PARKWAY PROPERTIES INC, 10-K, 2000-03-28

PARKWAY PROPERTIES INC
10-K, 2000-03-28
OPERATORS OF NONRESIDENTIAL BUILDINGS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11533

PARKWAY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
MARYLAND 74-2123597
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

ONE JACKSON PLACE SUITE 1000
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201-2195
(Address of principal executive offices) (Zip Code)

(601) 948-4091
Registrant's telephone number:
---------------------

Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.001 PAR VALUE
8.75% SERIES A CUMULATIVE REDEEMABLE STOCK $.001 PAR VALUE
NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:
NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 10, 2000 was $250,299,000.

The number of shares outstanding in the registrant's class of common stock
as of March 10, 2000 was 9,874,508.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

Parkway Properties, Inc. ("Parkway" or the "Company") is a
self-administered, self-managed real estate investment trust ("REIT")
specializing in the operations, leasing, management, acquisition and financing
of office properties in the Southeastern United States and Texas. Parkway and
its predecessors have been public companies engaged in the real estate business
since 1971, and have successfully operated and grown through several major real
estate cycles. At March 10, 2000, Parkway owned or had an interest in 52 office
properties located in twelve states with an aggregate of approximately 7.4
million square feet of leasable space.

The purchase of the SkyTel Centre in Jackson, Mississippi in July 1995
marked the implementation of the Company's business strategy of focused
investment in office properties. As part of this strategy, the Company has (i)
completed the acquisition of 53 office properties, encompassing approximately
7.6 million net rentable square feet, for a total investment of more than $632.3
million; (ii) sold or is in the process of selling all of its non-office assets;
(iii) sold five office properties, encompassing approximately 555,000 net
rentable square feet primarily in markets that posed increasing risks and
redeployed these funds; and (iv) implemented self-management and self-leasing at
most of its properties to promote a focus on tenant retention and superior
service in meeting the needs of its tenants. Total investment is defined as
purchase price plus estimated closing costs and anticipated capital expenditures
during the first 12 months of ownership for tenant improvements, commissions,
upgrades and capital improvements to bring the building up to the Company's
standards.

In addition to direct real estate acquisitions, Parkway's investment
strategy includes the consummation of business combination transactions with
other public real estate and financial companies which Parkway deems to be
undervalued. Since 1979, Parkway has completed eight such business combinations.
Management may pursue similar business combination transactions on a selected
basis in order to enhance stockholder value.

Parkway has managed its properties in Jackson since 1990 and expanded its
self-management program on January 1, 1998 to office properties that it owned in
Houston, Atlanta, St. Petersburg, Deerfield Beach, Richmond, Hampton Roads,
Charlotte, Winston-Salem, Columbia, Knoxville and Memphis. The Company currently
self-manages approximately 92% of its current portfolio on a net rentable square
footage basis. In addition, the Company implemented self-leasing for renewals
(where allowed) in late 1998 and currently self-leases approximately 78% of its
current portfolio on a net rentable square footage basis. For new tenant
leasing, which is a small portion of our business, we fully cooperate with the
third party brokerage community. The Company benefits from a fully integrated
management infrastructure, provided by its wholly-owned management subsidiary,
Parkway Realty Services LLC ("Parkway Realty"). The Company plans to expand the
self-management of its properties to all markets as its presence in those
markets reaches the minimum net rentable square footage necessary to make it
cost efficient to self-manage. The Company believes self-management results in
better customer service, higher tenant retention and allows the Company to
enhance stockholder value through the application of its hands-on management
style. The Company believes that its focus on tenant retention will benefit the
Company and its stockholders by maintaining a stabilized revenue stream and
avoiding higher capital expenditures and leasing commissions associated with new
leases. The Company is considering the possible sale of most of its properties
that are not self-managed because the inability to self-manage these properties
limits the Company's ability to apply its hands-on operating strategy. In
addition to its owned properties, Parkway Realty currently manages and/or leases
approximately one million net rentable square feet for third-party owners.

Until December 31, 1996, Parkway operated as a real estate operating
company. For the taxable years 1995 and 1996, Parkway paid virtually no federal
income taxes ($64,000 in 1995 and none in 1996) primarily because Parkway had
certain net operating losses ("NOLs") to shelter most of Parkway's income from
such taxes. However, the increase in the number of outstanding common shares,
which resulted from the completion of a private placement of common shares in
June 1996 and Parkway's mergers during 1994 and 1995, caused the use of
Parkway's NOLs to be significantly limited in any one year. The taxable income
of the

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Company has increased significantly following the implementation of its strategy
of focused investment in office properties. Accordingly, Parkway's Board of
Directors determined that it was in the best interests of Parkway and its
stockholders to elect to qualify Parkway as a REIT under the Internal Revenue
Code for the taxable year beginning January 1, 1997, which allows Parkway to be
generally exempt from federal income taxes even if its NOLs are limited or
exhausted, provided it meets various REIT requirements.

BUSINESS OBJECTIVES AND STRATEGY OF THE COMPANY

Parkway's business objective is to maximize total return to stockholders
over time primarily through increases in distributions and share price
appreciation. During 1999, Parkway distributed $1.90 per share in dividends to
common shareholders, representing an 18.75% increase over the 1998 dividends
distributed of $1.60 per common share. Distributions in 1999 of $1.90 per share
represent a payout of 52.3% of the Company's funds from operations ("FFO") for
the year. The Company's dividend increase in 1999 was determined by the minimum
distribution requirements of the REIT rules. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operation" for
discussion of FFO.

Parkway's operating philosophy is based on the premise that we are in the
tenant retention business and further based on superior service to our
customers, commitment to our employees, openness in our communication and
simplicity. The Company strives to maximize shareholder returns by setting and
implementing goals to increase profitability, FFO, dividends and stock value
while minimizing risk. The Company will seek investments where the expertise of
the Parkway staff can add value through direct management, a hands-on
service-oriented operating philosophy and innovation. The Company will invest
directly in properties in the form of equity ownership. These investments may
include acquiring equity positions in private or publicly traded real estate
companies.

For many years, Parkway has been engaged in a process of strategic planning
and goal setting. The material goals and objectives of Parkway's earlier
strategic plans have been achieved, and have benefited Parkway's stockholders
through increased FFO and dividend payments per share. In 1998, assuming a
prolonged period of restricted access to the capital markets, Parkway adopted a
strategic plan that sets as its goal to increase Parkway's FFO per basic share
without the issuance of new equity. The review, accountability and reward of the
plan aligns management and shareholder interest. The goal of the new strategic
plan is to increase Parkway's FFO per basic share to $5.00 in 50 months (i.e.,
the end of 2002); hence the plan is referred to as the "5 IN 50 PLAN." The Plan
sets goals, assigns responsibility for the attainment of such goals to specific
Parkway officers, and provides for follow up evaluations to determine whether
the officers responsible for the attainment of each goal are moving toward
success. The major goals include realizing the embedded rental rate growth in
Parkway's existing portfolio of office properties, making net new investments of
$50 million per year (for a total of $200 million) at a positive spread of 250
basis points over the long-term cost of debt, selling Parkway's non-earning
assets and re-deploying the proceeds in higher yielding assets, increasing the
overall occupancy of Parkway's office portfolio to 97%, and taking numerous
other actions to generate additional cash flow from Parkway's properties. The 5
IN 50 PLAN is aggressive, but Parkway believes that its goals are attainable.
Parkway believes that the assumptions on which the anticipated increases in FFO
per basic share are based (e.g. anticipated rental rates, interest rates and
capitalization rates on newly acquired office properties) are reasonable, but
they are obviously subject to risk and uncertainties, many of which are beyond
Parkway's control. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Forward Looking Statements."

Parkway generally seeks to acquire well-located Class A, A- or B+ (as
classified within their respective markets) multi-story office buildings which
are located in primary or secondary markets in the Southeastern United States
and Texas, ranging in size from 50,000 to 500,000 net rentable square feet and
which have current and projected occupancy levels in excess of 75% and adequate
parking to accommodate full occupancy. The Company targets buildings which are
occupied by a major tenant (or tenants) (e.g., a tenant that accounts for at
least 30% of the building's total rental revenue and has at least five years
remaining on its lease). Parkway expects to focus any new property acquisitions
in central business districts rather than suburban markets due to management's
belief that the potential exists for greater returns in these markets. Parkway
strives to purchase office buildings at minimum initial unleveraged annual
yields on its total
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investment of 9.75% for urban assets to 10.5% for suburban assets. The Company
defines initial unleveraged yield as net operating income ("NOI") divided by
total investment (as previously defined), where net operating income represents
budgeted cash operating income for the current year at current occupancy rates
and at rental rates currently in place with no adjustments for anticipated
expense savings, increases in rental rates, additional leasing or straight line
rent. Leases that expire during the year are assumed to renew at market rates
unless interviews with tenants during pre-purchase due diligence indicate a
likelihood that a tenant will not renew. In markets where the Company
self-manages its properties, NOI also includes the net management fee expected
to be earned during the year. The Company also generally seeks to acquire
properties whose total investment per net rentable square foot is at least 25%
below estimated replacement cost and whose current rental rates are at or below
market rental rates. While the Company seeks to acquire properties which meet
all of the acquisition criteria, specific property acquisitions are evaluated
individually and may fail to meet one or more of the acquisition criteria at the
date of purchase. Since January 1, 1999, the Company has acquired two office
properties aggregating approximately 500,000 net rentable square feet for a
total investment of approximately $42 million, or approximately $82 per net
rentable square foot. One office property, consisting of approximately 466,000
square feet was located in the central business district of Columbia, South
Carolina. The second office property, consisting of approximately 34,000 square
feet was located in the Southwest suburban market of Richmond, Virginia.

In addition to investing in office properties, Parkway seeks to purchase
common stock of other REIT equities that meet certain criteria. This program is
referred to as the REIT Significant Value Program or "RSVP". The Company views
the purchase of public equities to be an alternative to "fee simple"
transactions for purchasing quality assets at attractive prices. The existence
of a sustainable dividend provides a yield on the investment while the Company
positions itself for direct involvement, or awaits capital appreciation. The
general criteria for purchase includes, but is not limited to the following:

(a) Strategic fit with Parkway with a preference to office, mixed
office/industrial, diversified or special situations with office.

(b) Situations where Parkway's direct involvement would add value to
the REIT.

(d) Sustainable dividend yield of 8% or greater.

(e) An acceptable debt level as measured by interest and fixed charge
coverage ratios.

(f) The investment economics have a positive impact on Parkway's 5 IN
50 PLAN.

(g) All REITs in which Parkway makes an investment will be approved by
the Parkway Board of Directors.

The Company has been actively engaged in the purchase of its outstanding
common stock since June 1998. Given the fluctuations in price of the Company's
public equity without a corresponding change in valuation of the underlying real
estate assets, the Company believes a well-executed repurchase program can add
significant shareholder value. During 1999, the Company repurchased 315,012
shares of common stock at an average cost of $28.40 per share and an additional
97,810 shares have been purchased in 2000, through March 10, 2000 at an average
price of $27.78. Since June 1998, the Company has purchased a total of 1,412,822
shares of its common stock, which represents approximately 12.8% of the Company
stock outstanding when the buyback program was initiated on June 30, 1998. When
considering repurchasing shares, the Company evaluates the following items:
impact on the Company's 5 IN 50 PLAN; discount to net asset value; implied
capitalization rate; implied value per square foot; impact on liquidity of
common stock; and other investment alternatives that are available with a
similar risk profile.

Parkway's management team consists of experienced office property
specialists with proven capabilities in office property (i) operations; (ii)
leasing; (iii) management; (iv) acquisition; (v) financing; and (vi) re-
positioning. The management team also has considerable experience in evaluating
and completing mergers and/or acquisitions of other REITs. Since 1979, the
Company has completed eight such business combina-

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tions. The Company believes these capabilities will allow Parkway to continue to
create office property value in all phases of the real estate cycle. Parkway's
eight senior officers have an average of over 19 years of real estate industry
experience, and have worked together at Parkway for an average of over 14 years.
Management has developed a highly service-oriented management culture and
believes that its proactive leasing, property management and asset management
activities will result in higher tenant retention and will continue to translate
into enhanced stockholder value.

DISPOSITIONS

Parkway has also pursued a strategy of liquidating its non-office assets
and office building investments that no longer meet the Company's investment
criteria and/or the Company has determined value will be maximized by selling
and redeploying the proceeds.

Since January 1, 1995, Parkway has sold non-core assets with a book value
of approximately $44 million for approximately $67 million, resulting in an
aggregate gain for financial reporting purposes of approximately $23 million.
The book value of all remaining non-office building real estate assets and
mortgage loans, all of which are for sale, was approximately $5.2 million as of
December 31, 1999.

Since January 1, 1998, the Company has sold five office properties,
encompassing approximately 555,000 net rentable square feet for net proceeds of
$53,374,000. The Company recorded gains for financial reporting purposes of
$3,736,000 on the sales. Four of the properties were sold on July 1, 1998 and
consisted of the Company's investment portfolio located in Dallas, Texas. The
decision to sell the Company's four office buildings in Dallas was based on
management's belief that the significant amount of development and proposed
development of office properties in the Dallas market may have the effect of
depressing the growth in rental rates. On November 30, 1999, one single-story
office building in Houston, Texas was sold. The Company routinely evaluates
changes in market conditions that indicate an opportunity or need to sell
properties within those markets in order to maximize shareholder value and
re-deploy capital.

Office buildings held for sale at December 31, 1999 of $19,621,000
consisted of three Northern Virginia properties that the Company decided to sell
during the quarter ended September 30, 1999. The decision to sell the Company's
three office properties in Northern Virginia was based on management's belief
that high rental rates have increased property valuations to above replacement
costs. The Company has a signed contract for the sale of these properties for a
price of $28,750,000. The closing is expected in the second quarter of 2000, but
can be extended at the Company's option to allow for a tax deferral of gains on
certain of these properties. The Company expects to reinvest approximately $15
million of the sale proceeds in office properties with the remaining proceeds
used to reduce short-term debt. Currently, the Company is also considering the
possible sale of its properties in Birmingham, Alabama; Greenville, South
Carolina; Indianapolis, Indiana; and Little Rock, Arkansas, primarily because
the Company does not own sufficient office space in these markets to justify
self-management and self-leasing. These investment decisions will be based upon
the Company's analysis of existing markets and competing investment
opportunities.

