 bps	RMS + 200 bps	RMS + 300 bps

With respect to the absolute return goal, 15% of the award is earned if the Company achieves threshold performance and a cumulative 60% is earned for target performance.  With respect to the relative return goal, 20% of the award is earned if the Company achieves threshold performance and a cumulative 55% is earned for target performance.  In each case, 100% of the award is earned if the Company achieves maximum performance or better. To the extent actually earned, the market condition awards will vest 50% on each of July 15, 2013 and 2014.

The Company also adopted a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010.  The performance goals for actual payment under the long-term cash incentive will require the Company to (i) achieve an absolute compounded annual TRS that exceeds 14% AND (ii) achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 500 basis points.  Notwithstanding the above goals, in the event the Company achieves an absolute compounded annual TRS that exceeds 19%, then the Company must achieve an absolute compounded annual TRS that exceeds the compounded annual return of the RMS by at least 600 basis points.  The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRS achieved by the Company.  There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million.  Achievement of the maximum cash incentive would equate to an absolute compounded annual TRS that approximates 23%, provided that the absolute compounded annual TRS exceeds the compounded annual return of the RMS by at least 600 basis points.  The total compensation expense for the long-term cash incentive awards is based upon the estimated fair value of the award on the grant date and adjustment as necessary each reporting period.  The long-term cash incentive awards are accounted for as a liability-classified award on the Company's September 30, 2012 and December 31, 2011 consolidated balance sheets.  The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

At September 30, 2012, a total of 298,423 shares of restricted stock remain outstanding which have been granted to officers of the Company.  The shares are valued at $2.5 million, which equates to an average price per share of $8.30.  The value, including estimated forfeitures, of restricted shares that vest based on service conditions will be amortized to compensation expense ratably over the vesting period for each grant of stock.  At September 30, 2012, a total of 18,465 deferred incentive share units remain outstanding which have been granted to employees of the Company.  The deferred incentive share units are valued at $465,000, which equates to an average price per share of $25.19, and the units vest four years from grant date.  Total compensation expense related to the restricted stock and deferred incentive units of $371,000, and $1.4 million was recognized during the nine months ended September 30, 2012 and 2011, respectively.  Total compensation expense related to nonvested awards not yet recognized was $1.4 million at September 30, 2012.  The weighted average period over which this expense is expected to be recognized is approximately 1.7 years.

A summary of the Company's restricted shares and deferred incentive share unit activity for the nine months ended September 30, 2012 is as follows:

				Weighted					Weighted
				Average		Deferred			Average
	Restricted			Grant-Date		Incentive			Grant-Date
	Shares			Fair Value		Share Units			Fair Value
Balance at 12/31/11		454,070		$	9.83		27,370		$	21.65
Issued		21,900			10.15		-			-
Vested		(56,013	)		21.55		(3,030	)		14.93
Forfeited		(121,534	)		8.25		(5,875	)		13.99
Balance at 09/30/12		298,423		$	8.30		18,465		$	25.19

Page 18 of 45

Note K - Fair Values of Financial Instruments

FASB Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities.  The Codification requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

	As of September 30, 2012					As of December 31, 2011
	Carrying			Fair		Carrying		Fair
	Amount			Value		Amount		Value
	(In thousands)
Financial Assets:
Cash and cash equivalents		$	53,556	$	53,556	$	75,183	$	75,183
Financial Liabilities:
Mortgage notes payable		$	549,429	$	563,293	$	752,414	$	761,942
Notes payable to banks			125,000		125,000		132,322		125,494
Interest rate swap agreements			15,348		15,348		11,134		11,134

The methods and assumptions used to estimate fair value for each class of financial asset or liability are discussed below:

Cash and cash equivalents:  The carrying amounts for cash and cash equivalents approximate fair value.

Mortgage notes payable:  The fair value of mortgage notes payable is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.  This information is considered a Level 2 input as defined by ASC 820.

Notes payable to banks:  The fair value of the Company's notes payable to banks is estimated by discounting expected cash flows at current market rates.  This information is considered a Level 2 input as defined by ASC 820.

Interest rate swap agreements:  The fair value of the interest rate swaps is determined by estimating the expected cash flows over the life of the swap using the mid-market rate and price environment as of the last trading day of the reporting period.  This information is considered a Level 2 input as defined by ASC 820.

Note L – Income Taxes

The Company qualifies and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code (the "Code").  The Company will generally not be subject to federal income tax to the extent that it distributes its taxable income to the Company's shareholders, and as long as Parkway satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.

The Company has elected to treat certain consolidated subsidiaries as taxable REIT subsidiaries, which are tax paying entities for income tax purposes and are taxed separately from the Company.  Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal and state income tax at regular corporate tax rates.

Parkway's provision for income taxes for the nine months ended September 30, 2012 and 2011, was $859,000 and $414,000, respectively of current federal and state income tax expense resulting from taxable REIT subsidiary income.

In connection with the purchase accounting for the Management Company, the Company recorded deferred tax liabilities of $14.8 million representing differences between the tax basis and GAAP basis of the acquired assets and liabilities (primarily related to the Management Company contracts) multiplied by the effective tax rate.  The Company was required to record these deferred tax liabilities as a result of the Management Company operating as a C corporation at the time it was acquired.  At September 30, 2012, the deferred tax liability totaled $13.6 million and the deferred income tax benefit recorded for the nine months ended September 30, 2012 was $717,000.

Page 19 of 45

Note M – TPG Securities Purchase Agreement

On May 3, 2012, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement"), by and among the Company and TPG.  Pursuant to the terms of the Purchase Agreement, on June 5, 2012, the Company issued to TPG 4.3 million shares, or approximately $48.4 million, of common stock and approximately 13.5 million shares, with an initial liquidation value of $151.6 million, of newly-created, non-voting Series E Cumulative Redeemable Convertible Preferred Stock (the "Series E Preferred Stock").  Parkway incurred approximately $13.9 million in transaction costs as it related to the issuance of equity and these were recorded as a reduction to proceeds received.  During the nine months ended September 30, 2012, the Company issued an additional 6,666 shares of Series E Preferred Stock and 6,198 shares of common stock to TPG in lieu of director's fees and paid approximately $2.3 million and $1.0 million in dividends on common stock and Series E Preferred Stock, respectively, to TPG.

At a special meeting of stockholders held on July 31, 2012, the stockholders approved, among other things, the right to convert, at the option of the Company or the holders, shares of the Series E Preferred Stock into shares of the Company's common stock. On August 1, 2012, the Company delivered a conversion notice to TPG and all shares of Series E Preferred Stock were converted into common stock on a one-for-one basis.

Note N - Segment Information

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

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

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

Page 20 of 45

The following is a reconciliation of FFO and net income (loss) attributable to common stockholders for office properties and total consolidated entities for the three months ended September 30, 2012 and 2011.  Amounts presented as "Unallocated and Other" represent primarily income and expense associated with providing management services, corporate general and administrative expense, interest expense on the Company's credit facility and preferred dividends.

	At or for the three months ended									At or for the three months ended
	September 30, 2012									September 30, 2011
	Office			Unallocated						Office			Unallocated
	Properties			and Other			Consolidated			Properties			and Other			Consolidated
	(in thousands)									(in thousands)
	(Unaudited)
Income from office and parking properties (a)	$	54,998		$	-		$	54,998		$	42,245		$	-		$	42,245
Management company income		-			4,591			4,591			-			6,120			6,120
Property operating expenses (b)		(21,257	)		-			(21,257	)		(18,471	)		-			(18,471	)
Depreciation and amortization		(21,766	)		-			(21,766	)		(17,471	)		-			(17,471	)
Management company expenses		-			(4,205	)		(4,205	)		-			(4,242	)		(4,242	)
Income tax benefit		-			7			7			-			174			174
General and administrative expenses		-			(3,749	)		(3,749	)		-			(4,104	)		(4,104	)
Acquisition costs		(159	)		-			(159	)		-			(25	)		(25	)
Other income		-			64			64			-			87			87
Equity in earnings of unconsolidated           joint ventures		-			-			-			5			-			5
Interest expense (c)		(7,796	)		(725	)		(8,521	)		(7,281	)		(1,595	)		(8,876	)
Adjustment for noncontrolling interests – unit holders		-			17			17			-			1			1
Adjustment for noncontrolling interest – real estate partnerships		896			-			896			77,546			-			77,546
Loss from discontinued operations		(330	)		-			(330	)		(131,800	)		-			(131,800	)
Gain on sale of real estate from discontinued operations		995			-			995			2,275			-			2,275
Gain on sale of real estate and other assets		48			500			548			743			-			743
Change in fair value of contingent consideration		-			-			-			-			12,000			12,000
Impairment loss on mortgage loan receivable		-			-			-			-			(9,235	)		(9,235	)
Dividends on preferred stock		-			(2,711	)		(2,711	)		-			(2,710	)		(2,710	)
Net income (loss) attributable to common stockholders		5,629			(6,211	)		(582	)		(52,209	)		(3,529	)		(55,738	)
Depreciation and amortization		21,766			-			21,766			17,471			-			17,471
Depreciation and amortization-discontinued       operations		102			-			102			14,819			-			14,819
Depreciation and amortization-noncontrolling       interest – real estate partnerships		(8,085	)		-			(8,085	)		(11,574	)		-			(11,574	)
Depreciation and amortization-unconsolidated       joint ventures
Adjustment for depreciation and amortization –unconsolidated joint ventures		-			-			-			38			-			38
Noncontrolling interests – unit holders		-			(17	)		(17	)		-			(1	)		(1	)
Impairment loss on real estate		-			-			-			54,767			-			54,767
(Gain) loss on sale of real estate		20		$	-			20			(3,018	)		-			(3,018	)
Funds from operations attributable to common       stockholders	$	19,432		$	(6,228	)	$	13,204		$	20,294		$	(3,530	)	$	16,764
Capital expenditures (d)	$	7,749		$	-		$	7,749		$	12,906		$	-		$	12,906

(a)	Included in income from office and parking properties are rental revenues, customer reimbursements, parking income and other income.
(b)	Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.
(c)	Interest expense for office properties represents interest expense on property secured mortgage debt.  It does not include interest expense on the Company's unsecured credit facilities, which is included in "Unallocated and Other".
(d)	Capital expenditures include building improvements, tenant improvements and leasing costs.

