<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
                                               ------------------

                         Commission file number 0-16341
                                                -------

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

           Delaware                                          04-3502382
           --------                                          ----------
(State or other jurisdiction of                           (I.R.S.Employer
incorporation or organization)                           Identification No.)

                  527 Madison Avenue, New York, New York 10022
                  --------------------------------------------
                    (Address of principal executive offices)

                                 (212) 319-3400
                                 --------------
              (Registrant's telephone number, including area code)

    P.O. Box 9507, 7 Bullfinch Place, Suite 500, Boston, Massachusetts 02114
    ------------------------------------------------------------------------
      (Former name, former address and former fiscal year, if changed since
                                  last report)

   Indicate by check 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
                                   ---       ---

   As of November 1, 2001, there were 1,237,916 shares of common stock
   outstanding.

================================================================================

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


The financial information contained in this Form 10-Q for the periods prior to
April 17, 2001 are those of Shelbourne Properties II, Inc.'s predecessor in
interest, High Equity Partners L.P. - Series 86 (the "Partnership"). On April
17, 2001, the Partnership was merged with and into Shelbourne Properties II, LP,
a limited partnership wholly owned, directly and indirectly, by Shelbourne
Properties II, Inc.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S>      <C>                                                                                    <C>
Part I.  Financial Information

Item I.  Financial Statements

         Balance Sheets - September 30, 2001 and December 31, 2000..........................      3

         Statements of Operations - Three and Nine Months Ended
            September 30, 2001 and 2000.....................................................      4

         Statement of Equity - Nine Months Ended September 30, 2001.........................      5

         Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000...........      6

         Notes to Financial Statements......................................................      7

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations................................................     14

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........................     18


Part II. Other Information:

Item 6.  Exhibits and Reports on Form 8-K...................................................     19

    Signatures..............................................................................     20
</TABLE>


                                       2


<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        SEPTEMBER 30, 2001   DECEMBER 31, 2000
                                                                        ------------------   -----------------
                                                                          (UNAUDITED)
<S>                                                                     <C>                  <C>
ASSETS
------

Real estate - net                                                          $ 28,128,306         $ 45,939,430
Real estate held for sale                                                    17,443,955                   --
Cash and cash equivalents                                                    20,432,834           17,607,533
Other assets                                                                  3,444,604            3,461,815
Receivables - net                                                               183,487              132,805
                                                                           ------------         ------------
                                                                           $ 69,633,186         $ 67,141,583
                                                                           ============         ============
LIABILITIES AND EQUITY
----------------------
Accounts payable and accrued expenses                                      $  1,508,389         $  1,353,556
Due to affiliates                                                                     -              512,473
                                                                           ------------         ------------
                                                                              1,508,389            1,866,029
                                                                           ------------         ------------
Equity:

Common Stock:
$.01 Par Value per share; Authorized 2,500,000 shares; issued
and outstanding 1,237,916 shares                                                 12,379                    -
Additional Capital                                                           66,329,959                    -
Retained Earnings                                                             1,782,459                    -

Limited partners' equity (588,010 units
     issued and outstanding)                                                          -           62,010,830
General partners' equity                                                              -            3,264,724
                                                                           ------------         ------------
                                                                             68,124,797           65,275,554
                                                                           ------------         ------------
                                                                           $ 69,633,186         $ 67,141,583
                                                                           ============         ============
</TABLE>

                       See notes to financial statements.


                                       3

<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               FOR THE THREE MONTHS ENDED             FOR THE NINE MONTHS ENDED
                                                      SEPTEMBER 30,                          SEPTEMBER 30,
                                             -----------------------------          ----------------------------
                                                2001               2000                 2001             2000
                                                ----               ----                 ----             ----
<S>                                          <C>               <C>                  <C>              <C>
Rental Revenue                               $ 3,005,861       $ 3,175,716          $ 9,102,274      $ 8,936,786
                                             -----------       -----------          -----------      -----------

Costs and Expenses:

     Operating expenses                        1,069,257           763,793            2,979,081        2,665,051
     Depreciation and amortization               578,243           560,693            1,685,617        1,591,688
     Asset management fee                        335,499           276,624            1,001,525          708,778
     Administrative expenses                      60,135           138,979              904,406          785,069
     Property management fee                      92,162            82,110              274,464          254,820
                                             -----------       -----------          -----------      -----------
                                               2,135,296         1,822,199            6,845,093        6,005,406
                                             -----------       -----------          -----------      -----------
Income before interest and other income          870,565         1,353,517            2,257,181        2,931,380