ADMINISTRATION

The Company is self-administered and self-managed and maintains its
principal executive offices in Jackson, Mississippi. As of March 10, 2000, the
Company had 168 employees.

The operations of the Company are conducted from approximately 11,000
square feet of office space located at 188 East Capitol Street, One Jackson
Place Suite 1000, Jackson, Mississippi. The building is owned by Parkway and is
leased by Parkway at market rental rates. The Company maintains a website at
www.pky.com.

ITEM 2. PROPERTIES.

GENERAL

The Company invests principally in office buildings in the Southeastern
United States and Texas, but is not limited to any specific geographical region
or property type. Including office building acquisitions made

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through March 10, 2000, the Company has an interest in 52 office buildings
comprising approximately 7.4 million square feet of office space located in
twelve states.

In addition, the Company has made an investment in the historic renovation
of the Toyota Center, formerly known as the Moore Building, which is adjacent to
a new Triple-A baseball stadium complex under development in downtown Memphis.
The Toyota Center was originally constructed in 1903 and will consist of
approximately 174,000 rentable square feet. The Company is also constructing a
multi-level, 777-space parking garage to accommodate the building and stadium
parking needs. This building is 100% pre-leased to three tenants under 15-year
non-cancelable leases. Rent will commence April 1, 2000 for 48% of the building
with the balance of the building to commence rent on May 1, 2000.

Property acquisitions in 1999, 1998 and 1997 were funded through a variety
of sources, including:

a. Cash reserves and cash generated from operating activities,

b. Sales of non-core assets, including real estate and mortgage loans,

c. Sales of office properties,

d. Fixed rate, non-recourse mortgage financing at terms ranging from
10 to 20 years,

e. Assumption of existing fixed rate, non-recourse mortgages on
properties purchased,

f. Sales of Parkway common stock and preferred stock, and

g. Advances on bank lines of credit.

OFFICE BUILDINGS

Other than as discussed under "Item 1. Business", the Company intends to
hold its portfolio of office buildings for investment purposes. Other than the
Toyota Center discussed previously, the Company does not propose any program for
the renovation, improvement or development of any of the office buildings,
except as called for under the renewal of existing leases or the signing of new
leases or improvements necessary to upgrade recent acquisitions to the Company's
operating standards. All such improvements are expected to be financed by cash
flow from the portfolio of office properties and advances on bank lines of
credit.

In the opinion of management, all properties are adequately covered by
insurance.

All office building investments compete for tenants with similar properties
located within the same market primarily on the basis of location, rent charged,
services provided and the design and condition of the improvements. The Company
also competes with other REITs, financial institutions, pension funds,
partnerships, individual investors and others when attempting to acquire office
properties.

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The following table sets forth certain information about office properties
owned by the Company as of March 10, 2000:

<TABLE>
<CAPTION>
ESTIMATED
AVERAGE
% OF AVERAGE MARKET % OF
TOTAL NET TOTAL RENT RENT LEASES %
NUMBER RENTABLE NET PER PER EXPIRING LEASED
OF SQUARE RENTABLE SQUARE SQUARE IN AS OF
LOCATION PROPERTIES FEET FEET FOOT(1) FOOT(2) 2000(3) 1/1/2000
- -------- ---------- --------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston, TX............... 10 1,606,000 21.7% $16.55 $17.91 14.7% 95.4%
Columbia, SC.............. 3 871,000 11.8% 15.17 16.47 13.0% 89.8%
Jackson, MS............... 5 827,000 11.2% 16.71 18.21 12.6% 99.1%
Memphis, TN............... 3 661,000 9.0% 15.97 16.29 14.5% 93.5%
Atlanta, GA............... 7 599,000 8.1% 17.94 18.38 8.2% 95.7%
Knoxville, TN............. 2 525,000 7.1% 14.69 15.09 14.4% 91.3%
Richmond, VA.............. 6 498,000 6.7% 15.66 15.77 19.8% 94.8%
Chesapeake, VA............ 3 386,000 5.2% 16.22 15.50 8.1% 82.4%
Winston-Salem, NC......... 1 239,000 3.2% 19.01 20.00 5.7% 97.6%
Northern VA............... 3 220,000 3.0% 19.62 22.81 13.4% 98.8%
Ft. Lauderdale, FL........ 2 215,000 2.9% 19.32 19.86 10.2% 95.1%
All Others................ 7 745,000 10.1% 14.77 15.30 13.5% 81.9%
-- --------- ----- ------ ------ ---- ----
52 7,392,000 100.0% $16.38 $17.27 13.0% 92.8%
== ========= ===== ====== ====== ==== ====
</TABLE>

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(1) Average rent per square foot is defined as the weighted average current
gross rental rate including expense escalations for occupied office space in
the building as of January 1, 2000.

(2) Estimated average market rent per square foot is based upon information
obtained from (i) the Company's own experience in leasing space at the
properties; (ii) leasing agents in the relevant markets with respect to
quoted rental rates and completed leasing transactions for comparable
properties in the relevant markets; and (iii) publicly available data with
respect thereto. Estimated average market rent is weighted by the net
rentable square feet expiring in each property.

(3) The percentage of leases expiring in 2000 represents the ratio of square
feet under leases expiring in 2000 divided by total net rentable square
feet.

The following table sets forth scheduled lease expirations for properties
owned as of March 10, 2000 for leases executed as of January 1, 2000, assuming
no tenant exercises renewal options:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
EXPIRING ESTIMATED
GROSS AVERAGE
NET RENTAL MARKET RENT
RENTABLE PERCENT ANNUALIZED RATE PER PER NET
YEAR OF NUMBER SQUARE OF TOTAL RENTAL NET RENTABLE RENTABLE
LEASE OF FEET NET RENTABLE AMOUNT SQUARE SQUARE
EXPIRATION LEASES EXPIRING SQUARE FEET EXPIRING(1) FOOT(2) FOOT(3)
- ---------- ------ --------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
2000................... 275 962,000 13.0% $ 15,536,000 $16.14 $17.28
2001................... 181 800,000 10.8% 13,379,000 16.72 17.31
2002................... 195 1,398,000 18.9% 23,067,000 16.51 17.20
2003................... 127 1,034,000 14.0% 17,283,000 16.71 17.14
2004................... 104 925,000 12.5% 14,655,000 15.85 16.90
Thereafter............. 73 1,741,000 23.6% 28,414,000 16.32 17.57
--- --------- ---- ------------ ------ ------
955 6,860,000 92.8% $112,334,000 $16.38 $17.27
=== ========= ==== ============ ====== ======
</TABLE>

- ---------------

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

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(2) Weighted average expiring gross rental rate is the weighted average rental
rate including expense escalations for office space.

(3) Estimated average market rent is based upon information obtained from (i)
the Company's own experience in leasing space at the properties: (ii)
leasing agents in the relevant markets with respect to quoted rental rates
and completed leasing transactions for comparable properties in the relevant
markets; and (iii) publicly available data with respect thereto. Estimated
average market rent is weighted by the net rentable square feet expiring in
each property.

TENANTS

The office properties are leased to approximately 955 tenants, which are in
a wide variety of industries including banking, professional services (including
legal, accounting, and consulting), energy, financial services and
telecommunications. The following table sets forth information concerning the 20
largest tenants of the properties owned as of January 1, 2000 (in thousands,
except square foot data):

<TABLE>
<CAPTION>
ANNUALIZED LEASE
SQUARE RENTAL EXPIRATION
TENANT FEET REVENUE(1) OFFICE BUILDING DATE
- ------ --------- ---------- ---------------------- ----------
<S> <C> <C> <C> <C>
SkyTel Communications, Inc. ............. 201,501 $ 3,061 (2) (2)
South Carolina State Budget and Control
Board.................................. 170,164 2,644 Capitol Center 06/02
Morgan Keegan & Company, Inc. ........... 159,910 2,794 Morgan Keegan Tower 09/07
Schlumberger Oil Field Services
Reservoir.............................. 155,324 2,586 Schlumberger 04/02
Raytheon Engineers and Constructors,
Inc. .................................. 147,075 2,894 Raytheon Building 12/05
Burlington Resources..................... 137,471 2,043 400 North Belt 12/06
Nabors Industries/Nabors Corporate
Services............................... 130,367 2,260 One Commerce Green (3)
First Tennessee Bank, NA................. 101,536 1,600 First Tennessee Plaza 09/04
Westvaco Corporation..................... 100,457 1,568 Westvaco 01/06
International Business Machine
Corporation............................ 99,459 1,839 Meridian Building, IBM (4)
Building
Womble Carlyle Sandridge and Rice PLLC... 99,254 1,905 BB&T Financial Center 06/05
DHL Airways.............................. 98,649 1,648 One Commerce Green 10/04
Bank of America, NA...................... 93,786 1,147 Bank of America Tower 06/06
PGS Tensor Geophysical, Inc. ............ 91,960 1,401 Tensor Building 03/05
Branch Banking & Trust (BB&T)............ 90,801 1,699 BB&T Financial Center, (5)
Town Point Center
Facility Holdings Corp. ................. 69,183 1,127 Lakewood II 11/08
Talus Solutions, Inc. ................... 60,352 1,200 Waterstone 08/03
Tritel Communications, Inc. ............. 59,984 964 SunCom Building, River (6)
Oaks Place
BellSouth Business/BellSouth
Communications......................... 58,664 897 Charlotte Park (7)
McNair Law Firm, PA...................... 56,409 679 Bank of America Tower 11/04
--------- -------
2,182,306 $35,956
========= =======
</TABLE>

- ---------------

(1) Annualized Rental Revenue represents the gross rental rate (including
escalations) per square foot as of January 1, 2000, multiplied by the number
of square feet leased by the tenant.

(2) SkyTel Communications, Inc. (SkyTel), a service provider in the
telecommunications industry, occupies 155,927 net rentable square feet in
SkyTel Centre which represents 59.7% of the total net rentable square feet
of the building. This lease is non-cancelable, expires in July 2005 and
includes a contractual rental increase in the 61st month of the lease term
based on the corresponding increase in the Consumer Price Index since the
inception of the lease. In addition, SkyTel occupies 37,817 net rentable
square feet in One Jackson Place, which represents 17.3% of the total net
rentable square feet of the building, under a

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<PAGE> 9

lease that expires in June 2002 and 7,757 net rentable square feet in the
SunCom Building, which represents 4.3% of the total net rentable square feet
of the building, under a lease that expires in January 2002.

(3) Nabors Industries/Nabors Corporate Services occupies 130,367 square feet in
One Commerce Green under separate leases that expire as follows: 2,124
square feet is rented on a month to month basis, 10,444 square feet expires
in July 2000 and 117,799 square feet expires in December 2005.

(4) International Business Machine Corporation (IBM) occupies a total of 99,459
square feet in two properties under separate leases that expire as follows:
12,135 square feet in March 2000 in the IBM Building and 87,324 square feet
in June 2001 in the Meridian Building.

(5) BB&T occupies a total of 90,801 square feet in two properties under separate
leases that expire as follows: 82,082 square feet in December 2007 and 2,461
square feet in August 2003 in Winston-Salem, North Carolina and 6,258 square
feet in November 2001 in Chesapeake, Virginia.

(6) Tritel Communications, Inc. occupies a total of 59,984 square feet in two
properties under separate leases that expire as follows: 36,265 square feet
in November 2003, 2,024 square feet in December 2003 and 5,797 square feet
in November 2008 in the SunCom Building and 15,898 square feet in March 2004
in River Oaks Place.

(7) BellSouth Business/BellSouth Communications occupies 58,664 square feet in
Charlotte Park under separate leases that expire as follows: 50,578 square
feet in January 2004, 6,003 square feet in February 2003 and 2,083 square
feet in August 2003.

NON-CORE ASSETS

Since January 1, 1995, Parkway has pursued a strategy of liquidating its
non-core assets and using the proceeds from such sales to acquire office
properties, pay down short-term debt and repurchase its own stock. The Company
defines non-core assets as all assets other than office properties which at
December 31, 1999 consisted of land and mortgage loans. In accordance with this
strategy, Parkway sold non-core assets with a book value of $3,342,000 for cash
proceeds of $5,189,000 during 1999 and 1998. Aggregate gains for financial
reporting purposes from sales, write-downs and deferred gains recognized on
non-core assets during 1999 and 1998 were $1,847,000. The book value of all
remaining non-office building real estate assets and mortgage loans, all of
which are for sale, was $5,173,000 as of December 31, 1999. Of this amount,
$4,283,000 represents undeveloped land with a carrying cost of approximately
$62,000 annually.

ITEM 3. LEGAL PROCEEDINGS.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

9
<PAGE> 10

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock ($.001 par value) is listed and trades on the
New York Stock Exchange under the symbol "PKY". The number of record holders of
the Company's common stock at March 10, 2000, was 2,972.