Page 21 of 45

The following is a reconciliation of FFO and net income (loss) attributable to common stockholders for office properties and total consolidated entities for the nine months ended September 30, 2012 and 2011.  Amounts presented as "Unallocated and Other" represent primarily income and expense associated with providing management services, corporate general and administrative expense, interest expense on the Company's credit facility and preferred dividends.

	At or for the nine months ended									At or for the nine months ended
	September 30, 2012									September 30, 2011
	Office			Unallocated						Office			Unallocated
	Properties			and Other			Consolidated			Properties			and Other			Consolidated
	(in thousands)									(in thousands)
	(Unaudited)
Income from office and parking properties (a)	$	149,995		$	-		$	149,995		$	104,739		$	-		$	104,739
Management company income		-			14,996			14,996			-			9,990			9,990
Property operating expenses (b)		(58,803	)		-			(58,803	)		(43,285	)		-			(43,285	)
Depreciation and amortization		(59,046	)		-			(59,046	)		(38,342	)		-			(38,342	)
Management company expenses		-			(12,966	)		(12,966	)		-			(8,196	)		(8,196	)
Income tax expense		-			(143	)		(143	)		-			(50	)		(50	)
General and administrative expenses		-			(11,266	)		(11,266	)		-			(11,569	)		(11,569	)
Acquisition costs		(1,491	)		-			(1,491	)		(2,764	)		(13,990	)		(16,754	)
Other income		-			205			205			-			849			849
Equity in earnings of unconsolidated       joint ventures		-			-			-			101			-			101
Interest expense (c)		(23,552	)		(2,749	)		(26,301	)		(17,576	)		(5,377	)		(22,953	)
Adjustment for noncontrolling interests – unit holders		-			1			1			-			2			2
Adjustment for noncontrolling interest – real estate partnerships		1,789			-			1,789			84,112			-			84,112
Income (loss) from discontinued operations		2,538			-			2,538			(138,571	)		-			(138,571	)
Gain on sale of real estate from discontinued       operations		9,767			-			9,767			6,567			-			6,567
Gain on sale of real estate and other assets		548			-			548			743			-			743
Change in fair value of contingent       consideration		-			(216	)		(216	)		-			12,000			12,000
Impairment on mortgage loan receivable		-			-			-			-			(9,235	)		(9,235	)
Dividends on preferred stock		-			(8,132	)		(8,132	)		-			(7,341	)		(7,341	)
Dividends on convertible preferred stock		-			(1,011	)		(1,011	)		-			-			-
Net income (loss) attributable to common       stockholders		21,745			(21,281	)		464			(44,276	)		(32,917	)		(77,193	)
Depreciation and amortization		59,046			-			59,046			38,342			-			38,342
Depreciation and amortization–discontinued      operations		926			-			926			45,964			-			45,964
Depreciation and amortization-noncontrolling       interest–real estate partnerships		(24,260	)		-			(24,260	)		(25,350	)		-			(25,350	)
Adjustment for depreciation and amortization -       unconsolidated joint ventures		22			-			22			197			-			197
Noncontrolling interests–unit holders		-			(1	)		(1	)		-			(2	)		(2	)
Impairment loss on real estate		-			-			-			56,467			-			56,467
Gain on sale of real estate		(4,914	)		-			(4,914	)		(7,310	)		-			(7,310	)
Funds from operations available to common stockholders	$	52,565		$	(21,282	)	$	31,283		$	64,034		$	(32,919	)	$	31,115
Total assets	$	1,481,253		$	103,091		$	1,584,344		$	1,822,926		$	91,256			1,914,182
Office and parking properties (e)	$	1,259,277		$	-		$	1,259,277		$	1,545,749		$	-		$	1,545,749
Capital expenditures (d)	$	26,404		$	-		$	26,404		$	40,554		$	-		$	40,554

(a)	Included in income from office and parking properties are rental revenues, customer reimbursements, parking income and other income.
(b)	Included in property operating expenses are real estate taxes, insurance, contract services, repairs and maintenance and property operating expenses.
(c)	Interest expense for office properties represents interest expense on property secured mortgage debt.  It does not include interest expense on the Company's unsecured credit facilities, which is included in "Unallocated and Other".
(d)	Capital expenditures include building improvements, tenant improvements and leasing costs.
(e)	Includes office and parking properties held for sale

Page 22 of 45

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

Overview

Parkway is a self-administered real estate investment trust ("REIT") specializing in the ownership of quality office properties in higher growth submarkets in the Sunbelt region of the United States.  At October 1, 2012, Parkway owns or has an interest in 39 office properties located in nine states with an aggregate of approximately 10.1 million square feet of leasable space.  Fee-based real estate services are offered through wholly owned subsidiaries of the Company, which in total manage and/or lease approximately 11.6 million square feet for third-party owners at October 1, 2012.  Unless otherwise indicated, all references to square feet represent net rentable area.

Occupancy.  Parkway's revenues are dependent on the occupancy of its office buildings.  At October 1, 2012, occupancy of Parkway's office portfolio was 89.6% compared to 87.4% at July 1, 2012 and 84.4% at October 1, 2011.  Not included in the October 1, 2012 occupancy rate is the impact of 13 signed leases totaling 81,000 square feet expected to take occupancy between now and the first quarter of 2013, of which the majority will commence during the fourth quarter of 2012.  Including these signed leases, the Company's portfolio was 90.4% leased at October 1, 2012.  The Company's average occupancy for the three months and nine months ended September 30, 2012 was 88.1% and 86.2%, respectively, and Parkway currently projects an average annual occupancy range of 85.5% to 86.5% during 2012 for its office properties and ending occupancy of 88.0% to 88.5%.  To combat rising vacancy, Parkway utilizes innovative approaches to produce new leases.  These include the Broker Bill of Rights, a short-form service agreement and customer advocacy programs that are models in the industry and have historically helped the Company maintain occupancy over time.

During the third quarter of 2012, 65 renewal, expansion and new leases were signed totaling 439,000 rentable square feet.  Included in this total were 35 renewal leases totaling 253,000 rentable square feet at an average rent per square foot of $21.88, representing a 8.8% rate of decrease from the expiring rate, and at an average cost of $2.75 per square foot per year of the lease term.  During the nine months ended September 30, 2012, 207 renewal, expansion and new leases were signed totaling 1.2 million rentable square feet.  Included in this total were 109 renewal leases totaling 631,000 rentable square feet at an average rent per square foot of $21.13, representing a 9.1% rate decrease from the expiring rate, and at an average cost of $2.17 per square foot per year of the lease term.

During the third quarter of 2012, 10 expansion leases were signed totaling 62,000 rentable square feet at an average rent per square foot of $25.49 and at an average cost of $5.53 per square foot per year of the lease term.  During the nine months ended September 30, 2012, 33 expansion leases were signed totaling 131,000 rentable square feet at an average rent per square foot of $23.50 and at an average cost of $5.00 per square foot per year of the lease term.

During the third quarter of 2012, 20 new leases were signed totaling 124,000 rentable square feet at an average rent per square foot of $19.73 and at an average cost of $3.78 per square foot per year of the term.  During the nine months ended September 30, 2012, 65 new leases were signed totaling 440,000 rentable square feet at an average rent per square foot of $20.89 and at an average cost of $5.05 per square foot per year of the term.

Rental Rates.  An increase in vacancy rates in a market or at a specific property has the effect of reducing market rental rates.  Inversely, a decrease in vacancy rates in a market or at a specific property has the effect of increasing market rental rates.  Parkway's leases typically have three to seven year terms, though the Company does enter into leases with terms that are either shorter or longer than that typical range from time to time.  As leases expire, the Company seeks to replace the existing leases with new leases at the current market rental rate.  For Parkway's properties owned as of October 1, 2012, management estimates that it has approximately $0.59 per square foot in rental rate embedded loss in its office property leases.  Embedded loss is defined as the difference between the weighted average in-place cash rents including operating expense reimbursements and the weighted average estimated market rental rate.

Customer Retention.  Keeping existing customers is important as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs.  Parkway estimates that it costs five to six times more to replace an existing customer with a new one than to retain the existing customer.  In making this estimate, Parkway takes into account the sum of revenue lost during downtime on the space plus leasing costs, which typically rise as market vacancies increase.  Therefore, Parkway focuses a great amount of energy on customer retention. Parkway seeks to retain its customers by continually focusing on operations at its office properties. The Company believes in providing superior customer service; hiring, training, retaining and empowering each employee; and creating an environment of open communication both internally and externally with customers and stockholders. Over the past ten years, Parkway maintained an average 65% customer retention rate. Parkway's customer retention rate was 76.0% for the quarter ended September 30, 2012, as compared to 63.2% for the quarter ended June 30, 2012, and 45.4% for the quarter ended September 30, 2011.

Page 23 of 45

Business Objective and Operating Strategies

Our business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets.  We intend to achieve this objective by executing on the following business and growth strategies:

· Create Value as the Leading Owner of Quality Assets in Core Sunbelt Submarkets. Our investment strategy is to pursue attractive returns by focusing primarily on owning high-quality office buildings and portfolios that are well-located and competitively positioned within central business district and urban infill locations within our core submarkets in the Sunbelt region of the United States.   We also seek to pursue value-add investment opportunities on a limited basis, for example by acquiring under-leased assets at attractive purchase prices and increasing occupancy at those assets over time, to complement the balance of the core portfolio.  Further, we intend to pursue an efficient capital allocation strategy that maximizes the returns on our invested capital.  This may include selectively disposing of properties when we believe returns have been maximized and redeploying capital into acquisitions or other opportunities.

· Maximize Cash Flow by Continuing to Enhance the Operating Performance of Each Property.  We provide property and asset management and leasing services to our portfolio, actively managing our properties and leveraging our customer relationships to improve operating performance, maximize long-term cash flow and enhance stockholder value.  By developing an ownership plan for each of our properties and then continually managing our properties to those plans throughout our ownership, we seek to attain a favorable customer retention rate by providing outstanding property management and customer service programs responsive to the varying needs of our diverse customer base.  We will also employ a judicious prioritization of capital projects to focus on projects that enhance the value of a property through increased rental rates, occupancy, service delivery, or enhanced reversion value.

· Realize Leasing and Operational Efficiencies and Gain Local Advantage.  We expect to concentrate our real estate portfolio in submarkets where we believe that we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies.  We believe that strengthening our local presence and leveraging our extensive market relationships will yield superior market information and service delivery and facilitate additional investment opportunities to create long-term stockholder value.