     Interest income                             147,558           215,256              563,560          548,149

     Other income                                  6,100            25,750               28,502           35,800
                                             -----------       -----------          -----------      -----------
Net income                                   $ 1,024,223       $ 1,594,523          $ 2,849,243      $ 3,515,329
                                             ===========       ===========          ===========      ===========
Earnings Per Share - Basic and Diluted

Net income per common share                  $       .83       $      1.29          $      2.30      $      2.84
                                             ===========       ===========          ===========      ===========
Weighted average common shares                 1,237,916         1,237,916            1,237,916        1,237,916
                                             ===========       ===========          ===========      ===========
</TABLE>




                       See notes to financial statements.



                                       4
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001


                               STATEMENT OF EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                           PARTNERS' EQUITY                   SHAREHOLDERS' EQUITY
                                           ----------------                   --------------------
                                        GENERAL        LIMITED          COMMON       ADDITIONAL     RETAINED
                                       PARTNERS        PARTNERS         STOCK         CAPITAL       EARNINGS        TOTAL
                                       --------        --------         -----         -------       --------        -----
<S>                                  <C>             <C>               <C>          <C>           <C>           <C>
Balance, January 1, 2001             $ 3,264,724     $ 62,010,830      $      -     $         -   $         -   $ 65,275,554

Net income through April 17, 2001         51,439        1,015,345             -               -             -      1,066,784

Conversion of partnership into REIT   (3,316,163)     (63,026,175)       12,379      66,329,959             -              -

Net income subsequent to conversion            -                -             -               -     1,782,459      1,782,459
                                     -----------     ------------      --------     -----------   -----------   ------------

Balance, September 30, 2001          $         -     $          -      $ 12,379     $66,329,959   $ 1,782,459   $ 68,124,797
                                     ===========     ============      ========     ===========   ===========   ============
</TABLE>



                       See notes to financial statements.



                                       5
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             FOR THE NINE MONTHS ENDED
                                                                   SEPTEMBER 30,
                                                                   -------------
                                                            2001                  2000
                                                            ----                  ----
<S>                                                    <C>                    <C>
Cash Flows From Operating Activities:

     Net income                                           $2,849,243            $3,515,329
     Adjustments to reconcile net income to net
     Cash provided by operating activities:
         Depreciation and amortization                     1,685,617             1,591,688
         Straight line adjustment for stepped
           lease rentals                                      53,185              (29,833)
     Changes in asset and liabilities:
         Other assets                                      (327,427)             (386,786)
         Receivables                                        (50,682)             (139,904)
         Accounts payable and accrued expenses               154,833             (126,043)
         Due to affiliates                                 (512,473)             (273,984)
                                                        ------------          ------------
     Net cash provided by operating activities             3,852,296             4,150,467
                                                        ------------          ------------
Cash Flows From Investing Activities:

     Improvements to real estate                         (1,026,995)             (361,403)
                                                        ------------          ------------

Increase in Cash and Cash Equivalents                      2,825,301             3,789,064

Cash and Cash Equivalents, Beginning of Year              17,607,533            12,675,936
                                                        ------------          ------------

Cash and Cash Equivalents, End of Quarter               $ 20,432,834          $ 16,465,000
                                                        ============          ============
</TABLE>





                       See notes to financial statements.



                                       6
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. GENERAL

   The accompanying financial statements, notes and discussions should be read
   in conjunction with the financial statements, related notes and discussions
   contained in the Annual Report on Form l0-K of High Equity Partners, L.P. -
   Series 86 (the "Partnership") for the year ended December 31, 2000. Effective
   April 17, 2001, the Partnership was merged with and into Shelbourne
   Properties II, LP (the "Operating Partnership"), a limited partnership wholly
   owned, directly and indirectly, by Shelbourne Properties II, Inc. (together
   with the Operating Partnership, the "Company"). See Note 8.

   The financial information contained herein is unaudited; however, in the
   opinion of management, all adjustments (consisting only of normal recurring
   adjustments) necessary for a fair presentation of such financial information
   have been included. Results of operations for the three and nine months ended
   September 30, 2001 are not necessarily indicative of the results to be
   expected for the entire year.