The following table sets forth, for the periods indicated, the high and low
last reported sales prices per share of the Company's common stock and the per
share cash distributions paid by Parkway during each quarter.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- ---------------------------------
QUARTER ENDED HIGH LOW DISTRIBUTIONS HIGH LOW DISTRIBUTIONS
- ------------- ------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
March 31............................. $31.688 $26.375 $ .45 $34.875 $30.125 $ .35
June 30.............................. 34.500 27.063 .45 33.500 28.875 .35
September 30......................... 34.250 31.313 .50 30.938 25.813 .45
December 31.......................... 32.250 26.938 .50 33.000 27.000 .45
----- -----
$1.90 $1.60
===== =====
</TABLE>

Common stock distributions during 1999 and 1998 ($1.90 and $1.60 per share,
respectively) were taxable as follows for federal income tax purposes:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Ordinary income............................................. $1.90 $1.52
Capital gain................................................ -- .04
Unrecaptured Section 1250 gain.............................. -- .04
----- -----
$1.90 $1.60
===== =====
</TABLE>

The Company's shares of Series A 8.75% Cumulative Redeemable Preferred
Stock are also listed for trading on the New York Stock Exchange and trade under
the symbol "PKY PrA". The following table shows the high and low preferred share
prices and per share distributions paid for each quarter of 1999 and 1998
reported by the New York Stock Exchange. (No Preferred Shares were outstanding
in the first quarter of 1998.)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------
QUARTER ENDED HIGH LOW DISTRIBUTIONS HIGH LOW DISTRIBUTIONS
- ------------- ------- -------- ------------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
March 31........................... $23.500 $22.0625 $ .55 N/A N/A N/A
June 30............................ 23.500 21.8750 55 $25.250 $23.9375 N/A
September 30....................... 22.875 21.8750 .55 24.875 21.6250 .47
December 31........................ 22.250 17.5000 .54 24.500 21.4375 .55
----- -----
$2.19 $1.02
===== =====
</TABLE>

10
<PAGE> 11

As of March 10, 2000, there were 73 holders of record of the Company's
2,650,000 outstanding shares of Series A preferred stock. Preferred stock
distributions during 1999 and 1998 were taxable as follows for federal income
tax purposes:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Ordinary income............................................. $2.19 $ .97
Capital gain................................................ -- .03
Unrecaptured Section 1250 gain.............................. -- .02
----- -----
$2.19 $1.02
===== =====
</TABLE>

11
<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Income from office properties............. $113,161 $ 95,438 $ 45,799 $ 18,840 $ 6,918
Other income.............................. 1,159 1,045 2,288 5,239 5,849
Expenses
Operating expenses:
Office properties...................... 47,458 40,844 19,697 8,466 2,960
Non-core assets........................ 112 153 462 1,379 1,916
Interest expense....................... 15,346 11,660 5,581 3,526 2,230
Depreciation & amortization............ 17,413 13,256 6,033 2,444 1,331
Minority interest...................... -- -- 59 (28) (100)
Interest expense.......................... 4,104 4,349 997 621 291
General & administrative & other.......... 4,353 3,583 3,674 3,758 3,185
Income before gains & minority interest..... 25,534 22,638 11,584 3,913 954
Gain on real estate, mortgage loans,
securities and real estate partnership.... 795 4,788 2,907 10,458 10,866
Minority interest -- unit holders........... (2) (1) -- -- --
Net income.................................. 26,327 27,425 14,491 14,371 11,820
Dividends on preferred stock................ 5,797 3,913 -- -- --
Net income available to common
stockholders.............................. $ 20,530 $ 23,512 $ 14,491 $ 14,371 $ 11,820
PER COMMON SHARE DATA:
Net income:
Basic.................................. $ 2.04 $ 2.24 $ 2.05 $ 3.92 $ 4.24
Diluted................................ $ 2.01 $ 2.21 $ 2.01 $ 3.81 $ 4.16
Book value (at end of year)............... $ 25.55 $ 25.89 $ 25.06 $ 18.30 $ 24.51
Cash distributions:
Declared............................... $ 1.90 $ 1.60 $ 1.20 $ .62 $ .44
Weighted average shares outstanding:
Basic.................................. 10,083 10,490 7,078 3,662 2,787
Diluted................................ 10,197 10,621 7,214 3,776 2,844
BALANCE SHEET DATA:
Office investments, net of depreciation... $625,365 $568,244 $347,931 $122,802 $ 52,284
Total assets.............................. 649,369 592,252 368,592 147,035 88,043
Notes payable to banks.................... 86,640 40,896 6,473 -- --
Mortgage notes payable.................... 214,736 201,841 105,220 62,828 34,704
Total liabilities......................... 328,305 264,301 123,851 69,127 38,832
Preferred stock........................... 66,250 66,250 -- -- --
Stockholders' equity...................... 321,064 327,951 244,741 77,908 49,211
</TABLE>

12
<PAGE> 13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

FINANCIAL CONDITION

Comments are for the balance sheet dated December 31, 1999 compared to the
balance sheet dated December 31, 1998.

In 1999, Parkway continued the application of its strategy of operating and
acquiring office properties as well as liquidating non-core assets and office
assets that no longer meet the Company's investment criteria and/or the Company
has determined value will be maximized by selling. During the year ended
December 31, 1999, the Company purchased two office properties, sold one office
property and sold various non-core assets. The Company also incurred development
costs of $13,194,000 in the historic renovation of an office building and the
construction of a multi-level parking garage to accommodate the building. Total
assets increased $57,117,000 and office properties (before depreciation)
increased $39,281,000 or 7%.

Parkway's direct investment in office buildings and office redevelopment
increased $57,121,000, net of depreciation, to a carrying amount of $625,365,000
at December 31, 1999 and consisted of 51 operating properties and one
redevelopment project in progress. During the year ending December 31, 1999,
Parkway purchased two office properties as follows (in thousands):

<TABLE>
<CAPTION>
PURCHASE PURCHASE
OFFICE BUILDING LOCATION PRICE DATE
- --------------- -------- -------- --------
<S> <C> <C> <C>
Moorefield I*................................... Richmond, VA $ 3,900 01/12/99
Capitol Center.................................. Columbia, SC 38,000 07/01/99
</TABLE>

- ---------------

* The Company assumed a $1,936,000 first mortgage with a 7.625% interest rate as
part of this purchase.

During 1999, Parkway sold one office property for net proceeds of $903,000.
On November 30, 1999, the Company sold the West Office Building, a single-story
office building in Houston, Texas, and recorded a gain for financial reporting
purposes on this sale of $510,000.

During the year ending December 31, 1999, the Company incurred office
redevelopment costs of $13,194,000. Costs incurred included capitalized interest
costs of $661,000. The Company's redevelopment costs are associated with the
historic renovation of the Toyota Center, formerly known as the William R. Moore
Building, in downtown Memphis and an adjacent 777-space parking garage. The
building is 100% pre-leased to three tenants under 15-year non-cancelable
leases. Rent will commence April 1, 2000 for 48% of the building with the
balance of the building to commence rent on May 1, 2000.

Office buildings held for sale of $19,621,000 as of December 31, 1999
consisted of three office properties in the Northern Virginia portfolio. The
decision to put the Northern Virginia portfolio on the market for sale was based
on management's belief that office properties in this market may be peaking in
value. The Company has a signed contract for the sale of these properties for a
price of $28,750,000. The closing is expected in the second quarter of 2000, but
can be extended at the Company's option to allow for tax deferral of gains on
certain of these properties. The Company expects to reinvest approximately $15
million of the proceeds in office properties with the remaining proceeds used to
reduce short-term debt. The Company is also considering selling properties in
Birmingham, Alabama; Greenville, South Carolina; Indianapolis, Indiana; Little
Rock, Arkansas and a 50% interest in a property in New Orleans, Louisiana. The
investment decisions will be based upon the Company's analysis of existing
markets and competing investment opportunities.

During the year ending December 31, 1999, the Company capitalized building
improvements and additional purchase expenses of $18,844,000 and recorded
depreciation expense of $16,424,000 related to its office property portfolio.

Parkway sold various non-core and other assets during the year that
resulted in gains for financial reporting purposes of $285,000 and net proceeds
of $316,000. At December 31, 1999, non-core assets other than mortgage loans
totaled $4,283,000. The Company expects to continue its efforts to liquidate
these assets.

13
<PAGE> 14

Notes payable to banks increased $45,744,000 to a balance of $86,640,000 at
December 31, 1999 as the result of advances under bank lines of credit to
purchase additional office properties, make improvements to office properties
and purchase Company stock.

Mortgage notes payable without recourse increased a net $12,895,000 due to
the funding of a $20,100,000 fixed rate loan, the assumption of existing debt on
the Moorefield I building in the amount of $1,936,000, and scheduled principal
payments of $9,141,000 during the year ended December 31, 1999 on existing notes
payable without recourse.

On September 13, 1999, the Company closed a $20,100,000 non-recourse,
twenty-year fully amortizing mortgage on the Morgan Keegan Tower in Memphis,
Tennessee. The loan was funded from Massachusetts Mutual Life Insurance Company
at a fixed rate of 7.6%. The loan includes a provision which will allow the loan
to be converted to an unsecured loan during the first three years of the loan
term upon receipt of an investment grade rating from one of the major rating
agencies.

The Company expects to continue seeking fixed rate, non-recourse mortgage
financing at terms ranging from ten to twenty years on select office building
investments as additional capital is needed. The Company plans to maintain a
ratio of debt to total market capitalization from 25% to 45% although such ratio
may from time to time temporarily exceed 45%, especially when the Company has
incurred significant amounts of short-term debt in connection with acquisitions.
In addition, volatility in the price of the Company's common stock, which is out
of the control of the Company, may result in a debt to total market
capitalization exceeding 45% from time to time. In addition to the debt to total
market capitalization ratio, the Company also monitors interest and fixed charge
coverage ratios. Interest coverage ratios are computed by comparing the cash
interest accrued to earnings before interest, taxes, depreciation and
amortization. The interest coverage ratio for the years ending December 31, 1999
and 1998 was 3.23 and 3.48 times, respectively. Fixed charge coverage ratios are
computed by comparing the cash interest accrued, principal payments paid on
mortgage loans and preferred dividends paid to earnings before interest, taxes,
depreciation and amortization. The fixed charge coverage ratio for the years
ending December 31, 1999 and 1998 was 1.83 and 2.17 times, respectively.

Stockholders' equity decreased $6,887,000 during the year ended December
31, 1999 as a result of the following factors (in thousands):

<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Net income.................................................. $ 26,327
Shares purchased -- Company common stock.................... (8,946)
Preferred stock dividends declared.......................... (5,797)
Common stock dividends declared............................. (19,186)
Exercise of stock options................................... 209
Shares issued in lieu of directors fees..................... 72
Restricted shares issued.................................... 5,357
Unearned compensation....................................... (5,357)
Amortization of unearned compensation....................... 434
--------
$ (6,887)
========
</TABLE>

On March 2, 1999, the Board of Directors approved the repurchase of an
additional 500,000 shares of the Company's common stock. As of December 31,
1999, 315,012 additional shares had been purchased at an average price of
$28.40. An additional 97,810 shares have been purchased in 2000, through March
10, 2000, at an average price of $27.78. Since June 1998, the Company has
purchased a total of 1,412,822 shares of its common stock, which represents
approximately 12.8% of the common stock outstanding when the buyback program was
initiated on June 30, 1998.

14
<PAGE> 15

for the stock is 10 years or 46 months if certain operating results are achieved
by the Company. Effective September 14, 1999, the Compensation Committee
approved the issuance of an additional 8,000 shares of restricted stock to
newly-elected officers of the Company. The stock price on the date of the grant
was $32.1875. The vesting period for the restricted stock is 9.5 years or 40
months if certain operating results are achieved by the Company. The Company
recorded $5,357,000 as additional paid-in capital when the shares of the
restricted stock were issued, offset by unearned compensation of the same
amount. The unearned compensation was deducted from stockholders' equity and is
being amortized over the vesting period. Compensation expense of $434,000 was
recognized in 1999.

RESULTS OF OPERATIONS

Comments are for the year ended December 31, 1999 compared to the year ended
December 31, 1998.

Net income available for common stockholders for the year ended December
31, 1999 was $20,530,000 ($2.04 per basic common share) as compared to
$23,512,000 ($2.24 per basic common share) for the year ended December 31, 1998.
Net income included net gains from the sale of real estate and other assets in
the amounts of $795,000 and $4,788,000 for the years ended December 31, 1999 and
1998, respectively.

The primary reason for the increase in the Company's income before gains
for 1999 as compared to 1998 is the reflection of the operations of the
following office buildings subsequent to the date of purchase:

<TABLE>
<CAPTION>
BUILDING PURCHASE DATE
- -------- -------------
<S> <C>
Schlumberger................................................ 01/21/98
Brookdale Portfolio*........................................ 02/25/98
Southtrust.................................................. 03/31/98
Atrium at Stoneridge........................................ 04/28/98
River Oaks Place............................................ 05/01/98
Pavilion Center............................................. 06/30/98
SunCom Building............................................. 07/01/98
Town Point Center........................................... 07/20/98
Westvaco Building........................................... 07/20/98
Winchester.................................................. 12/18/98
Falls Building.............................................. 12/31/98
Moorefield I................................................ 01/12/99
Capitol Center.............................................. 07/01/99
</TABLE>

- ---------------

* On February 25, 1998, the Company purchased a 13-building portfolio (the
"Brookdale Portfolio") which totaled approximately 1,470,000 net rentable
square feet that included properties located in five of its primary markets
and three new markets. On July 1, 1998, the Company sold two properties
acquired in the Brookdale Portfolio comprising a total of 251,000 square
feet.

Operations of office building properties are summarized below (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
Income...................................................... $113,161 $ 95,438
Operating expense........................................... (47,458) (40,844)
-------- --------
65,703 54,594
Mortgage interest expense................................... (15,346) (11,660)
Depreciation and amortization............................... (17,413) (13,256)
-------- --------
Net income.................................................. $ 32,944 $ 29,678
======== ========
</TABLE>

15
<PAGE> 16

Net losses on operations of other real estate properties held for sale were
$112,000 and $153,000 for the years ended December 31, 1999 and 1998,
respectively and consisted primarily of property taxes on land held for sale.

The $3,686,000 increase in interest expense on office properties is
primarily due to the mortgage loans assumed and/or new loans placed during 1999
and 1998. The average interest rate on mortgage notes payable as of December 31,
1999 and 1998 was 7.4%.

The $193,000 increase in contractual interest expense on bank notes for the
year ending December 31, 1999 compared to the year ending December 31, 1998 is
primarily due to the increase in the average balance of borrowings outstanding
under bank lines of credit from $46,822,000 during 1998 to $59,463,000 during
1999, offset by a decrease in the weighted average interest rate from 7.0%
during the year ended December 31, 1998 to 6.5% during the year ended December
31, 1999. Amortization of loan costs on bank notes decreased $438,000 for the
year ending December 31, 1999 compared to December 31, 1998. This decrease
primarily reflects the lower cost associated with the unsecured bank line of
credit that was placed on October 7, 1998, compared to the previous line of
credit that was secured by certain office properties.

General and administrative expenses were $3,850,000 and $3,209,000 for the
years ended December 31, 1999 and 1998 respectively. The primary reason for the
$641,000 increase is due to charges of approximately $525,000 recorded in 1999
for certain expenses related to unsuccessful merger transactions. This
non-recurring charge includes the cost of legal, accounting, travel, interviews,
inspections and professional fees associated with documents, tax matters,
environmental reviews and financial studies to examine the impact of the
proposed mergers. In addition, during the year ended December 31, 1999, the
Company recorded $434,000 of amortization related to unearned compensation on
restricted stock issued in 1999.