Joint Ventures and Partnerships

Management views investing in wholly owned properties as the highest priority of our capital allocation.  However, the Company intends to selectively pursue joint ventures if and when we determine that such a structure will allow us to reduce anticipated risks related to a property or portfolio or to address unusual operational risks.  Under the terms of these joint ventures and partnerships, where applicable, Parkway will seek to manage all phases of the investment cycle including acquisition, financing, operations, leasing and dispositions.  The Company will seek to receive fees for providing these services.

At September 30, 2012, Parkway had one partnership structured as a discretionary fund.

Parkway Properties Office Fund II, L.P. ("Fund II"), a $750.0 million discretionary fund, was formed on May 14, 2008 and was fully invested at February 10, 2012.  Fund II was structured such that Teacher Retirement System of Texas ("TRST") would be a 70% investor and Parkway a 30% investor in the fund, with an original target capital structure of approximately $375.0 million of equity capital and $375.0 million of non-recourse, fixed-rate first mortgage debt.  Fund II acquired 13 properties totaling 4.2 million square feet in Atlanta, Charlotte, Phoenix, Jacksonville, Orlando, Tampa and Philadelphia.  In August 2012, Fund II increased its investment capacity by $20.0 million to purchase Hayden Ferry Garage, a 2,500 space parking garage, a 21,000 square foot office property and a vacant parcel of development land, all adjacent to Hayden Ferry I and Hayden Ferry II in Phoenix.

Page 24 of 45

Parkway serves as the general partner of Fund II and provides asset management, property management, leasing and construction management services to the fund, for which it is paid market-based fees.  Cash will be distributed pro rata to each partner until a 9% annual cumulative preferred return is received and invested capital is returned.  Thereafter, 56% will be distributed to TRST and 44% to Parkway.  The term of Fund II will be seven years from the date the fund was fully invested, or until February 2019, with provisions to extend the term for two additional one-year periods at the discretion of Parkway.

As previously disclosed, the Company entered into an agreement to sell its interest in Parkway Properties Office Fund, L.P. ("Fund I"), which included 13 office properties totaling 2.7 million square feet to its existing partner in the fund for a gross sales price of $344.3 million.  As of July 1, 2012, the Company has completed the sale of all Fund I assets.  Parkway received approximately $14.2 million in net proceeds for the completed sales of the Fund I assets, and the proceeds were used to reduce amounts outstanding under the Company's credit facilities.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was Parkway's share.

Financial Condition

Comments are for the balance sheet dated September 30, 2012 compared to the balance sheet dated December 31, 2011.

Office and Parking Properties. In 2012, Parkway continued the execution of its strategy of operating and acquiring office properties as well as liquidating non-core assets that no longer meet the Company's investment criteria or that the Company has determined value will be maximized by selling.  During the nine months ended September 30, 2012, total assets decreased $52.0 million or 3.2%.

Acquisitions and Improvements.  Parkway's investment in office and parking properties increased $330.7 million net of depreciation to a carrying amount of $1.3 billion at September 30, 2012 and consisted of 38 office and parking properties and excluded properties classified as held for sale.  The primary reason for the increase in office and parking properties relates to the purchase of four office properties.

On January 11, 2012, Fund II purchased The Pointe, a 252,000 square foot office building located in the Westshore submarket of Tampa, Florida.  The gross purchase price for The Pointe was $46.9 million and Parkway's ownership share is 30%.  Parkway's equity contribution of $7.0 million was funded through availability under the Company's senior unsecured revolving credit facility

On February 10, 2012, Fund II purchased Hayden Ferry Lakeside II ("Hayden Ferry II"), a 300,000 square foot Class A+ office building located in the Tempe submarket of Phoenix and directly adjacent to Hayden Ferry Lakeside I ("Hayden Ferry I") which was purchased by Fund II in the second quarter of 2011.  The gross purchase price was $86.0 million and Parkway's ownership share is 30%.  Parkway's equity contribution of $10.8 million was funded through availability under the Company's senior unsecured revolving credit facility.  This investment in Hayden Ferry II completed the investment period of Fund II.

On June 6, 2012, Parkway purchased Hearst Tower, a 972,000 square foot office tower located in the central business district of Charlotte, North Carolina.  The gross purchase price was $250.0 million.  The purchase of Hearst Tower was financed with proceeds received from the investment in the Company by TPG VI Pantera Holdings L.P., (together with its affiliates, ("TPG")) combined with borrowings on the Company's credit facility.  For more information on TPG's investment see Note M.

On August 31, 2012, Parkway purchased a 2,500 space parking garage, a 21,000 square foot office building and a vacant parcel of developable land (collectively the "Hayden Ferry Garage"), all adjacent to Parkway's currently owned Hayden Ferry I and Hayden Ferry II assets in Tempe, Arizona.  The gross purchase price was $18.2 million on behalf of Fund II.  Fund II increased its investment capacity to pursue the purchase, and Parkway's share in this investment is 30%.  Parkway's equity contribution of $5.5 million was funded using the Company's revolving credit facility.

Page 25 of 45

During the nine months ended September 30, 2012, the Company capitalized building improvements of $19.3 million and recorded depreciation expense of $36.4 million related to its office and parking properties.

Dispositions.  During the nine months ended September 30, 2012, the Company completed a significant portion of its previously disclosed dispositions as part of its strategic objective of becoming a leading owner of high-quality office assets in higher growth markets in the Sunbelt.  As previously disclosed, the Company entered into an agreement to sell its interest in 13 office properties totaling 2.7 million square feet owned by Fund I to its existing partner in the fund for a gross sales price of $344.3 million.  As of December 31, 2011, Parkway had completed the sale of 9 of these 13 assets.  During the nine months ended September 30, 2012, the Company completed the sale of the remaining four Fund I assets totaling 770,000 square feet.  Upon sale, the buyer assumed a total of $292.0 million in mortgage loans, of which $82.4 million was Parkway's share. Parkway received net proceeds for the sale of the Fund I assets of $14.2 million, which were used to reduce amounts outstanding under the Company's credit facilities.  Additionally, during the nine months ended September 30, 2012, the Company completed the sale of the 15 properties included in its strategic sale of a portfolio of non-core assets, for a gross sales price of $147.7 million and generating net proceeds to Parkway of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was Parkway's share.  The 15 assets that were sold include five assets in Richmond, four assets in Memphis, and six assets in Jackson.

The Company completed the sale of three additional assets during the nine months ended September 30, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, and Falls Pointe, a 107,000 square foot office property located in Atlanta and owned by Parkway Properties Office Fund II, L.P. ("Fund II") for a gross sales price of $157.4 million.  Parkway received approximately $4.8 million in net proceeds from these sales, which were used to reduce amounts outstanding under the Company's revolving credit facility.  In connection with the sale of 111 East Wacker, the buyer assumed a $147.9 mortgage loan upon sale.

Mortgage Loans.  In connection with the previous sale of One Park Ten, the Company had seller-financed a $1.5 million note receivable that bore interest at 7.3% per annum on an interest-only basis through maturity in June 2012.  On April 2, 2012, the borrower prepaid the note receivable and all accrued interest in full.

On April 10, 2012, the Company transferred its rights, title and interest in the B participation piece (the "B piece") of a first mortgage secured by an 844,000 square foot office building in Dallas, Texas known as 2100 Ross.  The B piece was purchased at an original cost of $6.9 million in November 2007.  The B piece was originated by Wachovia Bank, N.A., a Wells Fargo Company, and had a face value of $10.0 million, a stated coupon rate of 6.1% and a scheduled maturity in May 2012.  During 2011, the Company recorded a non-cash impairment loss on the mortgage loan in the amount of $9.2 million, thereby reducing its investment in the mortgage loan to zero.  Under the terms of the transfer, the Company is entitled to certain payments if the transferee is successful in obtaining ownership of 2100 Ross or if the transferee is successful in obtaining payment on the amount due on the note receivable.  During the third quarter of 2012, the transferee successfully obtained ownership of 2100 Ross and as a result the Company received a $500,000 payment which is classified as recovery of losses on mortgage loan receivable and other assets in the Company's Consolidated Statements of Operations and Comprehensive Income.

Intangible Assets, Net. For the nine months ended September 30, 2012, intangible assets net of related amortization increased $18.4 million or 19.2% and was primarily due to the purchase of four office properties.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $21.6 million or 28.8% during the nine months ended September 30, 2012 and is primarily due to equity contributions from Fund II limited partners received during 2011 for the purchase of office properties which closed during the first quarter of 2012, offset against proceeds from the $125 million unsecured term loan.  Parkway's proportionate share of cash and cash equivalents at September 30, 2012 and December 31, 2011 was $30.1 million and $25.8 million, respectively.

Assets Held for Sale and Liabilities Related to Assets Held for Sale.  For the nine months ended September 30, 2012, assets held for sale decreased $375.8 million or 98.2% and liabilities related to assets held for sale decreased $285.2 million or 99.9%.  For a complete discussion of assets and liabilities held for sale, please reference "Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Discontinued Operations."

Page 26 of 45

Notes Payable to Banks. Notes payable to banks decreased $7.3 million or 5.5% during the nine months ended September 30, 2012.  At September 30, 2012, notes payable to banks totaled $125.0 million and the net decrease is attributable to payments on the senior unsecured revolving credit facility from proceeds received from the sale of office properties, proceeds received from the issuance of common stock and Series E Cumulative Convertible preferred stock, offset by borrowings to fund the Company's proportionate share of four office property purchases as well as proceeds received from the placement of a  $125 million unsecured term loan.

On March 30, 2012, the Company entered into an Amended and Restated Credit Agreement with a consortium of eight banks for its $190 million senior unsecured revolving credit facility.  Additionally, the Company amended its $10 million working capital revolving credit facility under substantially the same terms and conditions, with the combined size of the facilities remaining at $200 million (collectively, the "New Facilities").  The New Facilities provide for modifications to the existing facilities by, among other things, extending the maturity date from January 31, 2014 to March 29, 2016, with an additional one-year extension option with the payment of a fee, increasing the size of the accordion feature from $50 million to as much as $160 million, lowering applicable interest rate spreads and unused fees, and modifying certain other terms and financial covenants.  The interest rate on the New Facilities is based on LIBOR plus 160 to 235 basis points, depending on overall Company leverage (with the current rate set at 210 basis points).  Additionally, the Company pays fees on the unused portion of the New Facilities ranging between 25 and 35 basis points based  upon usage of the aggregate commitment (with the current rate set at 35 basis points).  Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Book Runners on the senior facility.  In addition, Wells Fargo Bank, N.A. acted as Administrative Agent and Bank of America, N.A. acted as Syndication Agent.  KeyBank, N.A., PNC Bank, N.A. and Royal Bank of Canada all acted as Documentation Agents.  Other participating lenders include JPMorgan Chase Bank, Trustmark National Bank, and Seaside National Bank and Trust.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

On September 27, 2012, the Company closed a $125 million unsecured term loan.  The term loan has a maturity date of September 27, 2017, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million.  Interest on the term loan is based on LIBOR plus an applicable margin of 150 to 225 basis points depending on overall Company leverage (with the current rate set at 150 basis points.)  The term loan has substantially the same operating and financial covenants as required by the Company's current unsecured revolving credit facility.  Keybanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Bookrunners on the term loan.  In addition, Keybank National Association acted as Administrative Agent; Bank of America, N. A. acted as Syndication Agent; and Wells Fargo Bank, National Association acted as Documentation Agent.  Other participating lenders include Royal Bank of Canada, PNC Bank, National Association, U. S. Bank National Association, and Trustmark National Bank.

