<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 June 30, 2002

                         Commission file number 0-16343

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

         Delaware                                   04-3502381
(State or other jurisdiction of                   (I.R.S.Employer
incorporation or organization)                  Identification No.)

     P.O. Box 9507, 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114
                    (Address of principal executive offices)

                                 (617) 570-4600
              (Registrant's telephone number, including area code)



     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 August 13, 2002, there were 788,772 shares of common stock outstanding.
________________________________________________________________________________

                                       1
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                            FORM 10-Q - JUNE 30, 2002

The financial information contained in this Form 10-Q for the periods prior to
April 17, 2001 are those of Shelbourne Properties III, Inc.'s predecessor in
interest, High Equity Partners L.P. - Series 88 (the "Predecessor Partnership").
On April 17, 2001, the Predecessor Partnership was merged with and into
Shelbourne Properties III, L.P., a limited partnership wholly owned, directly
and indirectly, by Shelbourne Properties III, Inc.

                                      INDEX


Part I.  Financial Information:                                             Page

Item 1.  Condensed Consolidated Financial Statements

     Condensed Consolidated Balance Sheets - June 30, 2002
          and December 31, 2001..........................................      3

     Condensed Consolidated Statements of Operations -
          Three and Six Months Ended June 30, 2002 and 2001..............      4

     Condensed Consolidated Statement of Equity -
          Six Months Ended June 30, 2002.................................      5

     Condensed Consolidated Statements of Cash Flows -
          Six Months Ended June 30, 2002 and 2001........................      6

     Notes to Condensed Consolidated 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......     24


Part II. Other Information:

Item 1.       Legal Proceedings...........................................    25

Item 6.       Exhibits and Reports on Form 8-K............................    26

Signatures................................................................    28


                                       2
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                            FORM 10-Q - JUNE 30,2002

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                         (Unaudited)
                                                        June 30, 2002       December 31, 2001
                                                       ----------------     -----------------
<S>                                                       <C>                   <C>
ASSETS

Real estate, net                                          $ 17,299,546          $ 40,493,332
Real estate held for sale                                            -             2,961,146
Cash and cash equivalents                                    5,516,241            11,122,456
Other assets                                                 8,511,830             1,921,600
Receivables, net of allowances of
   $89,995 and $35,245, respectively                           206,257                42,928
Investment in joint ventures                                18,319,454                     -
                                                       ----------------     -----------------

TOTAL ASSETS                                              $ 49,853,328          $ 56,541,462
                                                       ================     =================

LIABILTIES AND EQUITY

Accounts payable and accrued expenses                      $ 1,948,532             $ 816,904
Note payable                                                19,718,457                     -
                                                       ----------------     -----------------

Total Liabilities                                           21,666,989               816,904
                                                       ----------------     -----------------

COMMITMENTS AND CONTINGENCIES

CLASS A 5% PREFERRED PARTNERSHIP INTERESTS,
   AT LIQUIDATION VALUE                                        672,178                     -
                                                       ----------------     -----------------

EQUITY

Common stock:
   $.01 par value share; authorized 2,500,000 shares;
   issued 1,173,998 shares; outstanding 788,772 and
   1,173,998, respectively                                      11,739                11,739
Additional capital                                          56,083,569            56,083,569
Treasury stock, at cost                                    (11,830,337)                    -
Retained earnings                                          (16,750,810)             (370,750)
                                                       ----------------     -----------------

Total Equity                                                27,514,161            55,724,558
                                                       ----------------     -----------------

TOTAL LIABILITIES AND EQUITY                              $ 49,853,328          $ 56,541,462
                                                       ================     =================
</TABLE>

            See notes to condensed consolidated financial statements.