2. SIGNIFICANT ACCOUNTING POLICIES

   Investment in Joint Ventures
   ----------------------------

   Certain properties are owned in joint ventures with Shelbourne Properties I
   and/or Shelbourne Properties III, LP, affiliated partnerships that are under
   common control with the Company. The Company owns, and the Partnership owned,
   an undivided interest in the assets owned by these joint ventures and is and
   was severally liable for indebtedness it incurred in connection with its
   ownership interest in those properties. Therefore, the Company's financial
   statements present the assets, liabilities, revenues and expenses of the
   joint ventures on a pro rata basis in accordance with the Company's
   percentage of ownership.

   Real Estate
   -----------

   Real Estate is carried at cost, net of adjustments for impairment. Repairs
   and maintenance are charged to expense as incurred. Replacement and
   betterments are capitalized. The Partnership evaluated, and the Company will
   evaluate, the recoverability of the net carrying value of its real estate and
   related assets at least annually, and more often if circumstances dictate. If
   this review indicates that the carrying value of a property might not be
   recoverable, the Partnership prepared, and the Company will prepare estimates
   of the future undiscounted cash flows expected to result from the use of the
   property and its eventual disposition, generally over a five-year holding
   period. In performing this review, management takes into account, among other
   things, the existing occupancy, the expected leasing prospects of the
   property and the economic situation in the region where the property was
   located.



                                       7
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   Real Estate (continued)
   -----------------------

   If the sum of the expected future cash flows, undiscounted, was less than the
   carrying amount of the property, the Partnership recognized, and the Company
   will recognize, an impairment loss, and reduced the carrying amount of the
   property to its estimated fair value. Fair value is the amount at which the
   property could be bought or sold in a current transaction between willing
   parties, that is, other than in a forced or liquidation sale. Management
   estimated and will continue to estimate fair value using discounted cash
   flows or market comparables, as most appropriate for each property.
   Independent certified appraisers were utilized to assist management, when
   warranted.

   Impairment write-downs recorded by the Partnership prior to April 17, 2001
   did not affect the tax basis of the assets and were not included in the
   determination of taxable income or loss. No write-downs have been recorded
   since the effective date of the merger.

   Because the expected cash flows used to evaluate the recoverability of the
   property and their fair values were based upon projections of future economic
   events, such as property occupancy rates, rental rates, operating cost
   inflation and market capitalization rates, the amounts ultimately realized at
   disposition may differ materially from the net carrying values at the balance
   sheet dates. The cash flows and market comparables used in this process were
   based on good faith estimates and assumptions developed by management.
   Unanticipated events and circumstances may occur and some assumptions may not
   materialize; therefore, actual results may vary materially from the
   estimates. The Company may in the future provide additional write-downs,
   which could be material, if real estate markets or local economic conditions
   change.

   Recently Issued Accounting Pronouncements
   -----------------------------------------

   Effective January 1, 2001, the Statement of Financial Accounting Standards
   ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
   Activities" was adopted by the Partnership. Because the Partnership did not
   utilize derivatives or engage in hedging activities, this standard did not
   have a material effect on the Partnership's financial statements and is not
   expected to have a material effect on the Company's financial statements.

   In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
   No. 141 "Business Combinations". SFAS No. 141 requires that all business
   combinations be accounted for under the purchase method of accounting. SFAS
   No. 141 also changes the criteria for the separate recognition of intangible
   assets acquired in a business combination. SFAS No. 141 is effective for all
   business combinations initiated after June 30, 2001. This statement is not
   expected to have a material effect on the Company's financial statements.

                                       8
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   Recently Issued Accounting Pronouncements (continued)
   -----------------------------------------------------

   In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
   Assets". SFAS no. 142 addresses accounting and reporting for intangible
   assets acquired, except for those acquired in a business combination. SFAS
   No. 142 presumes that goodwill and certain intangible assets have indefinite
   useful lives. Accordingly, goodwill and certain intangibles will not be
   amortized but rather will be tested at least annually for impairment. SFAS
   No. 142 also addresses accounting and reporting for goodwill and other
   intangible assets subsequent to their acquisition. SFAS No. 142 is effective
   for fiscal years beginning after December 15, 2001. This statement is not
   expected to have a material effect on the Company's financial statements.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
   or Disposal of Long-Lived Assets," which addresses financial accounting and
   reporting for the impairment or disposal of long-lived assets. This statement
   supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
   and for Long-Lived Assets to be Disposed Of" and the accounting and reporting
   provisions of APB Opinion No. 30, "Reporting the Results of Operations
   -Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual
   and Infrequently Occurring Events and Transactions," for the disposal of a
   segment of a business. This Statement also amends ARB No. 51, "Consolidated
   Financial Statements," to eliminate the exception to consolidation for a
   subsidiary for which control is likely to be temporary. SFAS No. 144 is
   effective for fiscal years beginning after December 15, 2001, and interim
   periods within those fiscal years. The provisions of this Statement generally
   are to be applied prospectively. The Company has not evaluated the effect of
   this statement, however, it is not expected that this statement will have a
   material effect on the Company's results of operations.