RESULTS OF OPERATIONS

Comments are for the year ended December 31, 1998 compared to the year ended
December 31, 1997.

Net income available for common stockholders for the year ended December
31, 1998 was $23,512,000 ($2.24 per basic common share) as compared to
$14,491,000 ($2.05 per basic common share) for the year ended December 31, 1997.
Net income included net gains from the sale of real estate and mortgage loans in
the amounts of $4,788,000 and $2,907,000 for the years ended December 31, 1998
and 1997, respectively.

The primary reason for the increase in the Company's income before gains
for 1998 as compared to 1997 is the reflection of the operations of the
acquisitions of 16 office properties in 1997 and 23 office properties in 1998
subsequent to their date of purchase.

On July 1, 1998, the Company sold its investment portfolio of four office
properties in Dallas, Texas for net proceeds of $52,471,000.

Operations of office building properties are summarized below (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Income...................................................... $ 95,438 $ 45,799
Operating expense........................................... (40,844) (19,697)
-------- --------
54,594 26,102
Mortgage interest expense................................... (11,660) (5,581)
Depreciation and amortization............................... (13,256) (6,033)
Minority interest........................................... -- (59)
-------- --------
Net income.................................................. $ 29,678 $ 14,429
======== ========
</TABLE>

16
<PAGE> 17

Operations of other real estate properties held for sale are summarized
below (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------
1998 1997
----- -----
<S> <C> <C>
Income from other real estate properties.................... $ -- $ 722
Real estate operating expenses.............................. (153) (462)
----- -----
Net income (loss)........................................... $(153) $ 260
===== =====
</TABLE>

The $6,079,000 increase in interest expense on office properties is
primarily due to the mortgage loans assumed and/or new loans placed during 1998
and 1997. The average interest rate on mortgage notes payable as of December 31,
1998 was 7.4%.

The $2,580,000 increase in interest expense on banks notes for the year
ending December 31, 1998 compared to the year ending December 31, 1997 is
primarily due to advances made on bank lines of credit for purchases of office
properties and Company stock in 1998 and an advance of $75,000,000 on an
unsecured loan from Bank of America. The Bank of America facility required the
negative pledge of the 13 office properties purchased February 25, 1998 and
matured August 25, 1998. This loan was repaid in full on June 30, 1998 with
proceeds from the $97,000,000 mortgage notes payable. Amortization of loan costs
on bank notes increased $772,000 for the year ending December 31, 1998 compared
to December 31, 1997 due primarily to an increase in the amounts available under
bank lines of credit and the costs associated with the Bank of America unsecured
loan of $184,000.

On October 7, 1998, the Company closed a three-year $150 million unsecured
credit facility with a consortium of 14 banks arranged by Chase Securities, Inc.
The interest rate on the line of credit is equal to LIBOR plus 112.5 to 137.5
basis points, depending upon overall company leverage, with the rate set at 6.6%
as of December 31, 1998. The credit facility reflects a 15 basis point interest
rate reduction (based on leverage at December 31, 1998) and a $50 million
increase over the previous lines of credit, which were secured lines of credit.

LIQUIDITY AND CAPITAL RESOURCES

STATEMENT OF CASH FLOWS. Cash and cash equivalents were $885,000 and
$2,937,000 at December 31, 1999 and 1998, respectively. The Company generated
$47,463,000 in cash flows from operating activities during the year ended
December 31, 1999 compared to $40,345,000 for the same period of 1998. The
Company used $72,724,000 in investing activities during the year ending December
31, 1999. In implementing its investment strategy, the Company used $41,900,000
(not including closing costs and certain capitalized expenses) to purchase
office properties while receiving net cash proceeds from the sale of an office
property and other non-core assets of $1,504,000. The Company also spent
$18,266,000 to make capital improvements at its office properties and
$13,194,000 related to the Memphis real estate redevelopment project. Cash
dividends of $18,960,000 were paid to common stockholders ($1.90 per common
share) and $5,797,000 were paid to preferred stockholders ($2.19 per preferred
share), 315,012 shares of common stock were repurchased for a total of
$8,946,000 and principal payments of $9,141,000 were made on mortgage notes
payable during the year ending December 31, 1999.

LIQUIDITY. The Company plans to continue pursuing the purchase of
investments that meet the Company's investment criteria in accordance with the
strategies outlined under "Item 1. Business" and intends to use bank lines of
credit, proceeds from the sale of non-core assets and office properties held for
sale, and cash balances to fund those acquisitions. At December 31, 1999, the
Company had $86,640,000 outstanding under two bank lines of credit.

The Company is exposed to interest rate changes primarily as a result of
its lines of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of the Company's real estate investment
portfolio and operations. The Company's interest rate risk management objective
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve

17
<PAGE> 18

its objectives, the Company borrows at fixed rates but also has a three-year
$150 million unsecured revolving credit facility with a consortium of 13 banks
with Chase Bank of Texas, National Association serving as the lead agent (the
"$150 million line") and a three-year $10 million unsecured line of credit with
AmSouth Bank (the "$10 million line"). The interest rates on the lines of credit
are equal to the 30 day LIBOR rate plus 112.5 to 137.5 basis points, depending
upon overall Company leverage. The interest rate on the $10 million line and the
$150 million line was 7.854% and 7.439%, respectively, at December 31, 1999.

The $10 million line is unsecured and is expected to fund the daily cash
requirements of the Company's treasury management system. This line of credit
matures September 30, 2001 and has an interest rate equal to the 30 day LIBOR
rate plus 112.5 to 137.5 basis points depending on overall Company leverage,
with the current rate set at LIBOR plus 137.5 basis points. The Company paid a
facility fee of 40 basis points ($40,000) upon closing of the loan and pays an
annual administration fee of $3,000. The Company also pays fees on the unused
portion of the line based upon overall Company leverage, with the current rate
set at 25 basis points.

The $150 million line is also unsecured and is expected to fund
acquisitions of additional investments. This line of credit matures October 7,
2001 and has an interest rate equal to the LIBOR rate plus 112.5 to 137.5 basis
points depending upon overall Company leverage, with the current rate set at
LIBOR plus 137.5 basis points. The Company paid a facility fee of $150,000 and
originating fees of $432,500 (28.8 basis points) upon closing of the loan and
pays an annual administration fee of $37,500. The Company also pays unused fees
on the unused portion of the line based upon overall Company leverage, with the
current rate set at 25 basis points.

At December 31, 1999, the Company had $214,736,000 of non-recourse fixed
rate mortgage notes payable with an average interest rate of 7.4% secured by
office properties and $86,640,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately $654,991,000 at December
31, 1999 (using the December 31, 1999 closing price of $28.8125 per share), the
Company's debt represented approximately 46% of its total market capitalization.
The Company plans to maintain a ratio of debt to total market capitalization
from 25% to 45% although such ratio may from time to time temporarily exceed
45%, especially when the Company has incurred significant amounts of short-term
debt in connection with acquisitions. In addition, volatility in the price of
the Company's common stock, which is out of the control of the Company, may
result in a debt to market capitalization exceeding 45% from time to time. In
addition to the debt to total market capitalization ratio, the Company also
monitors interest and fixed charge coverage ratios. Interest coverage ratios are
computed by comparing the cash interest accrued to earnings before interest,
taxes, depreciation and amortization. The interest coverage ratio for the years
ending December 31, 1999 and 1998 was 3.23 and 3.48 times, respectively. Fixed
charge coverage ratios are computed by comparing the cash interest accrued,
principal payments paid on mortgage loans and preferred dividends paid to
earnings before interest, taxes, depreciation and amortization. The fixed charge
coverage ratio for the years ending December 31, 1999 and 1998 was 1.83 and 2.17
times, respectively.

The table below presents the principal payments due and weighted average
interest rates for the fixed rate debt.

<TABLE>
<CAPTION>
AVERAGE
INTEREST RATE FIXED RATE DEBT
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
2000...................................................... 7.40% $ 10,179
2001...................................................... 7.40% 10,961
2002...................................................... 7.40% 11,803
2003...................................................... 7.39% 14,374
2004...................................................... 7.39% 13,619
Thereafter................................................ 7.58% 153,800
--------
Total..................................................... $214,736
========
Fair value at 12/31/99.................................... $208,410
========
</TABLE>

18
<PAGE> 19

The Company presently has plans to make capital improvements at its office
properties in 2000 of approximately $18,011,000. These expenses include tenant
improvements, capitalized acquisition costs and capitalized building
improvements. Approximately $4,327,000 of these improvements relate to upgrades
on properties acquired in recent years that were anticipated at the time of
purchase. All such improvements are expected to be financed by cash flow from
the properties and advances on bank lines of credit.

The Company anticipates that its current cash balance, operating cash
flows, proceeds from the sale of office properties held for sale and borrowings
(including borrowings under the working capital line of credit) will be adequate
to pay the Company's (i) operating and administrative expenses, (ii) debt
service obligations, (iii) distributions to shareholders, (iv) capital
improvements, and (v) normal repair and maintenance expenses at its properties
both in the short and long term.

FUNDS FROM OPERATIONS. Management believes that funds from operations
("FFO") is an appropriate measure of performance for equity REITs. Funds from
operations is defined by the National Association of Real Estate Investment
Trusts (NAREIT) as net income or loss, excluding gains or losses from debt
restructuring and sales of properties, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. In March
1995, NAREIT issued a clarification of the definition of FFO. The clarification
provides that amortization of deferred financing costs and depreciation of
non-real estate assets are not to be added back to net income to arrive at FFO.
In addition, effective January 1, 2000, NAREIT has clarified that FFO should
include both recurring and non-recurring operating results except those defined
as extraordinary items under generally accepted accounting principles and gains
or losses from sales of depreciable operating property. The Company's
calculation of FFO is consistent with NAREIT's recent clarification and
restatement will not be necessary. Funds from operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles 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 the Company's FFO for the years ended December
31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------
1999 1998
------- -------
<S> <C> <C>
Net income.................................................. $26,327 $27,425
Adjustments to derive funds from operations:
Depreciation and amortization............................. 17,413 13,256
Equity in earnings........................................ (40) (47)
Distributions from unconsolidated subsidiaries............ 23 24
Preferred dividends....................................... (5,797) (3,913)
Gain on real estate and other assets...................... (795) (4,788)
Amortization of discounts, deferred gains and other....... (50) (6)
------- -------
Funds from operations....................................... $37,081 $31,951
======= =======
</TABLE>

19
<PAGE> 20

NAREIT has recommended supplemental disclosure concerning certain capital
expenditures, leasing costs and straight-line rents as shown below (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------
1999 1998
------ ------
<S> <C> <C>
Straight-line rents......................................... $1,343 $ 763
Amortization of restricted stock grants..................... 434 --
Building improvements....................................... 3,340 1,697
Tenant improvements:
New leases................................................ 2,470 1,023
Lease renewals............................................ 2,217 1,598
Leasing commissions:
New leases................................................ 883 513
Lease renewals............................................ 1,348 1,104
Leasing commissions amortized............................... 932 663
Upgrades on acquisitions anticipated at the date of
purchase.................................................. 8,008 6,748
</TABLE>

INFLATION

In the last five years, 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. Most of the leases require the tenants to pay their pro rata
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation. In addition, the Company's leases
typically have three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base rent if rents on the existing
leases are below the then-existing market rate.

IMPACT OF YEAR 2000

In August 1998, the Company adopted a comprehensive uniform plan to address
the issue of Year 2000 Compliance. The Year 2000 issue was the result of
computer programs and embedded chips using a two-digit format, as opposed to
four digits, to indicate the year. Such computer systems may have been unable to
interpret dates beyond the year 1999, which could have caused a system failure
or other computer errors, leading to disruptions in operations.

The Company's plan addressed problems that might arise in information
technology systems, building systems that rely upon the date sensitive
microprocessors, and third party tenants, manufacturers, vendors and suppliers.
The plan was a multi-phase process where the systems were inventoried,
identified and tested for Year 2000 compliance. Testing included, but was not
limited to, central accounting and operating systems, building systems, and
tenant and vendor compliance. Any systems found not to be Year 2000 compliant
were upgraded as necessary. Contingency plans were prepared in the event of Year
2000 failures associated with any Company systems.

The Company's plan was completed on schedule in the fourth quarter of 1999.
The cost of the Year 2000 compliance effort was not material to the Company's
financial position. Approximately $474,000 was incurred to modify, upgrade
and/or replace non-compliant systems. Of the total amount incurred,
approximately $442,000 would have been expended irrespective of the Year 2000
issue.

We experienced no system failures or computer errors associated with Year
2000 compliance. We have concluded the Year 2000 Plan and anticipate no further
Year 2000 compliance issues or expenditures.

FORWARD-LOOKING STATEMENTS

In addition to historical information, certain sections of this Form 10-K
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities

20
<PAGE> 21

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

21
<PAGE> 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 23
Consolidated Balance Sheets -- as of December 31, 1999 and
1998...................................................... 24
Consolidated Statements of Income -- for the years ended
December 31, 1999, 1998 and 1997.......................... 25
Consolidated Statements of Stockholders' Equity -- for the
years ended December 31, 1999, 1998 and 1997.............. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 27
Notes to Consolidated Financial Statements.................. 28
Schedule III -- Real Estate and Accumulated Depreciation.... 39
Note to Schedule III -- Real Estate and Accumulated
Depreciation.............................................. 42
</TABLE>

22
<PAGE> 23

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Parkway Properties, Inc.

We have audited the accompanying consolidated balance sheets of Parkway
Properties, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. Our audit
also included the financial statement schedule listed in the index under Item
14. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Parkway
Properties, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth herein.