                                       3

<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                            FORM 10-Q - JUNE 30, 2002

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                     For the Three Months Ended             For the Six Months Ended
                                                      June 30,          June 30,          June 30,         June 30,
                                                        2002              2001              2002             2001
                                                    -----------        -----------      -----------      -----------
<S>                                                  <C>               <C>              <C>              <C>
Rental revenues                                      $  991,242        $ 1,837,133      $ 1,826,891      $ 3,887,145
                                                    -----------        -----------      -----------      -----------
Costs and Expenses:

      Operating expenses                                285,325            457,842          569,782          904,656
      Depreciation and amortization                     213,238            415,304          386,012          823,535
      Asset management fee                                    -            216,805          105,863          432,165
      Transition management fee                          83,300                  -          124,950                -
      Purchase of advisory agreements                         -                  -       15,262,114                -
      Administrative expenses                         2,156,542            258,863        2,848,036          742,804
      Property management fee                            23,899             56,164           48,191          110,364
                                                    -----------        -----------      -----------      -----------
                                                      2,762,304          1,404,978       19,344,948        3,013,524
                                                    -----------        -----------      -----------      -----------
(Loss) income before equity income from joint
       ventures, interest and other income           (1,771,062)           432,155      (17,518,057)         873,621

      Equity income from joint ventures                 308,864                  -        1,405,142                -
      Interest expense                                 (198,233)                 -         (282,827)               -
      Interest income                                    16,703            110,715           28,379          252,826
      Other income                                            -             33,034                -           42,734
                                                    -----------        -----------      -----------      -----------
Net (loss) income                                    (1,643,728)           575,904      (16,367,363)       1,169,181
Preferred dividends                                      (8,496)                 -          (12,697)               -
                                                    -----------        -----------      -----------      -----------
Net (loss) income available for common shares       $(1,652,224)         $ 575,904     $(16,380,060)     $ 1,169,181

Earnings per share - basic and diluted

Net (loss) income per common share                      $ (2.09)            $ 0.49         $ (18.52)          $ 1.00
                                                    ===========        ==========       ============     ===========
Weighted average common shares                          788,772          1,173,998          884,547        1,173,998
                                                    ===========        ==========       ============     ===========
</TABLE>

            See notes to condensed consolidated financial statements.

                                       4
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                            FORM 10-Q - JUNE 30,2002

                   CONDENSED CONSOLIDATED STATEMENT OF EQUITY
                                   (Unaudited)

<TABLE>
<CAPTION>

                                  Common      Additional       Treasury        Retained
                                  Stock        Capital          Stock          Earnings        Totals
                                ----------  -------------- ---------------  -------------  -------------

<S>                              <C>         <C>            <C>             <C>             <C>
Balance, January 1, 2002          $ 11,739    $ 56,083,569   $           -   $   (370,750)   $55,724,558

Purchase of treasury stock              -               -     (11,830,337)             -    (11,830,337)

Preferred dividends                     -               -               -        (12,697)       (12,697)

Net loss                                -               -               -    (16,367,363)   (16,367,363)
                                ----------  -------------- ---------------  -------------  -------------

Balance, June 30, 2002           $ 11,739    $ 56,083,569   $ (11,830,337)  $(16,750,810)   $27,514,161
                                ==========  ============== ===============  =============  =============

</TABLE>
            See notes to condensed consolidated financial statements.

                                       5
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                            FORM 10-Q - JUNE 30,2002

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        For the Six Months Ended
                                                                                 June 30,
                                                              ------------------------------------------
                                                                   2002                        2001
                                                              --------------               -------------
<S>                                                           <C>                           <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income                                             $ (16,367,363)                $ 1,169,181
Adjustments to reconcile net (loss) income
to net cash provided by operating activities
         Depreciation and amortization                              386,012                     823,535
         Straight-line adjustment for stepped
             lease rentals                                           21,120                     (47,407)
         Increase in bad debt reserve                                61,250                           -
         Purchase of advisory agreement                          15,262,114                           -
         Equity income from joint venture                        (1,405,142)                          -

Change in assets and liabilities
       Accounts payable and accrued expenses                      1,454,031                     (70,178)
       Receivables                                                 (242,982)                   (100,239)
       Due to affiliates                                                  -                    (335,041)
       Other assets                                              10,668,722                    (464,507)
                                                              --------------               -------------
Net Cash Provided by Operating Activities                         9,837,762                     975,344
                                                              --------------               -------------
CASH FLOW FROM INVESTING ACTIVITIES -

       Improvements to real estate                                 (459,194)                   (150,308)
                                                              --------------               -------------
CASH FLOW FROM FINANCING ACTIVITIES:

       Purchase of treasury stock                               (11,830,337)                          -
       Proceeds from note payable                                19,718,457                           -
       Payoff of note payable                                   (14,589,936)                          -
                                                              --------------               -------------
Net Cash Used in Financing Activities                            (6,701,816)                          -
                                                              --------------               -------------
(Decrease) Increase in cash and cash equivalents                  2,676,752                     975,344

Cash and cash equivalents, beginning of year                     11,122,456                  10,222,394
Cash and cash equivalents, related to investment
   in joint ventures                                             (8,282,967)                          -
                                                              --------------               -------------

Adjusted cash and cash equivalents, beginning of year             2,839,489                  10,222,394
                                                              --------------               -------------
Cash and cash equivalents, end of quarter                       $ 5,516,241                $ 11,197,738
                                                              ==============               =============
Supplemental Disclosure of Cash Flow Information:

       Cash paid for interest                                     $ 282,827                         $ -
                                                              ==============               =============
</TABLE>

            See notes to condensed consolidated financial statements.

                                       6
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

l.   GENERAL

     The accompanying condensed consolidated financial statements, notes and
     discussions should be read in conjunction with the consolidated financial
     statements, related notes and discussions contained in the Annual Report on
     Form l0-K Shelbourne Properties III, Inc. a Delaware corporation (the
     "Company"), for the year ended December 31, 2001.

     The financial information contained herein is condensed and 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 months and six months ended June 30, 2002 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, L.P. and/or Shelbourne Properties II, L.P. Prior to April 30, 2002, the
     Company owned an undivided interest in the assets owned by these joint
     ventures and was severally liable for indebtedness it incurred in
     connection with its ownership interest in those properties. Therefore, the
     Company's condensed consolidated financial statements presented the assets,
     liabilities, revenues, and expenses of the joint ventures on a pro rata
     basis in accordance with the Company's percentage of ownership.

     After April 30, 2002, as a result of the Company's incurring debt in
     connection with entering into the Note Payable discussed in Note 8, the
     Company is no longer able to account for its investments in joint ventures
     on a pro-rata consolidation basis in accordance with its percentage of
     ownership but must instead utilize the equity method of accounting.
     Accordingly, the Company's balance sheet at June 30, 2002 and the Company's
     condensed consolidated statements of operations for the three and six month
     period ending June 30, 2002 reflect the equity method of accounting.

     The change to equity accounting on the December 31, 2001 balance sheet
     reduced real estate and real estate held for sale by $26.3 million, cash
     and cash equivalents by $8.3 million, receivables by $.02 million, accounts
     payable and accrued expenses by $.4 million, which was offset by increases
     in other assets of $17.4 million and investment in joint ventures of $16.9
     million.

     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 Company evaluates 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 Company
     prepares 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>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     If the sum of the expected future cash flows, undiscounted, is less than
     the carrying amount of the property, the Company recognizes an impairment
     loss and reduces 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 estimates fair value using
     discounted cash flows or market comparables, as most appropriate for each
     property. Independent certified appraisers are utilized to assist
     management when warranted.

     Impairment write-downs recorded by the Company 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 are 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.

     Treasury Stock

     Treasury stock is stated at cost.

     Amounts Per Share

     Net income (loss) per share is computed based on average shares
     outstanding.

     Recently Issued Accounting Pronouncements

     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.
     The Company has adopted this statement, which did not materially affect 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

                                       8
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     Business and Extraordinary, Unusual and Infrequently Occurring Events and
     Transactions," for the disposal of a segment of a business. 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 adopted this
     statement, which did not materially affect the Company's financial
     statements.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
     Corrections," which updates, clarifies and simplifies existing accounting
     pronouncements. In part, this statement rescinds SFAS 4, "Reporting Gains
     and Losses from Exstinguishment of Debt." FASB No. 145 will be effective
     for fiscal years beginning after May 15, 2002. Under adoption, enterprises
     must reclassify prior period items that do not meet the extraordinary item
     classification criteria in APB opinion No. 30. The Company does not expect
     that this statement will have an effect on the Company's financial
     statements.