3. RELATED PARTY TRANSACTION

   Until April 17, 2001, the general partners of the Partnership were entitled
   to receive certain fees and reimbursement for expenses as permitted under the
   terms of the Partnership's partnership agreement. Effective April 17, 2001,
   the Company entered into a contract with Shelbourne Management, LLC
   ("Shelbourne Management"), which contract has a term of 10 years, pursuant to
   which Shelbourne Management is to provide the Company with all management,
   advisory and property management services. Shelbourne Management is owned by
   Presidio Capital Investment Company, LLC ("PCIC"), an entity controlled and
   principally owned by affiliates of the senior management of the Company. For
   providing these services, Shelbourne Management will receive (1) an annual
   asset management fee, payable quarterly, equal to 1.25% of the gross asset
   value of Shelbourne as of the last day of each year, (2) property management
   fees of up to 6% of property revenues, (3) $150,000 for non-accountable
   expenses and (4) reimbursement of expenses incurred in connection with the
   performance of its services.

   The fees payable to the general partners to April 17, 2001 and to Shelbourne
   Management from and after April 17, 2001 consist of (i) a maximum
   non-accountable expense reimbursement of $150,000 per year, (ii) an annual
   management fee of 1.25% of the Gross Asset Value of the Partnership/Company
   (as



                                       9
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

3. RELATED PARTY TRANSACTION (CONTINUED)

   defined), (iii) property management fees of up to 6% of property revenues,
   and (iv) reimbursement of expenses incurred in connection with the
   performance of its services. Gross Asset Value is the gross asset value of
   all assets owned by the Operating Partnership based on the latest appraisal
   of real estate assets by an independent appraiser of national reputation
   selected by the advisor and the amount of other assets as reflected on the
   balance sheet. Since the asset management fee is based on gross assets, the
   amount payable to Shelbourne Management will increase to the extent the
   Company acquires new investments, whether for cash, by causing the Company to
   incur indebtedness or otherwise.

   The following table indicates the amounts paid to general partners and
   Shelbourne Management on account of such fees for the nine-month periods
   ended September 30, 2001 and September 30, 2000.

<TABLE>
<CAPTION>
                                      Nine Months Ended                    Nine Months Ended
                                      -----------------                    -----------------
                                     September 30, 2001                    September 30, 2000
                                     ------------------                    ------------------
                                         (Unaudited)                          (Unaudited)
                          General Partners       Shelbourne Management     General Partners
                          ----------------       ---------------------     ----------------
<S>                           <C>                       <C>                    <C>
Expense Reimbursement         $ 59,444                  $ 90,556               $150,000
Asset Management Fee          $394,808                  $606,717               $708,778
</TABLE>

   Prior to October 2000, the Partnership had a property management services
   agreement with Resources Supervisory Management Corp. ("Resources
   Supervisory"), an affiliate of the general partners, to perform certain
   functions relating to the management of the properties of the Partnership. A
   portion of the property management fees were paid to unaffiliated management
   companies which were engaged for the purpose of performing certain of the
   management functions for certain properties.

   For the quarter ended September 30, 2000, Resources Supervisory was entitled
   to receive $82,110 for property management services, $81,526 was paid to
   Kestrel Management L.P. ("Kestrel"), an entity controlled by former executive
   officers and a director of the Company, and $584 was paid to an unaffiliated
   management company. For the nine months ended September 30, 2000, Resources
   Supervisory was entitled to receive $254,820 for property management
   services, $152,415 was paid to Kestrel and $102,405 was paid to unaffiliated
   management companies with the balance being retained by Resources
   Supervisory.

   Effective October 2000, Kestrel began performing all property management
   services directly for the Partnership and, effective April 17, 2001, the
   Company. For the quarter ended September 30, 2001, Kestrel earned $92,162.
   For the nine months ended September 30, 2001, Kestrel earned $274,464.