/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP

Jackson, Mississippi
February 4, 2000

23
<PAGE> 24

PARKWAY PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Real estate related investments:
Office buildings.......................................... $628,552 $589,271
Office buildings held for sale............................ 19,621 --
Office redevelopment...................................... 18,511 5,317
Accumulated depreciation.................................. (41,319) (26,344)
-------- --------
625,365 568,244
Land held for sale........................................ 4,283 4,599
Mortgage loans............................................ 890 895
Real estate partnership................................... 361 345
-------- --------
630,899 574,083
Interest, rents receivable and other assets................. 17,585 15,232
Cash and cash equivalents................................... 885 2,937
-------- --------
$649,369 $592,252
======== ========
LIABILITIES
Notes payable to banks...................................... $ 86,640 $ 40,896
Mortgage notes payable without recourse..................... 214,736 201,841
Accounts payable and other liabilities...................... 26,929 21,564
-------- --------
328,305 264,301
-------- --------
STOCKHOLDERS' EQUITY
8.75% Series A Preferred stock, $.001 par value, 2,750,000
shares authorized and 2,650,000 shares issued and
outstanding in 1999 and 1998.............................. 66,250 66,250
Common stock, $.001 par value, 67,250,000 shares authorized,
9,972,318 and 10,109,891 shares issued and outstanding in
1999 and 1998, respectively............................... 10 10
Additional paid-in capital.................................. 220,526 223,834
Unearned compensation....................................... (4,923) --
Retained earnings........................................... 39,201 37,857
-------- --------
321,064 327,951
-------- --------
$649,369 $592,252
======== ========
</TABLE>

See notes to consolidated financial statements.
24
<PAGE> 25

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Income from office properties............................... $113,161 $ 95,438 $ 45,799
Income from other real estate properties.................... -- -- 722
Interest on mortgage loans.................................. 92 120 63
Management company income................................... 772 464 539
Interest on investments..................................... 56 162 373
Dividend income............................................. 85 73 388
Deferred gains and other income............................. 154 226 203
-------- -------- --------
114,320 96,483 48,087
-------- -------- --------
EXPENSES
Office properties:
Operating expense......................................... 47,458 40,844 19,697
Interest expense:
Contractual............................................ 15,182 11,512 5,486
Amortization of loan costs............................. 164 148 95
Depreciation and amortization............................. 17,413 13,256 6,033
Minority interest......................................... -- -- 59
Other real estate properties:
Operating expense......................................... 112 153 462
Interest expense on bank notes:
Contractual............................................... 3,583 3,390 810
Amortization of loan costs................................ 521 959 187
Management company expenses................................. 503 374 362
General and administrative.................................. 3,850 3,209 3,312
-------- -------- --------
88,786 73,845 36,503
-------- -------- --------
INCOME BEFORE GAINS AND MINORITY INTEREST................... 25,534 22,638 11,584
GAIN ON SALES AND MINORITY INTEREST
Gain on real estate held for sale and other assets.......... 795 4,788 2,907
Minority interest-unit holders.............................. (2) (1) --
-------- -------- --------
NET INCOME.................................................. 26,327 27,425 14,491
Dividends on preferred stock................................ 5,797 3,913 --
-------- -------- --------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS................. $ 20,530 $ 23,512 $ 14,491
======== ======== ========
NET INCOME PER COMMON SHARE:
Basic..................................................... $ 2.04 $ 2.24 $ 2.05
======== ======== ========
Diluted................................................... $ 2.01 $ 2.21 $ 2.01
======== ======== ========
DIVIDENDS PER COMMON SHARE:
Basic..................................................... $ 1.90 $ 1.60 $ 2.05
======== ======== ========
Diluted................................................... $ 1.90 $ 1.60 $ 2.01
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 10,083 10,490 7,078
======== ======== ========
Diluted................................................... 10,197 10,621 7,214
======== ======== ========
</TABLE>

See notes to consolidated financial statements.
25
<PAGE> 26

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
8.75% SERIES A PREFERRED STOCK, $.001 PAR VALUE
Balance at beginning of year.............................. $ 66,250 $ -- $ --
Shares issued............................................. -- 66,250 --
-------- -------- --------
Balance at end of year.................................... 66,250 66,250 --
-------- -------- --------
COMMON STOCK, $.001 PAR VALUE
Balance at beginning of year.............................. 10 10 4
Shares issued -- stock offerings.......................... -- 1 5
Purchase of Company stock................................. -- (1) --
Stock options exercised................................... -- -- 1
-------- -------- --------
Balance at end of year.................................... 10 10 10
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............................. 223,834 213,461 52,356
Stock options exercised................................... 209 470 394
Shares issued -- stock offerings.......................... -- 38,559 160,656
Shares issued in lieu of cash director's fees............. 72 65 55
Shares issued -- IRS Plan................................. 5,357 -- --
Purchase of Company stock................................. (8,946) (28,721) --
-------- -------- --------
Balance at end of year.................................... 220,526 223,834 213,461
-------- -------- --------
UNEARNED COMPENSATION
Balance at beginning of year.............................. -- -- --
Restricted shares issued.................................. (5,357) -- --
Amortization of unearned compensation..................... 434 -- --
-------- -------- --------
Balance at end of year.................................... (4,923) -- --
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year.............................. 37,857 31,270 25,548
Net income................................................ 26,327 27,425 14,491
Preferred stock dividends declared........................ (5,797) (3,913) --
Common stock dividends declared........................... (19,186) (16,925) (8,769)
-------- -------- --------
Balance at end of year.................................... 39,201 37,857 31,270
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........................ $321,064 $327,951 $244,741
======== ======== ========
</TABLE>

See notes to consolidated financial statements.
26
<PAGE> 27

PARKWAY PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 26,327 $ 27,425 $ 14,491
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 17,413 13,256 6,033
Amortization of unearned compensation.................... 434 -- --
Gain on real estate held for sale and mortgage loans..... (795) (4,788) (2,907)
Equity in earnings and other............................. (66) (29) (5)
Changes in operating assets and liabilities:
Increase in receivables............................... (1,028) (2,008) (5,017)
Increase in accounts payable and accrued expenses..... 5,178 6,489 4,959
-------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES...................... 47,463 40,345 17,554
-------- --------- ---------
INVESTING ACTIVITIES
Payments received on mortgage loans........................ 5 395 230
Purchase of real estate related investments................ (42,773) (264,934) (213,863)
Proceeds from sale of real estate held for sale and other
assets................................................... 1,504 56,845 9,330
Real estate development.................................... (13,194) -- --
Improvements to real estate related investments............ (18,266) (12,683) (6,630)
-------- --------- ---------
CASH USED IN INVESTING ACTIVITIES.......................... (72,724) (220,377) (210,933)
-------- --------- ---------
FINANCING ACTIVITIES
Principal payments on mortgage notes payable............... (9,141) (6,341) (2,475)
Proceeds from long-term financing.......................... 20,100 97,000 30,000
Proceeds from bank borrowings.............................. 45,744 226,913 149,773
Principal payments on bank borrowings...................... -- (192,490) (143,300)
Stock options exercised.................................... 209 470 395
Dividends paid on common stock............................. (18,960) (16,925) (8,769)
Dividends paid on preferred stock.......................... (5,797) (2,705) --
Proceeds from sale of stock................................ -- 104,810 160,661
Purchase of Company stock.................................. (8,946) (28,722) --
-------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES...................... 23,209 182,010 186,285
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (2,052) 1,978 (7,094)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 2,937 959 8,053
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 885 $ 2,937 $ 959
======== ========= =========
</TABLE>

See notes to consolidated financial statements.
27
<PAGE> 28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Parkway
Properties, Inc.("Parkway" or "the Company") and its 100% owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated.

BASIS OF PRESENTATION

The accompanying financial statements reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
periods presented. All such adjustments are of a normal recurring nature. The
financial statements should be read in conjunction with the annual report and
the notes thereto.

Effective January 1, 1997, the Company elected to be taxed as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended.

The Company completed its reorganization into the UPREIT (Umbrella
Partnership REIT) structure effective January 1, 1998. The Company anticipates
that the UPREIT structure will enable it to pursue additional investment
opportunities by having the ability to offer tax-advantaged operating
partnership units to property owners in exchange for properties.

BUSINESS

The Company's operations are exclusively in the real estate industry,
principally the operation, management, and ownership of office buildings.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH EQUIVALENTS

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

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

The Company shares voting control in the Wink/Parkway Partnership with a
partner and, accordingly, accounts for its investment using the equity method of
accounting.

REAL ESTATE PROPERTIES

Gains from sales of real estate are recognized based on the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 66 which require upon
closing, the transfer of rights of ownership to the purchaser, receipt from the
purchaser of an adequate cash down payment and adequate continuing investment by
the purchaser. If the requirements for recognizing gains have not been met, the
sale and related costs are recorded, but the gain is deferred and recognized
generally on the installment method of accounting as collections are received.

28
<PAGE> 29

Real estate properties are carried at cost less accumulated depreciation.
Cost includes the carrying amount of the Company's investment plus any
additional consideration paid, liabilities assumed, costs of securing title (not
to exceed fair market value in the aggregate) and improvements made subsequent
to acquisition. Depreciation of buildings is computed using the straight-line
method over their estimated useful lives of 40 years. Depreciation of tenant
improvements, including personal property, is computed using the straight-line
method over the term of the lease involved. Maintenance and repair expenses are
charged to expense as incurred, while improvements are capitalized and
depreciated in accordance with the useful lives outlined above. Geographically,
the Company's properties are concentrated in the Southeastern United States and
Texas.

Revenue from real estate rentals is recognized and accrued as earned on a
pro rata basis over the term of the lease.

Management continually evaluates the Company's office buildings and the
markets where the properties are located to ensure that these buildings continue
to meet their investment criteria. During 1998, management implemented a self
management strategy for the Company's office buildings which requires the
Company to have minimum square footage in an area in order for the strategy to
be cost effective. If the office properties no longer meet management's
investment criteria or the management of the building is not cost effective,
management may consider a sale of the office property. If such a sale becomes
probable, the office property is classified as available for sale.

Management fee income and leasing and brokerage commissions are recorded in
income as earned. Such fees on Company-owned properties are eliminated in
consolidation.

Non-core assets (see Note C) are carried at the lower of cost or fair value
minus estimated costs to sell. Operating real estate held for investment is
stated at the lower of cost or net realizable value.

Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.

INTEREST INCOME RECOGNITION

Interest is generally accrued monthly based on the outstanding loan
balances. Recognition of interest income is discontinued whenever, in the
opinion of management, the collectibility of such income becomes doubtful. After
a loan is classified as non-earning, interest is recognized as income when
received in cash.

AMORTIZATION

Debt origination costs are deferred and amortized using the straight-line
method over the term of the loan. Leasing costs are deferred and amortized using
the straight-line method over the term of the respective lease.

STOCK BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to or above the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes no compensation expense for the stock option grants.

The Company also accounts for restricted stock in accordance with APB No.
25 and accordingly, compensation expense is recognized over the expected vesting
period.

INCOME TAXES

Income taxes have been provided using the liability method with SFAS No.
109, "Accounting for Income Taxes". Deferred income taxes reflect the net tax
effects of (a) temporary differences between the

29
<PAGE> 30

carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and (b) operating loss and tax credit
carryforwards.

NET INCOME PER COMMON SHARE

Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the year. In arriving at income available to common stockholders, preferred
stock dividends are deducted. Diluted EPS reflects the potential dilution that
could occur if dilutive operating partnership units, dilutive employee stock
options and warrants were exercised or converted into common stock that then
shared in the earnings of Parkway.

The computation of diluted earnings per share is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Numerator:
Basic and diluted net income available to common
stockholders....................................... $20,530 $23,512 $14,491
======= ======= =======
Denominator:
Basic weighted average shares......................... 10,083 10,490 7,078
Effect of employee stock options and warrants......... 114 131 136
------- ------- -------
Diluted weighted average shares....................... 10,197 10,621 7,214
======= ======= =======
Diluted earnings per share.............................. $ 2.01 $ 2.21 $ 2.01
======= ======= =======
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("FASB No.
133"). FASB No. 133 is effective January 1, 2001. FASB No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company has no derivative or hedging instruments outstanding as
of December 31, 1999; therefore, management does not anticipate that the
adoption of FASB No. 133 will have a significant effect on the Company's results
of consolidated operations or its financial position.

NOTE B -- INVESTMENT IN OFFICE PROPERTIES

At December 31, 1999, Parkway owned or had a direct interest in 51 office
properties located in 11 states with an aggregate of 7,360,000 square feet of
leasable space. During the year ended December 31, 1999, the Company purchased
two office properties as follows:

<TABLE>
<CAPTION>
MARKET LOCATION COST
--------------- --------------
(IN THOUSANDS)
<S> <C>
Richmond, VA........................................... $ 3,900
Columbia, SC........................................... 38,000
-------
Total.................................................. $41,900
=======
</TABLE>

The Company assumed a $1,936,000 first mortgage note payable with a 7.625%
interest rate on the Richmond, Virginia property in connection with this
purchase.

30
<PAGE> 31

The unaudited pro forma effect on the Company's consolidated results of
operations of the 1999 and 1998 purchases as if the purchases had occurred on
January 1, 1998 and 1997, respectively is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1999 1998
------ -------
<S> <C> <C>
Revenues.................................................... $3,627 $17,318
Net income.................................................. $1,819 $ 9,083
Basic earnings per share.................................... $ .18 $ .87
Diluted earnings per share.................................. $ .18 $ .86
</TABLE>

Pro-forma results do not purport to be indicative of actual results had the
purchases been made at January 1, 1998 and 1997 or the results that may occur in
the future.

In addition to the 51 properties owned directly, the Company also owns a
50% interest in one office property in New Orleans, Louisiana through an
investment in a real estate partnership. The building has 32,325 net rentable
square feet and 100% of the building is leased and occupied by the other 50%
partner, an unrelated party. The carrying amount of the partnership interest at
December 31, 1999 and 1998 was $361,000 and $345,000, respectively.

The following is a schedule by year of future approximate minimum rental
receipts under noncancelable leases for office buildings owned as of December
31, 1999 (in thousands):

<TABLE>
<S> <C>
2000..................................................... $104,831
2001..................................................... 96,731
2002..................................................... 88,826
2003..................................................... 60,655
2004..................................................... 42,099
Subsequently............................................. 51,668
--------
$444,810
========
</TABLE>

NOTE C -- NON-CORE ASSETS

At December 31, 1999, Parkway's investment in non-core assets consisted of
the following (in thousands):

<TABLE>
<CAPTION>
SIZE LOCATION BOOK VALUE
- ---- -------- ----------
<S> <C> <C>
12 acres.............................................. New Orleans, LA $2,012
17 acres.............................................. Charlotte, NC 1,721
3 acres.............................................. Ft. Lauderdale, FL 550
Mortgage Loans........................................ Texas 890
------
$5,173
======
</TABLE>

There were three mortgage loans outstanding at December 31, 1999 secured by
land, residential real estate and a retail center.

