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

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

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

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

The time-based awards vest ratably over four years from the date the shares are granted. The market condition awards are contingent on the Company meeting goals for compounded annual total return to stockholders ("TRTS") over the three year period beginning July 1, 2010. The market condition goals are based upon (i) the Company's absolute compounded annual TRTS; and (ii) the Company's absolute compounded annual TRTS relative to the compounded annual return of the MSCI US REIT ("RMS") Index calculated on a gross basis, as follows:

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

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

The Company also adopted a long-term cash incentive that was designed to reward significant outperformance over the three year period beginning July 1, 2010. The performance goals for actual payment under the long-term cash incentive will require the Company to (i) achieve an absolute compounded annual TRTS that exceeds 14% and (ii) achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 500 basis points. Notwithstanding the above goals, in the event the Company achieves an absolute compounded annual TRTS that exceeds 19%, then the Company must achieve an absolute compounded annual TRTS that exceeds the compounded annual return of the RMS by at least 600 basis points. The aggregate amount of the cash incentive earned would increase with corresponding increases in the absolute compounded annual TRTS achieved by the Company. There will be a cap on the aggregate cash incentive earned in the amount of $7.1 million. Achievement of the maximum cash incentive would equate to an absolute compounded annual TRTS that approximates 23%, provided that the absolute compounded annual TRTS exceeds the compounded annual return of the RMS by at least 600 basis points. The total compensation expense for the long-term cash incentive awards is based upon the estimated fair value of the award on the grant date and adjustment as necessary each reporting period. The long-term cash incentive awards are accounted for as a liability-classified award on the Company's March 31, 2013 and December 31, 2012 consolidated balance sheets. The grant date and quarterly fair value estimates for awards that are subject to a market condition are determined using a simulation pricing model developed to specifically accommodate the unique features of the awards.

At March 31, 2013, a total of 244,472 shares of restricted stock had been granted to officers of the Company and remain outstanding. The shares are valued at $2.0 million, which equates to an average price per share of $8.09. The value, including estimated forfeitures, of restricted shares that vest based on service conditions will be amortized to compensation expense ratably over the vesting period for each grant of stock. At March 31, 2013, a total of 17,235 deferred incentive share units had been granted to employees of the Company and remain outstanding. The deferred incentive share units are valued at $356,000, which equates to an average price per share of $20.66, and the units vest four years from grant date. Total compensation expense related to the restricted stock and deferred incentive units of $89,000 and $157,000 was recognized during the three months ended March 31, 2013 and 2012, respectively. Total compensation expense related to non-vested awards not yet recognized was $724,000 at March 31, 2013. The weighted average period over which this expense is expected to be recognized is approximately 1.5 years.

A summary of the Company's restricted shares and deferred incentive share unit activity for the three months ended March 31, 2013 is as follows:

				Weighted					Weighted
				Average		Deferred			Average
	Restricted			Grant-Date		Incentive			Grant-Date
	Shares			Fair Value		Share Units			Fair Value
Balance at 12/31/12		281,233		$	8.34		17,760		$	25.61
Vested		(11,786	)		15.14		-			-
Forfeited		(24,975	)		7.53		(525	)		N/M	*
Balance at 03/31/13		244,472		$	8.09		17,235		$	20.66
*N/M-Not meaningful

On December 19, 2012, the Company's Board of Directors adopted the Parkway Properties, Inc. and Parkway Properties LP 2013 Omnibus Equity Incentive Plan (the "Plan"), subject to approval by its stockholders within 12 months of approval and adoption of the Plan by the Company's Board of Directors, or December 19, 2013. Except with respect to awards granted to non-employee directors, the Compensation Committee of the Company's Board of Directors (the "Committee") has the authority to administer the Plan. The Plan authorizes the Committee or the Company's Board, where applicable, to grant stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units ("RSUs"), dividend equivalents, profits interest units ("LTIP units") and other stock-based awards. The Company's employees, non-employee directors and consultants are eligible to receive awards under the Plan. The aggregate number of shares of common stock available for awards pursuant to the Plan is 3,250,000, including a maximum of 2,000,000 shares that may be granted pursuant to stock options or stock appreciation rights and a maximum of 1,250,000 shares that may be granted pursuant to other awards.

On March 2, 2013, the Committee approved the grant of 1.85 million stock options, 114,443 LTIP units and 173,947 RSUs (comprised of 115,350 time-vesting RSUs and 58,597 performance-vesting RSUs) under the Plan to employees of the Company. Each stock option and time-vesting RSU award will vest in increments of 25% per year on each of the first, second, third and fourth anniversaries of the grant date, subject to the employee's continued service. Each LTIP unit and performance-vesting RSU will vest based on the attainment of total stockholder return targets during the performance period running from March 2, 2013 to March 1, 2016, subject to the employee's continued service. The Company will begin to expense the grants only if and when it receives stockholder approval of the Plan. The actual expense associated with these grants is dependant on the public price of our common stock on the day of adoption of the Plan by the Company's stockholders. If the Company's stockholders do not approve the Plan by December 19, 2013, the grants automatically will terminate and be forfeited.