   In connection with the merger, the units of limited partnership interest held
   by affiliates of the general partners, including those acquired in tender
   offers made in connection with the settlement of a class action lawsuit were
   converted into shares of common stock of the Company. In this regard,
   affiliates of PCIC received 281,232 shares of common stock of the Company
   representing 22.7% of the total outstanding shares. In addition, pursuant to
   the terms of the merger, the general partners received an aggregate of 61,896
   shares. See Note 8.




                                       10
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

4. REAL ESTATE

   The following table is a summary of the Company's real estate as of:

<TABLE>
<CAPTION>
                                     SEPTEMBER 30, 2001     DECEMBER 31, 2000
                                     ------------------     -----------------
                                        (UNAUDITED)
<S>                                 <C>                    <C>
Land                                    $ 11,669,652           $ 11,669,652
Buildings and improvements                61,026,230             59,999,235
                                        ------------           ------------

                                          72,695,882             71,668,887

Less: Accumulated depreciation          (27,123,621)           (25,729,457)
                                        ------------           ------------

                                        $ 45,572,261           $ 45,939,430
                                        ============           ============
</TABLE>


5. REAL ESTATE HELD FOR SALE

   For real estate properties to be disposed of, an impairment loss is
   recognized when the fair value of the real estate, less the estimated cost to
   sell, is less than the carrying amount of the real estate measured at the
   time it is certain that the Operating Partnership will sell the property.
   Real estate held for disposition is reported at the lower of its carrying
   amount or its estimated fair value, less its cost to sell.

6. DUE TO AFFILIATES

<TABLE>
<CAPTION>
                                           SEPTEMBER 30, 2001       DECEMBER 31, 2000
                                           ------------------       -----------------
                                              (UNAUDITED)
<S>                                       <C>                      <C>
Partnership asset management fee                $      -               $ 462,473
Non-accountable expense reimbursement                  -                  50,000
                                                --------               ---------
     Total                                      $      -               $ 512,473
                                                ========               =========
</TABLE>


   The amounts payable at December 31, 2000 were paid in the subsequent
   quarters.



                                       11
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

7. FEDERAL INCOME TAX CONSIDERATIONS

   As of April 17, 2001, the Partnership was converted into a corporation that
   elected to be taxed as a real estate investment trust (REIT) under the
   provisions of the Internal Revenue Code. See Note 8. As a result, the
   shareholders of the REIT will be required to include their proportionate
   share of any distribution of taxable income on their returns. REITs are
   required to distribute at least 90% of their ordinary taxable income to
   shareholders and meet certain income, asset and shareholder ownership
   requirements.

8. SETTLEMENT OF LAWSUIT

   In April 1999, the California Superior Court approved the terms of the
   settlement of a class action and derivative litigation involving the
   Partnership. Under the terms of the settlement, the general partners agreed
   to take the actions described below subject to first obtaining the consent of
   limited partners to amendments to the Agreement of Limited Partnership of the
   Partnership summarized below. The settlement became effective in August 1999
   following approval of the amendments.

   As amended, the Partnership Agreement (a) provided for a Partnership Asset
   Management Fee equal to 1.25% of the Gross Asset Value of the Partnership (as
   defined) and (b) fixed the amount that the General Partners would be liable
   to pay to limited partners upon liquidation of the Partnership as repayment
   of fees previously received (the "Fee Give-Back Amount"). As of March 31,
   2001, the Fee Give-Back Amount was $3.77 per Unit, subject to reduction by
   approximately $.49 per Unit for each full calendar year after 2000 in which
   liquidation did not occur. As amended, the Partnership Agreement provided
   that, upon a reorganization of the Partnership into a REIT or other public
   entity, the general partners would have no further liability to pay the Fee
   Give-Back Amount. As a result of the conversion of the Partnership into a
   REIT on April 17, 2001, as described below, the general partners liability to
   pay the Fee Give-Back Amount was extinguished.

   As required by the settlement, an affiliate of the general partners,
   Millennium Funding III, LLC, made a tender offer to limited partners to
   acquire up to 39,596 Units (representing approximately 6.7% of the
   outstanding Units) at a price of $103.05 per Unit. The offer closed in
   January 2000 and all 39,596 Units were acquired in the offer.

   The final requirement of the settlement obligated the general partners to use
   their best efforts to reorganize the Partnership into a REIT or other entity
   whose shares were listed on a national securities exchange or on the NASDAQ
   National Market System. A Registration Statement was filed with the
   Securities and Exchange Commission on February 11, 2000 with respect to the
   restructuring of the Partnership into a publicly traded REIT. On or about
   February 15, 2001 a prospectus/consent solicitation statement was mailed to
   the limited partners of the Partnership seeking consent to the reorganization
   of the Partnership into a REIT.