On October 10, 2012, the Company exercised $25 million of the $160 million accordion feature of its existing unsecured revolving credit facility which matures in March 2016 and increased capacity from $190 million to $215 million with the additional borrowing capacity being provided by U.S. Bank National Association, bringing the total number of participating lenders to nine.  The interest rate on the credit facility is currently LIBOR plus 160 basis points.  Other terms and conditions under the credit facility remain unchanged.

Mortgage Notes Payable. During the nine months ended September 30, 2012, mortgage notes payable increased $51.4 million or 10.3% and is due to the placement of non-recourse mortgage loans on two Fund II properties totaling $73.5 million, offset by the payoff of one mortgage loan in the amount of $16.3 million and scheduled principal payments of $5.8 million.

On January 11, 2012, in connection with the purchase of The Pointe in Tampa, Florida, Fund II obtained a $23.5 million non-recourse first mortgage loan, which matures in February 2019.  The mortgage has a fixed rate of 4.0% and is interest only for the first 42 months of the term.

On February 10, 2012, Fund II obtained a $50.0 million non-recourse mortgage loan, of which $15.0 million is Parkway's share, secured by Hayden Ferry II, a 300,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The mortgage loan matures in July 2018 and bears interest at LIBOR plus the applicable spread which ranges from 250 to 350 basis points over the term of the loan.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes LIBOR at 1.5% through January 25, 2018, which equates to a total interest rate ranging from 4.0% to 5.0%. The mortgage loan is cross-collateralized, cross-defaulted, and coterminous with the mortgage loan secured by Hayden Ferry I.

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On March 9, 2012, the Company repaid a $16.3 million non-recourse mortgage loan secured by Bank of America Plaza, a 337,000 square foot office property in Nashville, Tennessee.  The mortgage loan had a fixed rate of 7.1% and was scheduled to mature in May 2012.  The Company repaid the mortgage loan using available proceeds under the senior unsecured revolving credit facilities.

The Company expects to continue seeking primarily fixed-rate, non-recourse mortgage financing with maturities from five to ten years typically amortizing over 25 to 30 years on select office building investments as additional capital is needed.  The Company monitors a number of leverage and other financial metrics defined in the loan agreements for the Company's senior unsecured revolving credit facility and working capital unsecured credit facility, which include but are not limited to the Company's total debt to total asset value.  In addition, the Company monitors interest, fixed charge and modified fixed charge coverage ratios as well the net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio is computed by comparing cash interest accrued and preferred dividends paid to EBITDA.  The net debt to EBITDA multiple is computed by comparing Parkway's share of net debt to EBITDA computed for the current quarter as annualized and adjusted pro forma for any completed investment activity. Management believes all of the leverage and other financial metrics it monitors, including those discussed above, provides useful information on total debt levels as well as the Company's ability to cover interest, principal and/or preferred dividend payments.  The Company currently targets a net debt to EBITDA multiple of 5.5 to 6.5 times.

Accounts Payable and Other Liabilities.  For the nine months ended September 30, 2012, accounts payable and other liabilities decreased $10.5 million or 11.6% and is primarily due to the decrease in contingent consideration related to the Eola purchase for which 1.8 million operating partnership units ("OP units") were issued during the first quarter of 2012 offset by an increase in property tax payable and valuation allowances on interest rate swaps.

On December 30, 2011, Parkway and the former Eola principals amended certain post-closing provisions of the contribution agreement to provide, among other things, that if the Management Company achieved annual revenues in excess of the original 2011 target, all OP Units subject to the 2011 earn-out, the 2012 earn-out and the earn-up will be deemed earned and paid when the 2011 earn-out payment is made.  Based on the Management Company revenue for 2011, the target was achieved and all 1.8 million OP Units were earned and issued to Eola's principals on February 28, 2012.

Shelf Registration Statement.  The Company has a universal shelf registration statement on Form S-3 (No. 333-178001) that was declared effective by the Securities and Exchange Commission on December 5, 2011.  The Company may offer an indeterminate number or amount, as the case may be, of (i) shares of common stock, par value $0.001 per share; (ii) shares of preferred stock, par value $0.001 per share; and (iii) warrants to purchase preferred stock or common stock, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, at an aggregate public offering price not to exceed $500 million.  As of September 30, 2012, the Company had $500 million of securities available for issuance under the registration statement.

The Company also has a registration statement on Form S-3 (No. 333-178003) that was declared effective by the Securities and Exchange Commission on February 28, 2012.  The Company may issue up to 1.8 million shares of common stock, par value $0.001 per share, to certain holders of common units of limited partnership interests in Parkway Properties LP ("PPLP"), a Delaware limited partnership.  The Company's indirect, controlled subsidiary is the general partner of PPLP.  Pursuant to the Partnership Agreement for PPLP, the Company may elect to deliver shares to common unit holders who wish to have their common units redeemed.  The Company filed the registration statement in order to satisfy its registration obligations under the Registration Rights Agreement, dated May 18, 2011, between the Company and certain holders of common units.  As of September 30, 2012, the Company had 307,000 shares of common stock available for issuance under the registration statement.

Page 28 of 45

TPG Securities Purchase Agreement. On May 3, 2012, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement"), by and among the Company and TPG.  Pursuant to the terms of the Purchase Agreement, on June 5, 2012, the Company issued to TPG 4.3 million shares, or approximately $48.4 million, of common stock and approximately 13.5 million shares, with an initial liquidation value of $151.6 million, of newly-created, non-voting Series E Cumulative Redeemable Convertible Preferred Stock (the "Series E Preferred Stock").  Parkway incurred approximately $13.9 million in transaction costs as it related to the issuance of equity and these were recorded as a reduction to proceeds received.  During the nine months ended September 30, 2012, the Company issued an additional 6,666 shares of Series E Preferred Stock and 6,198 shares of common stock to TPG in lieu of director's fees and paid approximately $2.3 million and $1.0 million in dividends on common stock and Series E Preferred Stock, respectively, to TPG.

At a special meeting of stockholders held on July 31, 2012, the stockholders approved, among other things, the right to convert, at the option of the Company or the holders, shares of the Series E Preferred Stock into shares of the Company's common stock. On August 1, 2012, the Company delivered a conversion notice to TPG and all shares of Series E Preferred Stock were converted into common stock on a one-for-one basis.

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The reconciliation of net income (loss) for Parkway Properties, Inc. to EBITDA and the computation of the Company's proportionate share of interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple is as follows for the nine months ended September 30, 2012 and 2011 (in thousands):

	Nine Months Ended
	September 30
	2012			2011
	(Unaudited)
Net income (loss) for Parkway Properties, Inc.	$	9,607		$	(69,852	)
Adjustments to net income (loss) for Parkway Properties, Inc.:
Interest expense		27,159			44,367
Amortization of financing costs		1,458			1,573
Non-cash adjustment for interest rate swap – discontinued operations		(215	)		-
(Gain) loss on early extinguishment of debt		1,494			(302	)
Acquisition costs (Parkway's share)		846			15,060
Depreciation and amortization		59,972			84,306
Amortization of share-based compensation		371			1,389
Gain on sale of real estate (Parkway's share)		(5,462	)		(7,310	)
Non-cash impairment loss on real estate – discontinued operations		-			65,702
Change in fair value of contingent consideration		216			(12,000	)
Tax expense		143			50
EBITDA adjustments - unconsolidated joint ventures		58			306
EBITDA adjustments - noncontrolling interest in real estate partnerships		(36,418	)		(39,963	)
EBITDA (1)	$	59,229		$	83,326
Interest coverage ratio:
EBITDA	$	59,229		$	83,326
Interest expense:
Interest expense	$	27,159		$	44,367
Interest expense - unconsolidated joint ventures		21			108
Interest expense - noncontrolling interest in real estate partnerships		(11,277	)		(14,306	)
Total interest expense	$	15,903		$	30,169
Interest coverage ratio		3.7			2.8
Fixed charge coverage ratio:
EBITDA	$	59,229		$	83,326
Fixed charges:
Interest expense	$	15,903		$	30,169
Preferred dividends		9,143			7,341
Principal payments (excluding early extinguishment of debt)		6,115			9,246
Principal payments - unconsolidated joint ventures		6			26
Principal payments - noncontrolling interest in real estate partnerships		(1,769	)		(1,990	)
Total fixed charges	$	29,398		$	44,792
Fixed charge coverage ratio		2.0			1.9
Modified fixed charge coverage ratio:
EBITDA	$	59,229		$	83,326
Modified fixed charges:
Interest expense	$	15,903		$	30,169
Preferred dividends		9,143			7,341
Total modified fixed charges	$	25,046		$	37,510
Modified fixed charge coverage ratio		2.4			2.2
Net Debt to EBITDA multiple:
Annualized EBITDA (2)	$	82,887		$	106,822
Parkway's share of total debt:
Mortgage notes payable	$	549,429		$	978,981
Notes payable to banks		125,000			113,852
Adjustments for unconsolidated joint ventures		-			2,449
Adjustments for non-controlling interest in real estate partnerships		(272,880	)		(433,592	)
Parkway's share of total debt		401,549			661,690
Less:  Parkway's share of cash		(30,096	)		(14,165	)
Parkway's share of net debt	$	371,453		$	647,525
Net Debt to EBITDA multiple		4.5			6.1

(1)	Parkway defines EBITDA, a non-GAAP financial measure, as net income before interest, income taxes, depreciation, amortization, acquisition costs, gains or losses on early extinguishment of debt, other gains and losses and fair value adjustments.  EBITDA, as calculated by us, is not comparable to EBITDA reported by other REITs that do not define EBITDA exactly as we do.
(2)	Annualized EBITDA includes the implied annualized impact of any acquisition or disposition activity during the period.