NOTE D -- NOTES PAYABLE

NOTES PAYABLE TO BANKS

At December 31, 1999, the Company had $86,640,000 outstanding under two
bank lines of credit. The lines of credit include a $10,000,000 line of credit
with AmSouth Bank (the "$10 million line"), and a $150,000,000 line of credit
with a consortium of 13 banks with Chase Bank of Texas, National Association
serving as the lead agent (the "$150 million line").

31
<PAGE> 32

The $10 million line is unsecured and is expected to fund the daily cash
requirements of the Company's treasury management system. This line of credit
matures September 30, 2001 and has an interest rate equal to the 30 day LIBOR
rate plus 112.5 to 137.5 basis points, depending upon overall Company leverage.
The interest rate on the note was 7.854% at December 31, 1999. The Company paid
a facility fee of 40 basis points ($40,000) upon closing of the loan and pays an
annual administration fee of $3,000. The Company also pays fees on the unused
portion of the line based upon overall Company leverage, with the current rate
set at 25 basis points.

The $150 million line is also unsecured and is expected to fund
acquisitions of additional investments meeting the Company's investment
criteria. This line of credit matures October 7, 2001 and has an interest rate
equal to the LIBOR rate plus 112.5 to 137.5 basis points, depending upon overall
Company leverage. The interest rate on the note was 7.439% at December 31, 1999.
The Company paid a facility fee of $150,000 and origination fees of $432,500
(28.8 basis points) upon closing of the loan and pays an annual administration
fee of $37,500. The Company also pays fees on the unused portion of the line
based upon overall Company leverage, with the current rate set at 25 basis
points.

MORTGAGE NOTES PAYABLE WITHOUT RECOURSE

A summary of fixed rate mortgage notes payable at December 31, 1999 and
1998 which are non-recourse to the Company, is as follows (in thousands):

<TABLE>
<CAPTION>
NOTE BALANCE
CARRYING -------------------
AMOUNT DECEMBER 31
INTEREST MONTHLY MATURITY OF -------------------
OFFICE BUILDING RATE PAYMENT DATE COLLATERAL 1999 1998
- --------------- -------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Teachers Insurance and Annuity
Association (13 properties)...... 6.945% $ 869 07/08 $164,194 $ 91,243 $ 95,186
Morgan Keegan Tower................ 7.620% 164 10/19 35,253 19,992 --
One Jackson Place.................. 7.850% 152 11/10 18,208 16,525 17,032
BB&T Financial Center.............. 7.300% 137 11/12 23,586 13,813 14,428
First Tennessee Plaza.............. 7.170% 136 12/12 30,474 13,800 14,422
SkyTel Centre...................... 7.750% 118 01/08 13,959 8,392 9,121
Raytheon........................... 8.125% 89 09/08 15,282 7,003 7,482
Lakewood II........................ 8.080% 66 08/06 11,233 6,277 6,554
400 North Belt..................... 8.250% 65 08/11 10,423 5,825 6,117
Falls Pointe....................... 8.375% 63 01/12 8,812 5,715 5,981
SunCom Building.................... 7.000% 59 06/11 13,474 5,508 5,816
Waterstone......................... 8.000% 54 07/11 8,039 4,836 5,082
One Park 10 Plaza.................. 8.350% 46 08/11 6,931 4,060 4,262
IBM Building....................... 7.700% 45 03/11 6,807 4,041 4,261
Roswell North...................... 8.375% 33 01/12 4,692 3,012 3,152
Woodbranch......................... 8.250% 32 08/11 4,356 2,804 2,945
Moorefield I....................... 7.625% 16 03/03 3,952 1,890 --
------ -------- -------- --------
$2,144 $379,675 $214,736 $201,841
====== ======== ======== ========
</TABLE>

The aggregate annual maturities of notes payable at December 31, 1999 are
as follows (in thousands):

<TABLE>
<S> <C>
2000..................................................... $ 10,179
2001..................................................... 10,961
2002..................................................... 11,803
2003..................................................... 14,374
2004..................................................... 13,619
Subsequently............................................. 153,800
--------
$214,736
========
</TABLE>

During 1999, the Company capitalized $661,000 of interest cost pertaining
to the office redevelopment.
32
<PAGE> 33

NOTE E -- INCOME TAXES

The tax effects of significant items comprising the Company's net deferred
tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax asset (liability):
Differences in book and tax basis of assets............. $(1,964) $ (315) $ 2,404
Operating loss carryforwards............................ 3,099 3,183 3,435
Other................................................... 303 304 --
------- ------- -------
1,438 3,172 5,839
Valuation allowance..................................... (1,438) (3,172) (5,839)
------- ------- -------
Net deferred tax asset.................................. $ -- $ -- $ --
======= ======= =======
</TABLE>

The Company's income differs for income tax and financial reporting
purposes principally because (1) the timing of the deduction for the provision
for possible losses or writedowns, (2) real estate owned has a different basis
for tax and financial reporting purposes, producing different gains upon
disposition and different amounts of annual depreciation, and (3) mortgage loans
have a different basis for tax and financial reporting purposes, producing
different gains upon collection of these receivables.

The net decrease in the total valuation allowance for the year ended
December 31, 1999 was $1,734,000 from 1998 primarily from differences in book
and tax basis of real estate. At December 31, 1999, 1998 and 1997, the net
deferred tax asset was entirely offset by a valuation allowance because
realization of the net deferred tax asset was not assured.

The following is a reconciliation between the amount reported for income
taxes and the amount computed using the statutory federal tax rate (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Taxes at statutory rate..................................... $ 915 $ 915 $ 915
Operating loss carryforwards, as limited.................... (915) (915) (915)
Federal alternative minimum tax............................. 13 55 --
State income tax expense.................................... 92 5 --
----- ----- -----
Income tax expense.......................................... $ 105 $ 60 $ --
===== ===== =====
</TABLE>

At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $14,608,000 which
expire at various dates through 2018. These carryforwards are limited to a
maximum of approximately $2,700,000 that can be used in any given year.

The Company has qualified under Sections 856-860 of the Internal Revenue
Code, as a Real Estate Investment Trust, ("REIT") effective January 1, 1997. In
anticipation of converting to a REIT, the Company reincorporated in Maryland
during 1996. If the Company distributes to its shareholders at least 95% of its
REIT taxable income, it generally will not be subject to federal corporate
income tax on that portion of its ordinary income or capital gain that is timely
distributed to its shareholders. The Company will utilize the NOL carryforwards
as a REIT to the extent that it has taxable income prior to the carryforward
expiration dates, subject to the limitation as described above. The Company
intends to continue to qualify as a REIT, although the Company will be subject
to a number of organizational and operational requirements. If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to federal
income tax on its taxable income at the prevailing corporate rates and would be
ineligible to requalify as a REIT for four additional years.

33
<PAGE> 34

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

NOTE F -- STOCK OPTION AND LONG-TERM COMPENSATION PLANS

The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation", requires the use of option valuation models that
were not developed for use in valuing employee stock options.

The 1994 Stock Option Plan, as amended provides Parkway common shares
("Shares") to employees or officers of the Company and its subsidiaries upon the
exercise of options and upon incentive grants pursuant to the Stock Option Plan.
On July 1 of each year, the number of Shares available for grant shall
automatically increase by one percent (1%) of the Shares outstanding on such
date, provided that the number of Shares available for grant shall never exceed
12.5% of the Shares outstanding. In addition to the 1% automatic increase in
1999, the Stockholders voted to make available for grant an additional 250,000
shares. In accordance with these provisions, the Shares available for grant
increased 351,218 and 360,683 in 1999 and 1998, respectively. Under the 1991
Directors Stock Option Plan, as amended, options for up to 250,000 shares may be
granted to non-employee directors. Both plans have ten-year terms.

On June 3, 1999, the stockholders of the Company approved amendments to the
Company's 1994 Stock Option and Long-Term Compensation Plan that authorized the
Compensation Committee to issue restricted stock awards. The Compensation
Committee authorized the issuance of 150,000 shares of restricted stock to
officers of the Company effective June 3, 1999. The stock price on date of grant
was $34. The vesting period for the stock is 10 years or 46 months if certain
operating results are achieved by the Company. Effective September 14, 1999, the
Compensation Committee approved the issuance of an additional 8,000 shares of
restricted stock to newly-elected officers of the Company. The stock price on
the date of the grant was $32.1875. The vesting period for the restricted stock
is 9.5 years or 40 months if certain operating results are achieved by the
Company. The Company recorded $5,357,000 as additional paid-in capital when the
shares of the restricted stock were issued offset by unearned compensation of
the same amount. The unearned compensation was deducted from stockholders'
equity and is being amortized over the vesting period. Compensation expense of
$434,000 was recognized in 1999.

Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: risk-free interest of 6.5%, 5.5%, and 6.0%,
respectively; dividend yield of 6% in 1999 and 5% in 1998 and 1997; volatility
factor of the expected market price of the Company's common stock of .256, .389,
and .427, respectively; and a weighted-average expected life of the options of 3
years for the 1994 Stock Option Plan and 5 years for the 1991 Directors Stock
Option Plan. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options. The weighted
average fair value of options granted during 1999, 1998 and 1997 was $4.92,
$7.20 and $6.80, respectively.

34
<PAGE> 35

For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1999, 1998 and 1997 is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in thousands,
except per share information):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Pro forma net income available to common stockholders... $19,831 $22,586 $14,152
Pro forma net income per common share:
Basic................................................. $ 1.97 $ 2.15 $ 2.00
Diluted............................................... $ 1.94 $ 2.13 $ 1.96
</TABLE>

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

<TABLE>
<CAPTION>
1991 DIRECTORS
1994 STOCK STOCK
OPTION PLAN OPTION PLAN
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
OUTSTANDING AT JANUARY 1, 1997......................... 175,438 $13.12 78,000 $ 8.92
Granted.............................................. 65,450 26.63 25,500 25.88
Exercised............................................ (29,990) 10.69 (15,750) 9.42
Forfeited............................................ (1,850) 22.22 -- --
------- ------ ------- ------
OUTSTANDING AT DECEMBER 31, 1997....................... 209,048 17.62 87,750 13.76
Granted.............................................. 369,650 30.68 25,500 31.13
Exercised............................................ (24,638) 11.49 (11,250) 17.42
Forfeited............................................ (10,875) 29.39 -- --
------- ------ ------- ------
OUTSTANDING AT DECEMBER 31, 1998....................... 543,185 26.55 102,000 17.70
Granted.............................................. 83,250 31.14 21,000 34.00
Exercised............................................ (12,126) 19.71 (9,500) 9.71
Forfeited............................................ (25,125) 30.55 -- --
------- ------ ------- ------
OUTSTANDING AT DECEMBER 31, 1999....................... 589,184 $18.32 113,500 $21.38
======= ====== ======= ======
</TABLE>

Following is a summary of the status of options outstanding at December 31,
1999:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- OPTIONS
WEIGHTED- ------------------
AVERAGE WEIGHTED WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE CONTRACTUAL EXERCISE EXERCISE
RANGE NUMBER LIFE PRICE NUMBER PRICE
- -------- ------- ----------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
1994 STOCK OPTION PLAN
$ 9.19-$12.22............................... 50,861 4.7 years $10.95 50,861 $10.95
$12.67-$15.75............................... 41,573 6.1 years $14.13 41,573 $14.13
$21.00-$25.63............................... 19,125 6.5 years $21.00 19,125 $21.00
$25.63-$32.81............................... 477,625 8.4 years $30.28 59,975 $26.63
1991 DIRECTORS STOCK OPTION PLAN
$ 4.00...................................... 7,500 1.7 years $ 4.00 7,500 $ 4.00
$ 8.00-$10.17............................... 33,000 4.9 years $ 9.17 33,000 $ 9.17
$16.00...................................... 9,000 6.5 years $16.00 9,000 $16.00
$25.88-$34.00............................... 64,000 8.4 years $30.47 64,000 $30.47
</TABLE>

NOTE G -- OTHER MATTERS

The Company issued 2,650,000 shares of its 8.75% Series A Cumulative
Redeemable Preferred Stock, $.001 par value per share ("Cumulative Preferred
Stock") during 1998. Dividends on the Cumulative

35
<PAGE> 36

Preferred Stock are cumulative from the date of issue and are payable quarterly
in arrears. The Cumulative Preferred Stock is not redeemable prior to April 23,
2003, but may be redeemed for cash, at the option of the Company, on or after
that date at a redemption price of $25.00 per share, plus any accrued dividends.
The Cumulative Preferred Stock has no stated maturity, will not be subject to
any sinking fund or mandatory redemption and will not be convertible into any
other securities of the Company.

The Company adopted a Dividend Reinvestment and Stock Purchase Plan
("DRIP") during 1999 and registered 1,000,000 shares of its common stock in
connection therewith. The Company began accepting subscriptions under the plan
in February 2000. Shareholders may purchase shares of the Company's common stock
through the DRIP by reinvesting dividends or by making cash payments from $100
to $10,000 per month to the DRIP.

On March 2, 1999, the Board of Directors approved the repurchase of up to
500,000 shares of the Company's common stock. As of December 31, 1999, 315,012
shares had been purchased at an average price of $28.40. An additional 97,810
shares have been purchased in 2000, through March 10, 2000, at an average price
of $27.78. Since June 1998, the Company has purchased a total of 1,412,822
shares of its common stock, which represents approximately 12.8% of the common
stock outstanding when the buyback program was initiated on June 30, 1998.

SUPPLEMENTAL PROFIT AND LOSS INFORMATION

Included in operating expenses are taxes, principally property taxes, of
$10,557,000, $9,149,000 and $4,505,000 for the years ended December 31, 1999,
1998 and 1997, respectively.

SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Assumption of mortgage notes payable in connection with
purchase of properties.................................... $ 1,936 $ 5,962 $14,868
Loans to facilitate sales of real estate and real estate
securities................................................ -- 121 900
Interest paid............................................... 19,118 14,903 5,747
Income taxes paid........................................... 196 41 --
</TABLE>

LITIGATION

The Company is not presently engaged in any litigation other than ordinary
routine litigation incidental to its business. Management believes such
litigation will not materially affect the financial position, operations or
liquidity of the Company.