   The consent of limited partners was sought to approve the conversion of the
   Partnership into the Company. The consent solicitation expired April 16, 2001
   and holders of a majority of the units approved the conversion.


                                       12
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

8. SETTLEMENT OF LAWSUIT (CONTINUED)

   On April 17, 2001 the conversion was accomplished by merging the Partnership
   into the Operating Partnership. Pursuant to the merger, each limited partner
   of the Partnership received two shares of stock of the Company for each unit
   they owned, and the general partners received an aggregate of 61,896 shares
   of stock of the Company in exchange for their general partner interests in
   the Partnership. The common stock of the Company listed on the American Stock
   Exchange under the symbol HXE.




                                       13
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Statements contained herein may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
section 21E of the Securities Exchange Act of 1934, as amended. Any statements
contained herein which are not statements of historical facts and that address
activities, events or developments that Shelbourne Properties II, Inc. expects,
believes or anticipates will or may occur in the future shall be deemed to be
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events, actual results and
performance, financial and otherwise, could differ materially from those set
forth in or contemplated by the forward-looking statements herein. Factors that
could cause actual results to differ materially from those in forward-looking
statements include the terms of future property sales, investments and
financings, general economic and business conditions and various other risk
factors listed in the registration statement of Shelbourne Properties II, Inc.
filed with the Securities and Exchange Commission.

This item should be read in conjunction with the financial statements and other
items contained elsewhere in the report.

On April 17, 2001 Integrated Resources High Equity Partners, Series 86, a
California Limited Partnership (the "Partnership") was merged with and into
Shelbourne Properties II, LP, a limited partnership wholly owned, directly and
indirectly, by Shelbourne Properties II, Inc. Shelbourne Properties II, LP and
Shelbourne Properties II, Inc. are collectively referred to as the "Company".
Set below is a discussion and analysis of the financial condition of the Company
and the historical operations of the Partnership.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company uses its working capital reserves and any cash from operations as
its primary source of liquidity. In addition to cash, unlike the Partnership
which could not incur indebtedness or issue additional equity, the Company has
as potential sources of liquidity, capital raised by either borrowing money on a
long-term or short-term basis, or issuing additional equity securities. Due to
the restrictions on debt incurrence by the Partnership and the resulting lack of
mortgage debt on the properties, it is anticipated that the Company will have
significantly enhanced capital resources as compared to the Partnership. The
Company's use of these sources of capital may result in the encumbrance of its
current and future assets with substantial amounts of indebtedness. As a result,
the Company may have an increased risk of default on its obligations and thus a
decrease in its long-term liquidity.

The Company is currently marketing its Matthews Festival, Matthews, North
Carolina; Commerce Plaza, Richmond, Virginia; and Commonwealth Industrial Park,
Fullerton, California properties for sale. In the event that these properties,
or any of them, are ultimately sold, the net proceeds from such sale will be
distributed, held in reserves or invested in existing or new properties, or a
combination thereof.



                                       14
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001


The Company had $20,432,834 in cash and cash equivalents at September 30, 2001.
Cash and cash equivalents are temporarily invested in short-term instruments.
The Company's level of liquidity, which is based upon cash and cash equivalents,
increased by $2,825,301 at September 30, 2001 as compared to December 31, 2000.
The increase in cash and cash equivalents at September 30, 2001 is due to
$3,852,296 of cash provided by operating activities that was partially offset by
$1,026,995 of improvements to real estate (investing activities). Currently, the
Company's primary source of funds is cash flow from the operation of its
properties principally rents received from tenants that amounted to $9,102,274
for the nine months ended September 30, 2001. In addition, to the extent the
Company acquires additional assets, its cash flow from operations would be
derived from a larger, more diverse, and potentially riskier group of assets
than currently owned. Likewise, the Company's ability to pay dividends may be
affected by the leveraging of its assets and reinvestment of sale and financing
proceeds for the acquisition of additional assets.

For the three and nine months ended September 30, 2001, the Company made
$368,046 and $1,026,995 respectively, in capital expenditures that were funded
from cash flow and the Company's working capital reserves. In addition to tenant
improvements at the properties, capital expenditures consisted of elevator
repairs and water piping at Seattle Tower, pylon signage and water line
enhancements at Matthews Township Festival Shopping Center and booster pumps for
the fire sprinklers at 568 Broadway. In February 2001, the Seattle area was hit
with an earthquake. The damage to Seattle Tower did not effect its operations
and it is expected that insurance will cover the costs associated with the
damage.