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

Parkway views EBITDA primarily as a liquidity measure and, as such, the GAAP financial measure most directly comparable to it is cash flows provided by operating activities.  Because EBITDA is not a measure of financial performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for operating income, net income, or cash flows provided by operating, investing and financing activities prepared in accordance with GAAP.  The following table reconciles EBITDA to cash flows provided by operating activities for the nine months ended September 30, 2012 and 2011 (in thousands):

	Nine Months Ended
	September 30
	2012			2011
	(Unaudited)
Cash flows provided by operating activities	$	51,555		$	25,027
Amortization of above market leases		(3,799	)		(394	)
Amortization of mortgage loan discount		-			400
Interest rate swap adjustment		(215	)		-
Operating distributions from unconsolidated joint ventures		-			(507	)
Interest expense		27,159			44,367
(Gain) loss on early extinguishment of debt		1,494			(302	)
Acquisition costs (Parkway's share)		846			15,060
Tax expense - current		860			414
Change in deferred leasing costs		7,103			11,434
Change in receivables and other assets		(2,174	)		20,990
Change in accounts payable and other liabilities		6,137			(5,443	)
Adjustments for noncontrolling interests		(29,774	)		(28,091	)
Adjustments for unconsolidated joint ventures		37			371
EBITDA	$	59,229		$	83,326

Equity. Total equity increased $199.6 million or 31.7% during the nine months ended September 30, 2012, as a result of the following (in thousands):

	Increase
	(Decrease)
	(Unaudited)
Net income attributable to Parkway Properties, Inc.	$	9,607
Net loss attributable to noncontrolling interests		(1,790	)
Net income		7,817
Change in market value of interest rate swaps		(4,214	)
Comprehensive income		3,603
Common stock dividends declared		(8,283	)
Preferred stock dividends declared		(8,132	)
Convertible preferred dividends declared		(1,011	)
Share-based compensation		371
Shares issued in lieu of Director's fees		263
Issuance of Common Stock		44,995
Conversion of 13,484,444 convertible preferred shares to common stock		141,173
Shares withheld to satisfy tax withholding obligation on vesting of restricted stock		(173	)
Net shares distributed from deferred compensation plan		34
Issuance of 1.8 million operating partnership units		18,216
Sale of noncontrolling interest in Parkway Properties Office Fund, L.P.		(8,179	)
Contribution of capital by noncontrolling interest		17,447
Distribution of capital to noncontrolling interest		(675	)
	$	199,649

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Results of Operations

Comments are for the three months and nine months ended September 30, 2012, compared to the three months and nine months ended September 30, 2011.

Net loss attributable to common stockholders for the three months ended September 30, 2012 was $582,000 as compared to net loss attributable to common stockholders of $55.7 million for the three months ended September 30, 2011.  Net income attributable to common stockholders for the nine months ended September 30, 2012 was $464,000 and net loss attributable to common stockholders for the nine month ended September 30, 2011 was $77.2 million.  The increase in net income attributable to common stockholders for the nine months ended September 30, 2012 compared to the same period for 2011 in the amount of $77.7 million is primarily attributable to Parkway's proportionate share of impairment losses recorded during 2011 on Fund I office properties,  net operating income recorded in 2012 from Fund II purchases which closed in the second quarter of 2011 and first quarter of 2012 and the purchase of Hearst Tower in second quarter of 2012, gains on sale of real estate from discontinued operations, and acquisition costs recognized in 2011.  Other variances for income and expense items that comprise net income (loss) attributable to common stockholders are discussed in detail below.

Office and Parking Properties. The analysis below includes changes attributable to same-store properties and acquisitions of office properties.  Same-store properties are consolidated properties that the Company owned for the current and prior year reporting periods, excluding properties classified as discontinued operations.  At September 30, 2012, same-store properties consisted of 34 properties comprising 8.5 million square feet.

The following table represents revenue from office and parking properties for the three months and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30									Nine Months Ended September 30
					Increase		%							Increase		%
	2012		2011		(Decrease)		Change			2012		2011		(Decrease)		Change
Revenue from office and parking properties:
Same-store properties	$	43,916	$	42,245	$	1,671		4.0	%	$	97,004	$	94,367	$	2,637		2.8	%
Properties acquired		11,082		-		11,082		*N/	M		52,991		10,372		42,619		*N/	M
Total revenue from office and parking properties	$	54,998	$	42,245	$	12,753		30.2	%	$	149,995	$	104,739	$	45,256		43.2	%
*N/M-Not Meaningful

Revenue from office and parking properties for same-store properties increased $2.6 million or 2.8% for the nine months ended September 30, 2012.  The primary reason for the increase is due to an increase in same store occupancy during the nine months ended September 30, 2012, compared to the same period of 2011 of approximately 180 basis points.

The following table represents property operating expenses for the three months and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30										Nine Months Ended September 30
					Increase			%							Increase			%
	2012		2011		(Decrease)			Change			2012		2011		(Decrease)			Change
Expense from office and parking properties:
Same-store properties	$	18,140	$	18,459	$	(319	)		-1.7	%	$	39,004	$	39,918	$	(914	)		-2.3	%
Properties acquired		3,117		-		3,117			*N/	M		19,796		3,349		16,447			*N/	M
Properties sold		-		12		(12	)		*N/	M		3		18		(15	)		-83.3	%
Total expense from office and parking properties	$	21,257	$	18,471	$	2,786			15.1	%	$	58,803	$	43,285	$	15,518			35.9	%
*N/M-Not Meaningful

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Property operating expenses for same-store properties decreased $914,000 or 2.3% for the nine months ended September 30, 2012, compared to the same period of 2011.  The primary reason for the decrease is due to a decrease in utilities, personnel costs, repairs and maintenance, and bad debt expense.

Depreciation and amortization expense attributable to office and parking properties increased $4.3 million and $20.7 million for the three months and nine months ended September 30, 2012, compared to the same period for 2011, respectively.  The primary reason for the increase is due to the purchase of eight office properties and an additional interest in one property during 2011 and three office properties and Hayden Ferry Garage during 2012.

Management Company Income and Expenses.  Management company income decreased $1.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and increased $5.0 million for the nine months ended September 30, 2012 compared the nine months ended September 30, 2011.  Management company expenses increased $4.8 million for the nine months ended September 30, 2012 compared the nine months ended September 30, 2011.  The primary reason for the increases in management company income and expenses for the nine months ended September 30, 2012 is the purchase of the Eola Management Company in May 2011.

Acquisition Costs.  During the nine months ended September 30, 2012, the Company incurred $1.5 million in acquisition costs compared to $16.8 million for the same period in 2011, respectively.   The primary reason for the decrease is due to costs associated with the Eola combination and purchase of eight Fund II office properties that closed during the first half of 2011, compared with the purchase of three Fund II office properties and a parking garage and one wholly owned office property that closed during the nine months ended September 30, 2012.  Parkway's proportionate share of acquisition costs for the nine months ended September 30, 2012 and 2011 was $846,000 and $15.1 million, respectively.

Share-Based Compensation Expense. Compensation expense related to restricted shares and deferred incentive share units of $371,000 and $1.4 million was recognized for the nine months ended September 30, 2012 and 2011, respectively.  This expense is included in general and administrative expenses on the Company's Consolidated Statements of Operations and Comprehensive Income.  Total compensation expense related to nonvested awards not yet recognized was $1.4 million at September 30, 2012.  The weighted average period over which the expense is expected to be recognized is approximately 1.7 years.

On February 14, 2012, the Board of Directors approved 21,900 long-term equity incentive awards to officers of the Company.  The long-term equity incentive awards are valued at $222,000 which equates to an average price per share of $10.15 and are time-based awards.  These shares are accounted for as equity-classified awards.

The time-based awards will vest ratably over four years from the date the shares were granted.  See Note J for additional information on share-based and long-term compensation plans.

Interest Expense. Interest expense from continuing operations, including amortization of deferred financing costs, decreased $355,000 or 4.0% for the three months ended September 30, 2012, compared to an increase of $3.3 million for the nine months ended September 30, 2012 compared to the same period of 2011 and is comprised of the following (in thousands):

	Three Months Ended September 30										Nine Months Ended September 30
					Increase			%							Increase			%
	2012		2011		(Decrease)			Change			2012		2011		(Decrease)			Change
Interest expense:
Mortgage interest expense	$	7,622	$	7,130	$	492			6.9	%	$	22,847	$	17,247	$	5,600			32.5	%
Credit facility interest expense		470		1,299		(829	)		-63.8	%		1,880		4,534		(2,654	)		-58.5	%
Loss on early extinguishment of debt		-		-		-			-			190		-		190			*N/	M
Mortgage loan cost amortization		174		151		23			15.2	%		515		329		186			56.5	%
Credit facility cost amortization		255		296		(41	)		-13.9	%		869		843		26			3.1	%
Total interest expense	$	8,521	$	8,876	$	(355	)		-4.0	%	$	26,301	$	22,953	$	3,348			14.6	%
*N/M-not meaningful

Mortgage interest expense increased $492,000 and $5.6 million for the three months and nine months ended September 30, 2012 compared to the same period for 2011, and is primarily due to new loans obtained or assumed during 2011 and 2012.

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Credit facility interest expense decreased $829,000 and $2.7 million for the three months and nine months ended September 30, 2012 compared to the same period of 2011.  The decrease is due to a decrease in year-to-date average borrowings of $46.7 million due to the net proceeds from office property sales in 2011 and 2012 and proceeds received for the issuance of stock, which were used to pay down amounts outstanding under the credit facilities, offset by borrowings to fund the Company's equity investments in office properties purchased by Fund II during 2011 and 2012, as well as the purchase of Hearst Tower in 2012.