36
<PAGE> 37

ACCOUNTS PAYABLE AND OTHER LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Office Property Payables:
Accrued expenses and accounts payable..................... $ 4,840 $ 4,287
Accrued property taxes.................................... 6,927 5,297
Security deposits......................................... 2,652 2,621
Corporate payables.......................................... 8,188 5,292
Dividends payable........................................... 1,213 1,213
Deferred gains.............................................. 1,084 1,122
Accrued payroll............................................. 915 737
Interest payable............................................ 651 342
Other payables.............................................. 459 653
------- -------
$26,929 $21,564
======= =======
</TABLE>

INTEREST, RENTS RECEIVABLE AND OTHER ASSETS

<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable......................................... $ 3,199 $ 3,426
Straight line rent receivable............................... 2,678 1,334
Unamortized lease costs..................................... 4,367 3,066
Unamortized loan costs...................................... 2,120 2,248
Escrow and other deposits................................... 3,419 3,918
Prepaid items............................................... 945 493
Other assets................................................ 857 747
------- -------
$17,585 $15,232
======= =======
</TABLE>

NOTE H -- FAIR VALUES OF FINANCIAL INSTRUMENTS

CASH AND CASH EQUIVALENTS

The carrying amounts for cash and cash equivalents approximated fair value
at December 31, 1999 and 1998.

MORTGAGE LOANS

The fair values for mortgage loans receivable are estimated based on net
realizable value and discounted cash flow analysis, using interest rates
currently being offered on loans with similar terms to borrowers of similar
credit quality. The aggregate fair value of the mortgage loans receivable at
December 31, 1999 approximated its carrying amount of $890,000.

The fair value of the mortgage notes payable without recourse are estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The aggregate fair
value of the mortgage notes payable without recourse at December 31, 1999 was
$208,410,000 as compared to its carrying amount of $214,736,000 The aggregate
fair value of the mortgage notes payable without recourse at December 31, 1998
was $207,151,000 as compared to its carrying amount of $201,841,000.

37
<PAGE> 38

NOTE I -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized quarterly financial data for the years ended December 31, 1999
and 1998 are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (other than gains)........................ $ 27,169 $ 27,644 $ 29,909 $ 29,598
Expenses........................................... (20,898) (20,931) (23,878) (23,079)
Gain on real estate and other assets............... 86 -- -- 709
Minority interest -- unit holders.................. (1) -- (1) --
-------- -------- -------- --------
Net income......................................... 6,356 6,713 6,030 7,228
Dividends on preferred stock....................... 1,449 1,449 1,450 1,449
-------- -------- -------- --------
Net income available to common stockholders........ $ 4,907 $ 5,264 $ 4,580 $ 5,779
======== ======== ======== ========
Basic per common share data:
Net income....................................... $ .49 $ .52 $ .45 $ .57
Weighted average shares outstanding.............. 10,103 10,030 10,124 10,077
Diluted per common share data:
Net income....................................... $ .48 $ .52 $ .45 $ .57
Weighted average shares outstanding.............. 10,210 10,148 10,263 10,183
Dividends paid on common stock..................... $ .45 $ .45 $ .50 $ .50
</TABLE>

<TABLE>
<CAPTION>
1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (other than gains)........................ $ 19,914 $ 25,196 $ 25,182 $ 26,191
Expenses........................................... (15,296) (19,063) (19,851) (19,635)
Gain (loss) on real estate and other assets........ 952 387 3,547 (98)
Minority interest -- unit holders.................. -- -- (1) --
-------- -------- -------- --------
Net income......................................... 5,570 6,520 8,877 6,458
Dividends on preferred stock....................... -- 1,014 1,450 1,449
-------- -------- -------- --------
Net income available to common stockholders........ $ 5,570 $ 5,506 $ 7,427 $ 5,009
======== ======== ======== ========
Basic per common share data:
Net income....................................... $ 0.55 $ 0.50 $ 0.70 $ 0.50
Weighted average shares outstanding.............. 10,156 11,086 10,611 10,107
Diluted per common share data:
Net income....................................... $ 0.54 $ 0.49 $ 0.69 $ 0.49
Weighted average shares outstanding.............. 10,301 11,221 10,734 10,222
Dividends paid on common stock..................... $ 0.35 $ 0.35 $ 0.45 $ 0.45
</TABLE>

38
<PAGE> 39

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
INITIAL COST TO THE
COMPANY
---------------------- SUBSEQUENT
BUILDING AND CAPITALIZED
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS COSTS
- ----------- ------------ ------- ------------ -----------
<S> <C> <C> <C> <C>
Real Estate Properties:
Office Buildings:
One Jackson Place -- MS................................... $ 16,525 $ 1,799 $ 19,730 $ 5,048
SkyTel Centre -- MS....................................... 8,392 1,360 13,067 1,090
IBM Building -- MS........................................ 4,041 1,169 5,337 1,104
River Oaks Place -- MS.................................... -- 277 4,143 700
SunCom Building -- MS..................................... 5,508 915 10,830 2,341
Waterstone -- GA.......................................... 4,836 859 7,207 892
Falls Pointe -- GA........................................ 5,715 1,431 7,659 447
Roswell North -- GA....................................... 3,012 594 4,072 451
Meridian -- GA............................................ -- 994 9,547 267
Lakewood II -- GA......................................... 6,277 617 10,923 401
Hightower -- GA........................................... -- 530 6,201 1,052
Pavilion Center -- GA..................................... -- 510 4,005 278
One Park Ten -- TX........................................ 4,060 606 6,149 1,028
400 Northbelt -- TX....................................... 5,825 419 9,655 1,552
Woodbranch -- TX.......................................... 2,804 303 3,805 690
Tensor -- TX.............................................. -- 273 2,567 657
Ashford II -- TX.......................................... -- 163 2,069 449
Sugar Grove -- TX......................................... -- 364 7,385 1,485
Raytheon -- TX............................................ 7,003 856 15,175 42
Schlumberger -- TX........................................ -- 1,128 11,102 94
One Commerce Green -- TX.................................. -- 489 37,103 731
Comerica Bank Building -- TX.............................. -- 1,921 21,222 389
BB&T -- NC................................................ 13,813 1,018 23,539 1,000
Charlotte Park -- NC...................................... -- 1,400 12,911 1,157
Bank of America Tower -- SC............................... -- 316 20,350 1,252
Healthsource -- SC........................................ -- 555 5,176 54
Atrium at Stoneridge -- SC................................ -- 572 7,775 552
Capitol Center -- SC...................................... -- 973 37,232 120
Forum II & III -- TN...................................... -- 2,634 13,886 498
First Tennessee Plaza -- TN............................... 13,800 457 29,499 2,397
Morgan Keegan Tower -- TN................................. 19,992 -- 36,549 823
Cedar Ridge -- TN......................................... -- 741 8,631 512
Falls Building -- TN...................................... -- -- 7,628 321
Vestavia -- AL............................................ -- 729 3,956 721
First Little Rock -- AR................................... -- 965 9,307 428
Greenbrier Tower I -- VA.................................. -- 584 7,503 531
Greenbrier Tower II -- VA................................. -- 573 7,354 391
Lynnwood Plaza -- VA...................................... -- 985 8,306 286
Town Point Center -- VA................................... -- -- 10,756 460
Glen Forest -- VA......................................... -- 537 8,503 75
Moorefield II -- VA....................................... -- 469 4,752 84
Moorefield III -- VA...................................... -- 490 5,135 149
Westvaco -- VA............................................ -- 1,265 11,826 720
Winchester -- VA.......................................... -- 956 10,852 299
Moorefield I -- VA........................................ 1,890 260 3,698 87
Corporate Square West -- IN............................... -- 741 1,727 601
Hillsboro I-IV -- FL...................................... -- 1,129 7,734 502
Hillsboro V -- FL......................................... -- 1,325 12,249 493
Southtrust Bank Building -- FL............................ -- 785 18,588 440
Teachers Insurance and Annuity Association (13
properties)(4).......................................... 91,243 -- -- --
-------- ------- -------- -------
214,736 38,036 554,375 36,141
-------- ------- -------- -------
Office Buildings Held for Sale:
Cherokee -- VA............................................ -- 158 3,366 260
Courthouse -- VA.......................................... -- 554 7,058 474
Loudoun Plaza -- VA....................................... -- 420 8,624 59
-------- ------- -------- -------
-- 1,132 19,048 793
-------- ------- -------- -------
Office Redevelopment:
Moore Building -- TN...................................... -- -- 15,408 --
Moore Garage -- TN........................................ -- -- 3,103 --
-------- ------- -------- -------
-- -- 18,511 --
-------- ------- -------- -------
Total Real Estate Owned..................................... $214,736 $39,168 $591,934 $36,934
======== ======= ======== =======
</TABLE>

39
<PAGE> 40
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
-------------------------------------------------------------------------------
NET BOOK
BLDG. & ACCUM. VALUE OF YEAR YEAR
DESCRIPTION LAND IMPRV. TOTAL(1) DEPR. REAL ESTATE ACQUIR. CONSTRUCTED
- ----------- ------- -------- -------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Properties:
Office Buildings:
One Jackson Place -- MS............ $ 1,799 $ 24,778 $26,577 $ 8,370 $ 18,207 1986 1986
SkyTel Centre -- MS................ 1,360 14,157 15,517 1,558 13,959 1995 (2)1987
IBM Building -- MS................. 1,169 6,441 7,610 803 6,807 1995 1986
River Oaks Place -- MS............. 277 4,843 5,120 254 4,866 1998 1981
SunCom Building -- MS.............. 915 13,171 14,086 611 13,475 1998 1983
Waterstone -- GA................... 859 8,099 8,958 918 8,040 1995 1987
Falls Pointe -- GA................. 1,431 8,106 9,537 724 8,813 1996 1990
Roswell North -- GA................ 594 4,523 5,117 425 4,692 1996 1986
Meridian -- GA..................... 994 9,814 10,808 681 10,127 1997 1985
Lakewood II -- GA.................. 617 11,324 11,941 708 11,233 1997 1986
Hightower -- GA.................... 530 7,253 7,783 428 7,355 1997 1983
Pavilion Center -- GA.............. 510 4,283 4,793 182 4,611 1998 1984
One Park Ten -- TX................. 606 7,177 7,783 852 6,931 1996 1982
400 Northbelt -- TX................ 419 11,207 11,626 1,202 10,424 1996 1982
Woodbranch -- TX................... 303 4,495 4,798 442 4,356 1996 1982
Tensor -- TX....................... 273 3,224 3,497 248 3,249 1996 1983
Ashford II -- TX................... 163 2,518 2,681 184 2,497 1997 1979
Sugar Grove -- TX.................. 364 8,870 9,234 659 8,575 1997 1982
Raytheon -- TX..................... 856 15,217 16,073 791 15,282 1997 1983
Schlumberger -- TX................. 1,128 11,196 12,324 532 11,792 1998 1983
One Commerce Green -- TX........... 489 37,834 38,323 1,751 36,572 1998 1983
Comerica Bank Bldg. -- TX.......... 1,921 21,611 23,532 1,006 22,526 1998 1983
BB&T -- NC......................... 1,018 24,539 25,557 1,970 23,587 1996 1988
Charlotte Park -- NC............... 1,400 14,068 15,468 993 14,475 1997 1982/84/86
Bank of America Tower -- SC........ 316 21,602 21,918 1,264 20,654 1997 1973
Healthsource -- SC................. 555 5,230 5,785 241 5,544 1998 1986
Atrium at Stoneridge -- SC......... 572 8,327 8,899 363 8,536 1998 1986
Capitol Center -- SC............... 973 37,352 38,325 466 37,859 1999 1987
Forum II & III -- TN............... 2,634 14,384 17,018 1,137 15,881 1997 1985
First Tennessee Plaza -- TN........ 457 31,896 32,353 1,878 30,475 1997 1978
Morgan Keegan Tower -- TN.......... -- 37,372 37,372 2,118 35,254 1997 1985
Cedar Ridge -- TN.................. 741 9,143 9,884 493 9,391 1998 1982
Falls Building -- TN............... -- 7,949 7,949 205 7,744 1998 (3)1982/84/90
Vestavia -- AL..................... 729 4,677 5,406 372 5,034 1997 1988
First Little Rock -- AR............ 965 9,735 10,700 573 10,127 1997 1986
Greenbrier I -- VA................. 584 8,034 8,618 454 8,164 1997 1985/87
Greenbrier II -- VA................ 573 7,745 8,318 438 7,880 1997 1985/87
Lynnwood Plaza -- VA............... 985 8,592 9,577 413 9,164 1998 1986
Town Point Center -- VA............ -- 11,216 11,216 384 10,832 1998 1987
Glen Forest -- VA.................. 537 8,578 9,115 396 8,719 1998 1985
Moorefield II -- VA................ 469 4,836 5,305 232 5,073 1998 1985
Moorefield III -- VA............... 490 5,284 5,774 250 5,524 1998 1985
Westvaco -- VA..................... 1,265 12,546 13,811 455 13,356 1998 1986
Winchester -- VA................... 956 11,151 12,107 274 11,833 1998 1987
Moorefield I -- VA................. 260 3,785 4,045 92 3,953 1999 1984
Corporate Sq. West -- IN........... 741 2,328 3,069 731 2,338 1990 1968
Hillsboro I-IV -- FL............... 1,129 8,236 9,365 428 8,937 1998 1985
Hillsboro V -- FL.................. 1,325 12,742 14,067 603 13,464 1998 1985
Southtrust Bank Bldg. -- FL........ 785 19,028 19,813 767 19,046 1998 1985
Teachers Insurance and Annuity
Association (13 properties)(4)... -- -- -- -- -- -- --
------- -------- -------- ------- -------- ---- -------------
38,036 590,516 628,552 41,319 587,233 -- --
------- -------- -------- ------- -------- ---- -------------
Office Buildings Held for Sale:
Cherokee -- VA..................... 158 3,626 3,784 322 3,462 1996 1985
Courthouse -- VA................... 554 7,532 8,086 685 7,401 1996 1984
Loudoun Plaza -- VA................ 420 8,683 9,103 345 8,758 1998 1989
------- -------- -------- ------- -------- ---- -------------
1,132 19,841 20,973 1,352 19,621 -- --
------- -------- -------- ------- -------- ---- -------------
</TABLE>

40
<PAGE> 41
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

DECEMBER 31, 1999
(IN THOUSANDS)

- ---------------

(1) The aggregate cost for Federal Income Tax purposes was approximately
$662,075,000.