Although the Company budgeted an aggregate of $4,063,000 for capital
improvements and capitalized tenant procurement costs in 2001, to date the
Company has only spent $1,026,995 for these items. It is not expected that the
full budgeted amount will be spent prior to year end and any additional
expenditures are expected to be incurred during the normal course of business
and will be funded from cash flow from the operation of the properties and
working capital reserves that are temporarily invested in short-term money
market instruments, as well as other sources of capital including financing
proceeds and the issuance of additional equity. However, the actual amount of
such expenditures depends upon the level of leasing activity and other factors
that cannot be predicted with certainty. Because it is possible that the Company
will have mortgage indebtedness and a substantially larger pool of real estate
assets, thereby increasing expenses, the risk that it may be unable to fund the
necessary capital and tenant procurement costs at its properties will likely be
increased.

Except as discussed herein, management is not aware of any other trends, events,
commitments or uncertainties that will have a significant impact on the
Company's liquidity. If, however, real estate market conditions deteriorate in
any areas where the properties are located, there is substantial risk that
future cash flow may be insufficient to fund the capital improvements and lease
procurement costs of the properties. In that event, the Company would utilize
its remaining working capital reserves, reduce distributions, raise additional
capital through financing or the issuance of equity, or sell one or more
properties.



                                       15
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

RESULTS OF OPERATIONS
---------------------

Nine months ended September 30, 2001 vs. September 30, 2000
-----------------------------------------------------------

The Company's net income experienced a decrease of $666,086 (18.9%) for the nine
months ended September 30, 2001 as compared to the same period in the prior
year. The decrease in net income for the comparable nine-month periods was due
to an increase in costs and expenses of $839,687 (14%) and a decrease in other
income of $7,298 (20.4%). These were partially offset by increased rental
revenue of $165,488 (1.9%) and interest income of $15,411 (2.8%).

Costs and expenses increased by $839,687 during the nine months ended September
30, 2001 compared to the same period in 2000 due to increases in all expense
categories. Operating expenses increase due to increased property insurance,
real estate taxes and utility costs. Depreciation and amortization increased due
to significant real estate improvements completed in 2000 and the first nine
months of 2001 and increased tenant procurement costs due to leasing of vacant
spaces at Commerce Plaza. Asset management fees increased for the nine months
ended September 30, 2001 as compared to the nine months ended September 30, 2000
as appraisals were conducted for each property in the second quarter of 2000
that significantly increased the Gross Asset Value of the portfolio owned by the
Company along with the increase cash balance. Administrative expenses increased
for the nine months ended September 30, 2001 as compared to the same period in
2000 primarily due to the costs associated with the conversion of the
Partnership into the Company. Property management fees increased slightly due to
the increased revenue collection, but was partially offset by the increased
vacancies at the Matthews Festival property.

Rental revenues increased during the nine months ended September 30, 2001
compared to 2000 primarily due to increased income from the common area
maintenance and real estate tax recoveries. In addition there have been
increased rentals at 568 Broadway, Century Park, Commonwealth, Melrose Crossing,
Seattle, Sutton Square and the Tri-Columbus properties. These increases were
offset by Matthews Festival loss of Carmike Cinema in the 3rd quarter of 2000
and the loss of tenants or reduction of leased space by existing tenants at
Commerce Plaza . Commerce Plaza was able to partially offset those losses by
renting previously unoccupied space.

Interest income increased during the nine months ended September 30, 2001 due to
higher cash balances during the nine months of 2001 as compared to the
comparable period in 2000. This is due to the suspension by the Partnership of
distributions until the conditions of the settlement of the lawsuit were met. To
the extent that dividends are made in excess of net income, it is expected that
interest income will decline in subsequent quarters. Other income decreased
during the nine months ended September 30, 2001 as compared to the same period
in 2000 as a result of the decrease in the amount of investor servicing transfer
fees.

Three months ended September 30, 2001 vs. September 30, 2000
------------------------------------------------------------

The Company experienced a decrease in net income of $570,300 (35.8%) for the
three months ended September 30, 2001 as compared to the three months ended
September 30, 2000. The decrease in net income for the comparable three-month
period was due to an increase in costs and expenses of $313,097


                                       16
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001


(17.2%) a decrease in rental revenue of $169,855 (5.3%), interest income $67,698
(31.4%), and other income $19,650 (76.3%).