Discontinued Operations.  Discontinued operations is comprised of the following for the three months and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Statement of Operations:
Revenues
Income from office and parking properties	$	836		$	30,517		$	13,857		$	107,098
		836			30,517			13,857			107,098
Expenses
Office and parking properties:
Operating expense		543			13,359			6,450			47,907
Management company expense		53			76			291			202
Interest expense		468			7,023			3,845			22,792
Non-cash adjustment for interest rate swap		-			-			(215	)		-
Depreciation and amortization		102			14,852			948			46,061
Impairment loss		-			127,007			-			128,707
		1,166			162,317			11,319			245,669
Income (loss) from discontinued operations		(330	)		(131,800	)		2,538			(138,571	)
Gain on sale of real estate from discontinued       operations		995			2,275			9,767			6,567
Total discontinued operations per Statement       of Operations		665			(129,525	)		12,305			(132,004	)
Net (income) loss attributable to noncontrolling       interest from discontinued operations		(545	)		74,310			(4,219	)		77,840
Total discontinued operations-Parkway's share	$	120		$	(55,215	)	$	8,086		$	(54,164	)

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All current and prior period income from the following office property dispositions is included in discontinued operations for the three months and nine months ended September 30, 2012 (in thousands):

Office Property	Location	Square Feet		Date of Sale	Net Sales Price		Net Book Value of Real Estate		Gain (Loss) on Sale
233 North Michigan	Chicago, IL		1,070	05/11/2011	$	156,546	$	152,254	$	4,292
Greenbrier I & II	Hampton Roads, VA		172	07/19/2011		16,275		15,070		1,205
Glen Forest	Richmond, VA		81	08/16/2011		8,950		7,880		1,070
Tower at Gervais	Columbia, SC		298	09/08/2011		18,421		18,421		-
Wells Fargo	Houston, TX		134	12/09/2011		-		-		-
Fund I Assets	Various		1,956	12/31/2011		256,823		250,699		11,258
2011 Dispositions (2)			3,711		$	457,015	$	444,324	$	17,825
Falls Pointe	Atlanta, GA		107	01/06/2012	$	5,824	$	4,467	$	1,357
111 East Wacker	Chicago, IL		1,013	01/09/2012		153,240		153,237		3
Renaissance Center	Memphis, TN		189	03/01/2012		27,661		24,629		3,032
Overlook II	Atlanta, GA		260	04/30/2012		29,467		28,689		778
Wink Building	New Orleans, LA		32	06/08/2012		705		803		(98	)
Ashford/Peachtree	Atlanta, GA		321	07/01/2012		29,440		28,074		1,366
Non-Core Assets	Various		1,932	Various		125,486		122,157		3,329
2012 Dispositions (3)			3,854		$	371,823	$	362,056	$	9,767

Office Property	Location	Square Feet		Date of Sale	Gross Sales Price
Properties Held for Sale and Expected to Close During Fourth Quarter 2012 (1)
Sugar Grove	Houston, TX		124	10/23/2012	$	11,425
Total Properties Held for Sale			124		$	11,425

(1) Gains on assets held for sale are expected to be finalized upon sale and reflected in the year ending December 31, 2012 financial statements.

(2) Total gain on the sale of real estate in discontinued operations recognized for the year ended December 31, 2011 was $17.8 million, of which $9.8 million was Parkway's proportionate share.

(3) Total gain on the sale of real estate in discontinued operations recognized during the nine months ended September 30, 2012 was $9.8 million, of which $4.9 million was Parkway's proportionate share.

During the nine months ended September 30, 2012, the Company completed its previously disclosed dispositions as part of its strategic objective of becoming a leading owner of high-quality office assets in higher growth markets in the Sunbelt.  As previously disclosed, the Company entered into an agreement to sell its interest in 13 office properties totaling 2.7 million square feet owned by Parkway Properties Office Fund, L.P. ("Fund I") to its existing partner in the fund for a gross sales price of $344.3 million.  As of December 31, 2011, Parkway had completed the sale of 9 of these 13 assets.  During the nine months ended September 30, 2012, the Company completed the sale of four Fund I assets totaling 770,000 square feet.  Accordingly, income from all Fund I properties has been classified as discontinued operations for all current and prior periods.  These Fund I assets had a total of $292.0 million in mortgage loans, of which $82.4 million was Parkway's share, with a weighted average interest rate of 5.6% that were assumed by the buyer upon closing.  Parkway received net proceeds from the sales of the Fund I assets of $14.2 million, which were used to reduce amounts outstanding under the Company's credit facilities.

Additionally, during the nine months ended September 30, 2012, the Company completed the sale of the 15 properties included in its strategic sale of a portfolio of non-core assets, for a gross sales price of $147.7 million and generating net proceeds to Parkway of approximately $94.3 million, with the buyer assuming $41.7 million in mortgage loans upon sale, of which $31.9 million was Parkway's share.  The 15 assets that were sold include five assets in Richmond, four assets in Memphis, and six assets in Jackson.  Income from these non-core assets has been classified as discontinued operations for all current and prior periods.

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The Company completed the sale of three additional assets during the nine months ended September 30, 2012, including the sale of 111 East Wacker, a 1.0 million square foot office property located in Chicago, the Wink building, a 32,000 square foot office property in New Orleans, Louisiana, and Falls Pointe, a 107,000 square foot office property located in Atlanta and owned by Parkway Properties Office Fund II, L.P. ("Fund II") for a gross sales price of $157.4 million.  Parkway received approximately $4.8 million in net proceeds from these sales, which were used to reduce amounts outstanding under the Company's revolving credit facility.  In connection with the sale of 111 East Wacker, the buyer assumed a $147.9 mortgage loan upon sale.  Income from 111 East Wacker, the Wink building, and Falls Pointe has been classified as discontinued operations for all current and prior periods.

At September 30, 2012, assets and liabilities related to assets held for sale represented Sugar Grove, a 124,000 square foot office property in Houston, Texas.  On October 23, 2012, the Company sold Sugar Grove for $11.4 million and received $10.0 million in net proceeds, which will be used to fund future acquisitions.  Income from Sugar Grove has been classified as discontinued operations for all current and prior periods.  The assets and liabilities associated with Sugar Grove which have been classified as held for sale at September 30, 2012 are as follows (in thousands):

	September 30 2012
Balance Sheet:
Investment property	$	11,743
Accumulated depreciation		(5,071	)
Office property held for sale		6,672
Rents receivable and other assets		359
Total assets held for sale	$	7,031
Accounts payable and other liabilities	$	361
Total liabilities related to assets held for sale	$	361

Income Taxes.  The analysis below includes changes attributable to current income tax expenses and deferred income tax benefit for the three and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30												Nine Months Ended September 30
							(Increase)			%									(Increase)			%
	2012			2011			Decrease			Change			2012			2011			Decrease			Change
Income tax (expense) benefit:
Income tax expense-current	$	(231	)	$	(190	)	$	(41	)		21.6	%	$	(860	)	$	(414	)	$	(446	)		107.7	%
Income tax benefit-deferred		238			364			(126	)		-34.6	%		717			364			353			97.0	%
Total income tax (expense) benefit	$	7		$	174		$	(167	)		-96.0	%	$	(143	)	$	(50	)	$	(93	)		186.0	%

Current income tax expense increased $446,000 for the nine months ended September 30, 2012, compared to the same period of 2011.  The increase for the nine months ended September 30, 2012, is primarily attributable to an increase in revenue for the period from the Company's taxable REIT subsidiary, which was purchased in May 2011.  Deferred income tax benefit decreased $126,000 for the three months ended September 30, 2012 compared to the same period of 2011 and increased $353,000 for the nine months ended September 30, 2012 compared to the same period of 2011.  The increase for the nine months ended September 30, 2012 is primarily attributable to the change in deferred tax liability recorded as part of the purchase price allocation associated with the Eola Management Company.  At September 30, 2012, the deferred tax liability totaled $13.6 million.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which changes the wording used to describe the requirements in U.S. GAAP for measuring fair value, changes certain fair value measurement principles and enhances disclosure requirements for fair value measurements. The FASB does not intend for ASU 2011-04 to result in a change in the application of the requirements in ASC 820. The requirements of ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011. At March 31, 2012, the Company had implemented ASU 2011-04.

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In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income", which modifies reporting requirements for comprehensive income in order to increase the prominence of items reported in other comprehensive income in the financial statements.  ASU 2011-05 requires presentation of either a single continuous statement of comprehensive income or two separate, but consecutive statements in which the first statement presents net income and its components followed by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income.  The requirements of ASU 2011-05 are effective for interim and annual periods beginning after December 15, 2011.  At March 31, 2012, the Company had implemented ASU 2011-05.

Liquidity and Capital Resources

Statement of Cash Flows.  Net cash and cash equivalents were $53.6 million and $33.0 million at September 30, 2012 and 2011, respectively.  Net cash provided by operating activities was $51.6 million and $25.0 million for the nine months ended September 30, 2012 and 2011, respectively.  The increase in cash flows provided by operating activities of $26.5 million is primarily attributable to an increase in property net operating income due to the purchase of Hearst Tower and Fund II assets during 2011 and 2012, and a decrease in deferred leasing costs and acquisition costs.

Net cash used in investing activities for the nine months ended September 30, 2012 and 2011 was $296.4 million and $349.9 million, respectively.  The decrease in net cash used in investing activities of $53.5 million is primarily due to a decrease in investments in real estate in 2012, as well as the Company's purchase of the management company in 2011.

Net cash provided by financing activities was $223.2 million and $338.2 million for the nine months ended September 30, 2012 and 2011, respectively.  The decrease in net cash flows provided by financing activities of $115.0 million is primarily attributable to a decrease in bank borrowings, long-term financing and contributions from non-controlling interest partners to purchase office buildings offset by proceeds received from issuance of common stock and Series E cumulative convertible preferred stock in 2012.

Liquidity. The Company plans to continue pursuing the acquisition of additional investments that meet the Company's investment criteria and intends to use operating cash flow, proceeds from the placement of new mortgage loans, proceeds from the refinancing of existing mortgages, proceeds from the sale of assets, proceeds from the sale of portions of owned assets through joint ventures, possible sales of securities, cash balances and the Company's senior unsecured revolving credit facilities to fund those acquisitions.

The Company's cash flows are exposed to interest rate changes primarily as a result of its senior unsecured revolving credit facility, which has a floating interest rate tied to LIBOR used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations.  The Company's interest rate risk management objective is to limit the impact of interest rate changes on cash flows and to attempt to lower its overall borrowing costs.  To achieve its objectives, the Company borrows at fixed rates when possible, but also utilizes a senior unsecured revolving credit facility.