(2) For SkyTel Centre, this is the date of a major renovation.

(3) For the Falls Building, these are the dates of major renovations.

(4) The properties secured on the TIAA loan are Comerica Bank Building, One
Commerce Green, Charlotte Park, Healthsource, Cedar Ridge, Greenbrier I and
II, Loudoun Plaza, Lynnwood Plaza, Glen Forest, Moorefield II, Moorefield
III, Hillsboro I-IV and Hillsboro V.

41
<PAGE> 42

NOTE TO SCHEDULE III

AS OF DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)

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

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
Real Estate:
Office Buildings:
Balance at beginning of year.............................. $594,588 $362,074
Additions:
Acquisitions and improvements.......................... 60,744 276,685
Office redevelopment................................... 13,194 5,317
Cost of real estate sold or disposed...................... (490) (49,488)
Reclassified to held for sale............................. (20,973) --
-------- --------
Balance at close of year.................................. $647,063 $594,588
======== ========
Office Buildings Held for Sale:
Balance at beginning of year.............................. $ -- $ --
Northern Virginia properties:
Cost of real estate....................................... 20,973 --
Accumulated depreciation.................................. (1,352) --
-------- --------
Balance at close of year.................................. $ 19,621 $ --
======== ========
Accumulated Depreciation:
Balance at beginning of year.............................. $ 26,344 $ 14,143
Depreciation expense...................................... 16,424 12,538
Real estate sold or disposed.............................. (97) (337)
Reclassified to held for sale............................. (1,352) --
-------- --------
Balance at close of year.................................. $ 41,319 $ 26,344
======== ========
</TABLE>

42
<PAGE> 43

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The Registrant's definitive proxy statement which will be filed with the
Commission pursuant to Regulation 14A within 120 days of the end of Registrant's
fiscal year is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

<TABLE>
<S> <C> <C> <C>
(a) (1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets -- as of December 31, 1999 and 1998
Consolidated Statements of Income -- for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity -- for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
Schedule III -- Real Estate and Accumulated Depreciation as of
December 31, 1999
Notes to Schedule III
(3) Form 10-K Exhibits required by Item 601 of Regulation S-K:
(a) Articles of Incorporation, as amended, of Parkway
(incorporated by reference to Exhibit B to The Parkway
Company's Proxy Material for its Annual Meeting of
Stockholders held on July 18, 1996).
(b) Bylaws of Parkway (incorporated by reference to Exhibit C to
The Parkway Company's Proxy Material for its Annual Meeting
of Stockholders held on July 18, 1996).
(c) Amendments to Bylaws (incorporated by reference).
(d) Articles Supplementary creating the Registrant's 8.75%
Series A Cumulative Redeemable Preferred Stock (incorporated
by reference to the Registrant's Form 8-A filed April 24,
1998).
</TABLE>

43
<PAGE> 44
<TABLE>
<S> <C> <C> <C>
(10) Material Contracts:
(a) Registrant's 1994 Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 8,
1994).
(b) Registrant's 1991 Directors Stock Option Plan, as amended
(incorporated by reference to the Registrant's proxy
statement dated November 8, 1994).
(c) Form of Change-in-Control Agreement that Registrant has
entered into with Leland R. Speed, Steven G. Rogers and
Sarah P. Clark (incorporated by reference to the
Registrant's Form 10-KSB for the year ended December 31,
1996).
(d) Form of Change-in-Control Agreement that the Registrant has
entered into with David R. Fowler, G. Mitchel Mattingly,
Regina P. Shows, Jack R. Sullenberger and James M. Ingram
(incorporated by the Registrant's Form 10-KSB for the year
ended December 31, 1996).
(e) The Registrant's 1997 Non-Employee Directors Stock Ownership
Plan (incorporated by references to Appendix B in the
Registrant's Proxy Material for its June 6, 1997 Annual
Meeting).
(f) Form of First Amendment to Change-in-Control Agreement
(filed herewith).
(g) Sale Agreement and Amendments between Brookdale Investors,
L.P., a Delaware limited partnership, and Parkway Properties
LP, a Delaware limited partnership (incorporated by
reference to the Registrant's Form 8-K filed February 18,
1998).
(h) Credit Agreement among Parkway Properties LP, Chase Bank of
Texas, National Association, and PNC Bank, National
Association as agent (incorporated by reference to the
Registrant's Form 8-K filed November 12, 1998).
(i) Form of Note by Parkway Properties LP as maker and Chase
Bank of Texas, National Association as agent (incorporated
by reference to the Registrant's Form 8-K filed November 12,
1998).
(j) Purchase and Sale Agreement between Parkway Properties LP
and Triad Properties Corporation (incorporated by reference
to the Registrant's Form 8-K dated and filed April 22,
1998).
(k) Purchase and Sale Agreement between Parkway Portfolio I LLC
and Triad Properties Corporation, and Parkway Properties LP,
a Delaware limited partnership (incorporated by reference to
the Registrant's Form 8-K dated and filed April 22, 1998).
(l) Amended and Restated Agreement of Limited Partnership of
Parkway Properties LP, including Amended and Restated
Exhibit A of the Amended and Restated Agreement of Limited
Partnership (incorporated by reference to the Registrant's
Form 8-K filed July 15, 1998).
(m) Admission Agreement between Parkway Properties LP and Lane
N. Meltzer (incorporated by reference to the Registrant's
Form 8-K filed July 15, 1998).
(n) Promissory Note between Parkway Properties LP and Teachers
Insurance and Annuity Association of America (incorporated
by reference to the Registrant's Form 8-K filed July 15,
1998).
(o) Form of Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement by Parkway Properties
LP as borrower for the benefit of Teachers Insurance and
Annuity Association of America as lender (incorporated by
reference to the Registrant's Form 8-K filed July 15, 1998).
(p) Conversion and Note Agreement between Parkway Properties LP,
Parkway Properties, Inc. and Teachers Insurance and Annuity
Association of America (incorporated by reference to the
Registrant's Form 8-K filed July 15, 1998).
(q) Parkway Properties, Inc. 1994 Stock Option and Long-Term
Incentive Plan (incorporated by reference to Appendix A to
the Company's proxy material for its June 3, 1999 Annual
Meeting).
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Ernst & Young LLP, filed herewith.
(27) Financial Data Schedule
</TABLE>

44
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
(28) Agreement of Registrant to furnish the Commission with copies of
instruments defining the rights of holders of long-term debt
(incorporated by reference to Exhibit 28E of the Registrant's
Form S-4 (No. 33-2960) filed with the Commission on February 3,
1986).
(99) The Company Shareholder Rights Plan dated September 7, 1995
(incorporated by reference to the Registrant's Form 8-A filed
September 8, 1995).

(b) Reports on Form 8-K.
(1) 8-K -- Filed -- None
</TABLE>

45
<PAGE> 46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

PARKWAY PROPERTIES, INC.
Registrant

/s/ STEVEN G. ROGERS
------------------------------------
President, Chief Executive
Officer and Director
March 27, 2000

/s/ SARAH P. CLARK
------------------------------------
Sarah P. Clark
Chief Financial Officer
March 27, 2000

/s/ REGINA P. SHOWS
------------------------------------
Regina P. Shows
Chief Accounting Officer
March 27, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>

/s/ DANIEL C. ARNOLD Director March 27, 2000
- -----------------------------------------------------
Daniel C. Arnold

/s/ ROGER P. FRIOU Director March 27, 2000
- -----------------------------------------------------
Roger P. Friou

/s/ MARTIN L. GARCIA Director March 27, 2000
- -----------------------------------------------------
Martin L. Garcia

/s/ J. MICHAEL LIPSEY Director March 27, 2000
- -----------------------------------------------------
J. Michael Lipsey

/s/ JOE F. LYNCH Director March 27, 2000
- -----------------------------------------------------
Joe F. Lynch

/s/ C. HERBERT MAGRUDER Director March 27, 2000
- -----------------------------------------------------
C. Herbert Magruder, M.D.

/s/ W. LINCOLN MOSSOP, JR. Director March 27, 2000
- -----------------------------------------------------
W. Lincoln Mossop, Jr.
</TABLE>

46
<PAGE> 47

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>

/s/ STEVEN G. ROGERS President, Chief March 27, 2000
- ----------------------------------------------------- Executive Officer and
Steven G. Rogers Director

/s/ LELAND R. SPEED Chairman of Board and March 27, 2000
- ----------------------------------------------------- Director
Leland R. Speed
</TABLE>

<PAGE> 1
EXHIBIT 10(f)

FIRST AMENDMENT TO
CHANGE IN CONTROL AGREEMENT

This First Amendment to Change in Control Agreement (the "Amendment") by
and between Parkway Properties, Inc., a Maryland corporation (the "Company"),
with offices at One Jackson Place, Suite 1000, 188 East Capitol Street, Jackson,
Mississippi 39201-2195, and______________________(the "Executive"), an
individual residing at ______________________________, dated as of the
______________day of____________________.

WHEREAS, the Company and the Executive entered into a Change in Control
Agreement (the "Change in Control Agreement"), dated as of __________________;
and

WHEREAS, the Company and the Executive desire to amend the Change in
Control Agreement as provided herein.

NOW, THEREFORE, the parties, for good and valuable consideration and
intending to be legally bound, agree as follows:

1. Amendment. Paragraph 7 of the Change in Control Agreement is hereby
amended in its entirety to read as follows:

"7. Cut Back in Benefits. Notwithstanding any other provision of
this Agreement, the cash lump sum payment and other benefits otherwise to be
provided pursuant to Sections 3 and 4 of this Agreement (the "Severance
Benefit") shall be reduced as described below if the Net After-Tax Benefit (as
defined below) the Executive would realize would be greater with the reduction
than without the reduction. The Net After-Tax Benefit is the sum of the
parachute payments (within the meaning of section 280G of the Code) payable to
the Executive under this Agreement and all other plans, practices, policies, or
programs of the Company, reduced by the federal, state, and local income taxes
payable with respect to the parachute payments and any excise tax imposed on the
Executive with respect to the parachute payments under section 4999 of the Code.
If the Net After-Tax Benefit would be greater with the reduction, then the
Severance Benefit shall be reduced, but only to the extent required to avoid the
imposition on the Executive of any excise tax under section 4999 of the Code.
Tax counsel designated in the manner described below shall make all
determinations required for the purposes of this Section 7, including the
determination of which payments or benefits are parachute payments, the value of
the parachute payments, the amount of Net After-Tax Benefit realizable with and
without a reduction, and the amount of the reduction required to avoid the
excise tax. All determinations shall be made in accordance with sections 280G
and 4999 and other relevant provisions of the Code. Tax counsel shall be
designated as follows: the Executive and the Company shall each designate a
party to serve as co-tax counsel. The co-tax counsel shall endeavor to agree
upon the determinations required for the purposes of this Section 7, but if they
have not done so by the end of the tenth business day following the change in
control, the accounting firm that was the independent auditor of the Company
immediately before the change in control shall designate a third party to serve
as successor tax counsel, and all of its determinations shall prevail. The
Company shall determine which elements of the Severance Benefit shall be
reduced, if necessary to conform to the provisions of this Section. The Company
shall be responsible for payment of the fees charged by all parties serving as
tax counsel (whether as co-tax counsel or otherwise) and by the accounting firm
for services rendered in connection with this Section."

2. Choice of Law. This Amendment will be governed by and construed in
accordance with the laws of the State of Mississippi.

3. Counterparts. This Amendment may be executed in any number of counterparts
and each of such counterparts will for all purposes be deemed to be an original,
and all such counterparts will together constitute but one and the same
instrument.

4. Existing Terms. The existing terms and conditions of the Change in Control
Agreement will remain in full force and effect except as such terms and
conditions are specifically amended or conflict with the terms of this
Amendment.

IN WITNESS WHEREOF, the Executive has set his hand to this Amendment and,
pursuant to the authorization from the Board, the Company has caused this
Amendment to be executed as of the day and year first above written.

PARKWAY PROPERTIES, INC.

By:
---------------------
Name:
Title:

EXECUTIVE

<PAGE> 1
Exhibit (21) List of Subsidiaries

NAME STATE

CORPORATIONS:
------------

Parkway Properties General Partners, Inc. Delaware

Golf Properties, Inc. North Carolina

PARTNERSHIPS:
------------

Moore Building Associates LP Delaware

Moore Garage LLC Delaware

Parkway Moore LLC Delaware

Parkway Properties LP Delaware

Parkway Realty Services LLC Delaware

Wink/Parkway Partnership Louisiana

111 Capitol Building LP Mississippi

Parkway Jackson LLC Mississippi

Parkway Lamar LLC Mississippi

Parkway Mississippi LLC Mississippi

Parkway Properties Tax Administration LLC Mississippi

<PAGE> 1
EXHIBIT 23

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-3, No. 333-92957) and related Prospectus dated December 17, 1999, the
Registration Statement (Form S-8 on Form S-3, No. 333-88861) dated October 12,
1999, Registration Statement (Form S-8 on Form S-3, No. 333-00311) pertaining to
The Parkway Company 1994 Stock Option Plan, The Parkway Company 1991 Incentive
Plan and The Parkway Company 1991 Directors Stock Option Plan and the
Registration Statement, as amended, (Form S-3, No. 333-48161) and related
Prospectus dated April 8, 1998 of Parkway Properties, Inc., of our report dated
February 4, 2000, with respect to the consolidated financial statements of
Parkway Properties, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1999.

Jackson, Mississippi
March 27, 2000

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 885
<SECURITIES> 0
<RECEIVABLES> 17,585
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,470
<PP&E> 666,684
<DEPRECIATION> 41,319
<TOTAL-ASSETS> 659,369
<CURRENT-LIABILITIES> 113,569
<BONDS> 214,736
0
66,250
<COMMON> 10
<OTHER-SE> 254,804
<TOTAL-LIABILITY-AND-EQUITY> 649,369
<SALES> 113,933
<TOTAL-REVENUES> 114,320
<CGS> 0
<TOTAL-COSTS> 48,073
<OTHER-EXPENSES> 40,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,450
<INCOME-PRETAX> 26,327
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,327
<EPS-BASIC> 2.04
<EPS-DILUTED> 2.01

</TABLE>