Rental revenues decreased during the three months ended September 30, 2001
compared to 2000 primarily due to the termination of the lease with Carmike
Cinema at Matthews Festival in the third quarter of 2000.

Interest income decreased during the three-month period ended September 30, 2001
due to lower yields available on cash investments during that time as compared
to the same period ended September 30, 2000.

Other income decreased for the three-month period ended September 30, 2001 as
compared to the same period ended September 30, 2000 due to the decrease in
transfer fee income.

Costs and expenses increased for the three months ended September 30, 2001 as
compared to the same period in 2000 due to an increase in operating expenses.
Operating expenses increased $305,464 for the comparable periods due primarily
to increased insurance, real estate taxes and utility expenses. The 3rd quarter
increases in depreciation and amortization along with the increase asset
management fees were partially offset by the decrease in general and
administrative expenses. Property management fees increased $10,052 due to
higher collections during the 3rd quarter 2001 compared to the same period in
2000.

Inflation is not expected to have a material impact on the operations or
financial position of the Company.

FUNDS FROM OPERATIONS
---------------------

Management believes that Funds From Operations ("FFO") is helpful to investors
as a measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to incur
and service debt, to make capital expenditures and to fund other cash needs.

FFO, which is a commonly used measurement of the performance of an equity REIT,
as defined by the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"), is net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructurings,
asset valuation provisions and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures.

The Company's FFO may not be comparable to FFO reported by other REITs that do
not define the term in accordance with the current NAREIT definition or that
interpret the NAREIT definition differently. FFO does not represent cash
generated from operating activities determined in accordance with accounting
principles generally accepted in the United States and should not be considered
as an alternative to net income (determined in accordance with accounting
principles generally accepted in the United States) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.



                                       17
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001

FFO for the three and nine month periods ended September 30, 2001 and 2000 are
summarized in the following table:

<TABLE>
<CAPTION>
                                          Three Months Ended                    Nine Months Ended
                                       September 30,      September 30,     September 30,      September 30,
                                       -------------      -------------     -------------      -------------
                                            2001              2000              2001               2000
                                            ----              ----              ----               ----
<S>                                      <C>               <C>                <C>                <C>
Net Income                               $1,024,223        $1,594,523         $2,849,243         $3,515,329

Plus: Depreciation and
Amortization related to real estate         578,243           560,693          1,685,617          1,591,688
                                         ----------        ----------         ----------         ----------
Funds From Operations                    $1,602,466        $2,155,216         $4,534,860         $5,107,017
                                         ==========        ==========         ==========         ==========
</TABLE>


OTHER MATTERS
-------------

Effective August 15, 2001, Messrs. W. Edward Scheetz and David T. Hamamoto,
directors of the Company, were appointed as Co-Chief Executive Officers of the
Company and of its external adviser, Shelbourne Management LLC, in replacement
of Mr. Michael L. Ashner, who resigned effective as of such date. Mr. Ashner is
the Chief Executive Officer of Kestrel Management, L.P., the entity that,
together with its affiliates, continues to perform administrative and property
management services for the Company. The resignation of Mr. Ashner and the other
officers of the Company who are employed by Kestrel Management has not had an
adverse impact on the operations of the Company.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have any debt instruments. As such, the Company does not
have any market risk of interest rate volatility. However, to the extent that
interest rates are lowered, interest income on the Company's cash reserves will,
accordingly, decrease. The Company does not believe that it has any risk related
to derivative financial instruments.





                                       18
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                          FORM 10-Q--SEPTEMBER 30, 2001


PART II. OTHER INFORMATION


Item 6 - Exhibits and Reports on Form 8-K

         (a)      Exhibits:

                  None

         (b)      Reports on Form 8-K:

                  None




                                       19
<PAGE>


                                   SIGNATURES


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

                                         Shelbourne Properties II, Inc.


Dated: November 14, 2001                 By: /s/ W. Edward Scheetz
                                             -----------------------------------

                                             W. Edward Scheetz
                                             President and Director
                                             (Principal Executive Officer)


Dated: November 14, 2001                 By: /s/ Dallas E. Lucas
                                             -----------------------------------
                                             Dallas E. Lucas
                                             Treasurer
                                             (Principal Financial and Accounting
                                             Officer)




                                       20