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At September 30, 2012, the Company had a total of $125.0 million outstanding under the following credit facilities (in thousands):

		Interest				Outstanding
Credit Facilities	Lender	Rate			Maturity	Balance
$10.0 Million Unsecured Working Capital Revolving Credit Facility (1)	PNC Bank		-	%	03/29/16	$	-
$190.0 Million Unsecured Revolving Credit Facility (1)	Various		-	%	03/29/16		-
$125.0 Million Unsecured Term Loan (2)	Various		1.7	%	09/27/17		125,000
			1.7	%		$	125,000

(1)

The interest rate on the credit facilities is based on LIBOR plus 160 to 235 basis points, depending upon overall Company leverage as defined in the loan agreements for the Company's Credit Facility, with the current rate set at 160 basis points.  Additionally, the Company pays fees on the unused portion of the credit facilities ranging between 25 and 35 basis points based upon usage of the aggregate commitment, with the current rate set at 25 basis points.

(2)

The interest rate on the term loan is based on LIBOR plus an applicable margin, of 1.5% to 2.3%, depending on overall Company leverage (with the current rate set at 1.5%.)  On September 28, 2012, the Company executed two floating-to-fixed interest rate swaps totaling $125 million, locking LIBOR at 0.7% for five years which is effective October 1, 2012.

On March 30, 2012, the Company entered into an Amended and Restated Credit Agreement with a consortium of eight banks for its $190.0 million senior unsecured revolving credit facility. Additionally, the Company amended its $10.0 million working capital revolving credit facility under substantially the same terms and conditions, with the combined size of the facilities remaining at $200.0 million (collectively, the "New Facilities").  The New Facilities provide for modifications to the existing facilities by, among other things, extending the maturity date from January 31, 2014 to March 29, 2016, with an additional one-year extension option with the payment of a fee, increasing the size of the accordion feature from $50 million to as much as $160 million, lowering applicable interest rate spreads and unused fees, and modifying certain other terms and financial covenants.  The interest rate on the New Facilities is based on LIBOR plus 160 to 235 basis points, depending on overall Company leverage (with the current rate set at 160 basis points).  Additionally, the Company pays fees on the unused portion of the New Facilities ranging between 25 and 35 basis points based  upon usage of the aggregate commitment (with the current rate set at 25 basis points).  Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Book Runners on the senior facility.  In addition, Wells Fargo Bank, N.A. acted as Administrative Agent and Bank of America, N.A. acted as Syndication Agent.  KeyBank, N.A., PNC Bank, N.A. and Royal Bank of Canada all acted as Documentation Agents.  Other participating lenders include JPMorgan Chase Bank, Trustmark National Bank, and Seaside National Bank and Trust.  The working capital revolving credit facility was provided solely by PNC Bank, N.A.

On September 27, 2012, the Company closed a $125 million unsecured term loan.  The term loan has a maturity date of September 27, 2017, and has an accordion feature that allows for an increase in the size of the term loan to as much as $250 million.  Interest on the term loan is based on LIBOR plus an applicable margin of 150 to 225 basis points depending on overall Company leverage (with the current rate set at 150 basis points.)  The term loan has substantially the same operating and financial covenants as required by the Company's current unsecured revolving credit facility.  Keybanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Joint Lead Arrangers and Joint Bookrunners on the term loan.  In addition, Keybank National Association acted as Administrative Agent; Bank of America, N. A. acted as Syndication Agent; and Wells Fargo Bank, National Association acted as Documentation Agent.  Other participating lenders include Royal Bank of Canada, PNC Bank, National Association, U. S. Bank National Association, and Trustmark National Bank.

On October 10, 2012, the Company exercised $25 million of the $160 million accordion feature of its existing unsecured revolving credit facility which matures in March 2016 and increased capacity from $190 million to $215 million with the additional borrowing capacity being provided by U.S. Bank National Association, bringing the total number of participating lenders to nine.  The interest rate on the credit facility is currently LIBOR plus 160 basis points.  Other terms and conditions under the credit facility remain unchanged.

The Company has entered into interest rate swap agreements.  The Company designated the swaps as cash flow hedges of the variable interest rates on the debt secured by 245 Riverside, Corporate Center Four, Cypress Center, Bank of America Center, Two Ravinia, Hayden Ferry I, and Hayden Ferry II.  These swaps, are considered to be fully effective and changes in the fair value of the swaps are recognized in accumulated other comprehensive loss.

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On February 10, 2012, Fund II entered into an interest rate swap with the lender of the loan secured by Hayden Ferry II in Phoenix, Arizona, for a $50 million notional amount that fixes LIBOR at 1.5% through January 25, 2018, which when combined with the applicable spread ranging from 250 to 350 basis points equates to a total interest rate ranging from 4.0% to 5.0% over the term of the loan.  The Company designated the swap as a cash flow hedge of the variable interest payments associated with the mortgage loan.

On May 31, 2012, in connection with the sale of the Pinnacle at Jackson Place (the "Pinnacle"), the buyer assumed the interest rate swap, which had a notional amount of $23.5 million and fixed the interest rate on a portion of the debt secured by the Pinnacle at 5.8%.

On September 28, 2012, the Company executed two floating-to-fixed rate interest rate swaps for a notional amount totaling $125 million associated with its term loan that fixes LIBOR at 0.7% for five years with a maturity date of September 27, 2017.  The interest rate swaps were effective October 1, 2012.

The Company's interest rate hedge contracts at September 30, 2012, and 2011 are summarized as follows (in thousands):

									Fair Value
									Liability
Type of	Balance Sheet	Notional		Maturity		Fixed			September 30
Hedge	Location	Amount		Date	Reference Rate	Rate			2012			2011
Swap	Accounts payable and other liabilities	$	23,500	12/01/14	1-month LIBOR		5.8	%	$	-		$	(2,533	)
Swap	Accounts payable and other liabilities	$	12,088	11/18/15	1-month LIBOR		4.1	%		(639	)		(578	)
Swap	Accounts payable and other liabilities	$	50,000	09/27/17	1-month LIBOR		2.2	%		(61	)		-
Swap	Accounts payable and other liabilities	$	75,000	09/27/17	1-month LIBOR		2.2	%		(91	)		-
Swap	Accounts payable and other liabilities	$	33,875	11/18/17	1-month LIBOR		4.7	%		(3,498	)		(2,699	)
Swap	Accounts payable and other liabilities	$	22,000	01/25/18	1-month LIBOR		4.5	%		(2,029	)		(1,422	)
Swap	Accounts payable and other liabilities	$	48,750	01/25/18	1-month LIBOR		5.0	%		(1,688	)		-
Swap	Accounts payable and other liabilities	$	9,250	09/30/18	1-month LIBOR		5.2	%		(1,279	)		(1,039	)
Swap	Accounts payable and other liabilities	$	22,500	10/08/18	1-month LIBOR		5.4	%		(3,291	)		(2,723	)
Swap	Accounts payable and other liabilities	$	22,100	11/18/18	1-month LIBOR		5.0	%		(2,772	)		(2,108	)
									$	(15,348	)	$	(13,102	)

At September 30, 2012, the Company had $549.4 million in mortgage notes payable secured by office properties, with an average interest rate of 5.5%, and $125.0 million drawn under the Company's credit facilities.

On January 9, 2012, in connection with the sale of 111 East Wacker for a gross sale price of $150.6 million, the buyer assumed the existing $147.9 million non-recourse mortgage loan secured by the property which had a fixed interest rate of 6.3% and maturity date of July 2016.

On January 11, 2012, Fund II obtained a $23.5 million non-recourse, first-mortgage secured by The Pointe, a 252,000 square foot office property located in the Westshore submarket of Tampa, Florida. The mortgage loan has a fixed interest rate of 4.0% and is interest only for the first 42 months of the term with a maturity of February 10, 2019.

On February 10, 2012, Fund II obtained a $50.0 million non-recourse mortgage loan, of which $15.0 million is Parkway's share, secured by Hayden Ferry II, a 300,000 square foot office property located in the Tempe submarket of Phoenix, Arizona.  The mortgage loan matures in July 2018 and bears interest at LIBOR plus the applicable spread which ranges from 250 to 350 basis points over the term of the loan.  In connection with this mortgage, Fund II entered into an interest rate swap that fixes LIBOR at 1.5% through January 25, 2018, which equates to a total interest rate ranging from 4.0% to 5.0%. The mortgage loan is cross-collateralized, cross-defaulted, and coterminous with the mortgage loan secured by Hayden Ferry I.

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On March 9, 2012, the Company repaid a $16.3 million non-recourse mortgage loan secured by Bank of America Plaza, a 337,000 square foot office property in Nashville, Tennessee.  The mortgage loan had a fixed interest rate of 7.1% and was scheduled to mature in May 2012.  The Company repaid the mortgage loan using available proceeds under the senior unsecured revolving credit facilities.

On May 31, 2012, in connection with the sale of Pinnacle at Jackson Place and Parking at Jackson Place, for a gross sales price of $29.5 million, the buyer assumed the existing $29.5 million non-recourse mortgage loan secured by the property with a weighted average interest rate of 5.2%.  The buyer also assumed the related $23.5 million interest rate swap which fixed a portion of the debt secured by the Pinnacle at Jackson Place at an interest rate of 5.8%.

During 2012, in conjunction with the sale of the Fund I assets, the buyer assumed $76.7 million of non-recourse first mortgage loans, of which $19.2 million was Parkway's share.

The Company entered into a Securities Purchase Agreement with TPG on May 3, 2012.  See Note M for information regarding this investment.

The Company monitors a number of leverage and other financial metrics, including but not limited to debt to total asset value ratio, as defined in the loan agreements for the Company's credit facility.  In addition, the Company also monitors interest, fixed charge and modified fixed charge coverage ratios, as well as the net debt to EBITDA multiple.  The interest coverage ratio is computed by comparing the cash interest accrued to EBITDA. The interest coverage ratio for the nine months ended September 30, 2012 and 2011 was 3.7 and 2.7 times, respectively.  The fixed charge coverage ratio is computed by comparing the cash interest accrued, principal payments made on mortgage loans and preferred dividends paid to EBITDA.  The fixed charge coverage ratio for the nine months ended September 30, 2012 and 2011 was 2.0 and 1.9 times, respectively.  The modified fixed charge coverage ratio is computed by comparing the cash interest accrued and preferred dividends paid to EBITDA.  The modified fixed charge coverage ratio for the nine months ended September 30, 2012 and 2011 was 2.4 and 2.2 times, respectively.  The net debt to EBITDA multiple is computed by comparing Parkway's share of net debt to EBITDA for the current quarter, as annualized and adjusted pro forma for any completed investment activities.  The net debt to EBITDA multiple for the nine months ended September 30, 2012 and 2011 was 4.5 and 6.1 times, respectively.  Management believes various leverage and other financial metrics it monitors provide useful information on total debt levels as well as the Company's ability to cover interest, principal and/or preferred dividend payments.  The Company seeks to maintain over the long-term a net debt to EBITDA multiple of between 5.5 and 6.5 times.

The table below presents the principal payments due and weighted average interest rates for total mortgage notes payable, at September 30, 2012 (in thousands).

			Weighted			Total				Recurring
			Average			Mortgage		Balloon		Principal
			Interest Rate			Maturities		Payments		Amortization
Schedule of Mortgage Maturities by Years:
	2012	*		5.5	%	$	2,163	$	-	$	2,163
	2013			5.5	%		9,002		-		9,002
	2014			5.5	%		10,160		-		10,160
	2015			5.5	%		11,121		-		11,121
	2016			5.3	%		104,120		94,798		9,322
	2017			5.1	%		116,439		107,907		8,532
Thereafter				5.7	%		296,424		285,867		10,557
Total				5.5	%	$	549,429	$	488,572	$	60,857
Fair value at 09/30/12						$	563,293
*Remaining three months

On October 5, 2012, Parkway entered into a purchase and sale agreement to acquire Westshore Corporate Center, a 170,000 square foot office property located in the Westshore submarket of Tampa, Florida, for a net purchase price of $22.5 million.  Parkway plans to assume the in-place first mortgage secured by the property, which has a current outstanding balance of approximately $14.5 million with a fixed interest rate of 5.8% and a maturity date of May 1, 2015. Westshore Corporate Center is currently managed by Parkway Realty Services and was formerly part of the Eola Capital LLC ("Eola") portfolio before Eola merged with Parkway in May 2011. Pursuant to the agreement formed between Parkway and the former Eola principals in December 2011, 100% of any proceeds received by the former principals will be granted to Parkway, and therefore Parkway will only be required to pay a purchase price of $22.5 million. Closing is expected to occur by the end of the fourth quarter 2012 and is subject to lender approval of the assumption of the existing mortgage secured by the property and other customary closing conditions. Parkway expects to fund this investment using excess cash and borrowings from its revolving credit facility.

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On October 23, 2012, the Company sold Sugar Grove, a 124,000 square foot office property located in Houston, Texas for $11.4 million.  The company received $10.0 million in net proceeds, which will be used to fund future acquisitions.

On October 31, 2012, the Company entered into a purchase and sale agreement to acquire NASCAR Plaza, a 390,000 square foot office tower located in the central business district (CBD) of Charlotte, North Carolina, for a purchase price of approximately $100 million.  Parkway plans to assume the first mortgage secured by the property, which has a current outstanding balance of approximately $42.3 million with a current interest rate of 4.7% and a maturity date of March 30, 2016; however, Parkway intends to amend and restate the loan upon assumption to current market terms.  Closing is expected to occur by the end of the fourth quarter 2012 and is subject to customary closing conditions.  Parkway expects to fund this investment using excess cash and borrowings from its revolving credit facility.

The Company presently has plans to make recurring capital expenditures to its office properties during 2012 of approximately $17.5 to $18.5 million on a consolidated basis, with the same amount representing Parkway's proportionate share of recurring capital improvements.  During the nine months ended September 30, 2012, the Company incurred $12.3 million in recurring capital expenditures on a consolidated basis, with $11.8 million representing Parkway's proportionate share.  These costs include tenant improvements, leasing costs and recurring building improvements. Additionally, the Company presently has plans to make improvements related to upgrades on properties acquired in recent years that were anticipated at the time of purchase in 2012 of approximately $17.5 to $18.0 million on a consolidated basis, with approximately $10.0 to $10.5 million representing Parkway's proportionate share.  During the nine months ended September 30, 2012, the Company incurred $14.1 million related to upgrades on properties acquired in recent years that were anticipated at the time of purchase and major renovations that are nonrecurring in nature to office properties, with $4.8 million representing Parkway's proportionate share.  All such improvements were financed by cash flow from the properties, capital expenditure escrow accounts, advances from the Company's senior unsecured revolving credit facility and contributions from joint venture partners.

The Company anticipates that its current cash balance, operating cash flows, contributions from joint venture partners and borrowings (including borrowing availability under the Company's senior unsecured revolving credit facility) will be adequate to pay the Company's (i) operating and administrative expenses, (ii)

debt service and debt maturity obligations, (iii) distributions to stockholders, (iv) capital improvements, and (v) normal repair and maintenance expenses at its properties, both in the short and long term.  In addition, the Company may use proceeds from the sale of assets and the possible sale of equity securities to fund these items.

Contractual Obligations

See information appearing under the caption "Financial Condition - Notes Payable to Banks and Mortgage Notes Payable" in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of changes in long-term debt since December 31, 2011.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Parkway's most critical accounting policies and estimates include the following: (1) revenue recognition; (2) impairment or disposal of long-lived assets; (3) depreciable lives applied to real estate and improvements to real estate; (4) initial recognition, measurement and allocation of the cost of real estate acquired; and (5) allowance for doubtful accounts, which are described in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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Funds From Operations ("FFO")

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

The following table presents a reconciliation of the Company's net income (loss) for Parkway Properties, Inc. to FFO for the nine months ended September 30, 2012 and 2011 (in thousands):

	Nine Months Ended
	September 30
	2012			2011
Net income (loss) for Parkway Properties, Inc.	$	9,607		$	(69,852	)
Adjustments to derive funds from operations:
Depreciation and amortization		59,046			38,342
Depreciation and amortization – discontinued operations		948			46,061
Noncontrolling interest depreciation and amortization		(24,260	)		(25,351	)
Noncontrolling interest – unit holders		(1	)		(2	)
Adjustments for unconsolidated joint ventures		-			101
Preferred dividends		(8,132	)		(7,341	)
Convertible preferred dividends		(1,011	)		-
Gain on sale of real estate (Parkway's Share)		(4,914	)		(7,310	)
Impairment loss on real estate (Parkway's Share)		-			56,467
Funds from operations attributable to common stockholders (1)	$	31,283		$	31,115

(1) Funds from operations attributable to common stockholders for the nine months ended September 30, 2012 and 2011 include the following items at Parkway's proportionate ownership share (in thousands):

	Nine Months Ended
	September 30
	2012			2011
(Gain) loss on extinguishment of debt	$	896		$	(302	)
Acquisition costs		846			15,060
Non-recurring lease termination fee income		(1,947	)		(5,554	)
Change in fair value of contingent consideration		216			(12,000	)
Non-cash adjustment for interest rate swap		(215	)		-
Realignment expenses		2,278			-
Expenses related to litigation		-			119
Gain (loss) on non-depreciable real estate		(548	)		9,235

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Inflation

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

Forward-Looking Statements

Certain statements in this Form 10-Q that are not in the present or past tense or discuss the Company's expectations (including the use of the words anticipate, believe, forecast, intends, expects, project, or similar expressions) are forward-looking statements within the meaning of the federal securities laws and as such are based upon the Company's current belief as to the outcome and timing of future events. Examples of forward-looking statements include projected capital resources, projected profitability and portfolio performance, estimates of market rental rates, projected capital improvements, expected sources of financing, expectations as to the timing of closing of acquisitions, dispositions, or other transactions, and descriptions relating to these expectations. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. These forward-looking statements involve risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the real estate industry and in performance of the financial markets; the demand for and market acceptance of the Company's properties for rental purposes; the amount and growth of the Company's expenses; tenant financial difficulties and general economic conditions, including interest rates, as well as economic conditions in those areas where the Company owns properties; risks associated with joint venture partners; the risks associated with the ownership and development of real property; the failure to acquire or sell properties as and when anticipated; termination of property management contracts; the bankruptcy or insolvency of companies for which Parkway provides property management services or the sale of these properties; the outcome of claims and litigation involving or affecting the Company; the ability to satisfy conditions necessary to close pending transactions; and other risks and uncertainties detailed from time to time in the Company's SEC filings. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's business, financial condition, liquidity, cash flows and results could differ materially from those expressed in the forward-looking statements. Any forward looking statements speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. The Company does not undertake to update forward-looking statements except as may be required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed.  For a full description of risk factors previously disclosed, please refer to Item 1A-Risk Factors, in the 2011 Annual Report on Form 10-K and in Form 10-Q for the quarter ended March 31, 2012.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On September 26, 2012, the Company issued 6,198 shares of Common Stock to TPG VI Management, LLC as payment of a monitoring fee pursuant to the Management Services Agreement dated June 5, 2012.  The issuance of the Common Stock is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

The following table shows the total number of shares that the Company acquired during the three months ended September 30, 2012:

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans Or Programs		Maximum Number of Shares that May Yet Be Purchased Under The Plans or Programs
07/01/12 to 07/31/12		5,288	(1)	$	11.19		-		-
08/01/12 to 08/31/12		-			-		-		-
09/01/12 to 09/30/12		-			-		-		-
Total		5,288		$	11.19
(1) As permitted under the Company's equity compensation plan, these shares were withheld by the Company to satisfy tax withholding obligations for employees in connection with the vesting of stock. Shares withheld for tax withholding obligations do not affect the total number of shares available for repurchase under any approved common stock repurchase plan. At September 30, 2012, the Company did not have an authorized stock repurchase plan in place.

Item 6.  Exhibits

10.1 Term Loan Agreement by and among Parkway Properties LP, a Delaware limited partnership; Parkway Properties, Inc., a Maryland corporation; with KeyBanc Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint Lead Arrangers and Joint Bookrunners; KeyBank National Association as Administrative Agent; Bank of America, N. A. as Syndication Agent; Wells Fargo Bank, National Association as Documentation Agent; and the Lenders dated September 28, 2012  (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 1, 2012).

10.2 Second Amendment to Amended and Restated Credit Agreement by and among Parkway Properties LP, a Delaware limited partnership; Parkway Properties, Inc., a Maryland corporation; with Wells Fargo Bank, National Association, as Administrative Agent; and the Lenders dated September 28, 2012  (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed October 1, 2012).

10.3 Second Amendment to Limited Partnership Agreement of Parkway Properties Office Fund II, L.P. dated August 8, 2012.

10.4* Consulting Agreement, dated August 27, 2012 by and between the Company and James M. Ingram.

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

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

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

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

101 The following materials from Parkway Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of operations and comprehensive income, (iii) consolidated statement of changes in equity, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.**

* Denotes management contract or compensatory plan or arrangement.

** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

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

DATE: November 2, 2012

PARKWAY PROPERTIES, INC.

BY: /s/ Mandy M. Pope

Mandy M. Pope

Executive Vice President and

Chief Accounting Officer

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