3.   RELATED PARTY TRANSACTIONS

     On February 14, 2002, the Company, Shelbourne Properties I, Inc. and
     Shelbourne Properties II, Inc. (the "Companies") consummated a transaction
     (the "Transaction") whereby the Company purchased an advisory agreement
     (the "Advisory Agreement") between the Company and Shelbourne Management
     LLC ("Shelbourne Management"), an affiliate of Presidio Capital Investment
     Company, LLC ("PCIC"), and the 385,226 shares of the Company's common stock
     held by subsidiaries of PCIC. PCIC is controlled and principally owned by
     affiliates of the former senior management and one current director of the
     Company. The Company's operating partnership, Shelbourne Properties III,
     L.P., issued preferred partnership interests with an aggregate liquidation
     preference of $672,178 and a note in the amount of $14,589,936. Shelbourne
     Management's obligations under the contract terminated as of the effective
     date of the Transaction.

     In conjunction with the Transaction, PCIC entered into an agreement with
     the Companies and their respective operating partnerships to provide
     transition services, namely, accounting, asset management, investor
     services and treasury and cash management, for a period up to one year from
     the date of the agreement (until February 14, 2003) for a fee of $83,300
     per month. This fee is allocated equally among the Companies. For the
     period from April 1, 2002 to June 30, 2002 the Company paid PCIC $83,300
     for transition services and for the period from February 15, 2002 to June
     30, 2002, the Company paid PCIC $124,950 for transition services. As a
     result of the settlement of all lawsuits (see note 9) this agreement was
     terminated effective September 30, 2002 and all 3rd quarter transition fees
     owed were required to be paid in full by the Company in July 2002. The
     Company paid all transition fees owed on July 11, 2002.

     Prior to the Transaction, under the terms of the Advisory Agreements,
     Shelbourne Management provided the Company with all management, advisory
     and property management services. For providing these services, Shelbourne
     Management received (1) an annual asset management fee, payable quarterly,
     equal to 1.25% of the gross asset value of the Company 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.

     Upon its disposition of the Advisory Agreements, Shelbourne Management was
     entitled to receive reimbursement for non-accountable expenses for the
     period from January 1, 2002 through February 14, 2002. For that period
     Shelbourne Management received $25,000. Shelbourne Management was also

                                       9
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     entitled to receive an asset management fee for the period of January 1,
     2002 through February 14, 2002 equal to 1.25% of the gross asset value of
     the Company. For that period, Shelbourne Management received $105,863.

     On April 17, 2001, High Equity Partners Series 88 (the "Predecessor
     Partnership") was converted into a Real Estate Investment Trust. With the
     conversion, the Managing General Partner of the predecessor partnership was
     no longer entitled to receive fees for the administration of the
     partnership. As of the conversion date, Shelbourne Management was entitled
     to receive the fees formerly paid to the Managing General Partner. During
     the quarter ended June 30, 2001, the Managing General Partner received
     $9,444 for non-accountable expenses and $40,952 for the asset management
     fee. Shelbourne Management received $40,556 for non-accountable expenses
     and $175,853 for the asset management fee. For the six months ended June
     30, 2001, the Managing General Partner received $59,444 and Shelbourne
     Management received $40,556 for non-accountable expenses. For the six
     months ended June 30, 2001 the Managing General Partner received $256,312
     and Shelbourne Management received $175,853 for the asset management fee.

     Since October 2000, Kestrel Management L.P. ("Kestrel"), has performed all
     property management services directly for the Predecessor Partnership and,
     effective April 17, 2001, the Company. The Transaction did not have any
     effect on the property management services contract between the Company and
     Kestrel. For the three months ended June 30, 2002 and 2001, Kestrel earned
     $23,899 and $56,164 respectively. For the six months ended June 30, 2002
     and 2001, Kestrel earned $48,191 and $110,364, respectively.

     At June 30, 2002, $6,803,290 of receivables from joint ventures were
     included in other assets.

4.   REAL ESTATE

     The following table is a summary of the Company's real estate as of June
     30, 2002:

                                         June 30, 2002     December 31, 2001
                                         -------------     -----------------
                                          (unaudited)

Land                                        $ 3,980,559          $ 7,552,248
Buildings and improvements                   21,192,293           50,622,212
                                             ----------           ----------
                                             25,172,852           58,174,460
Less: Accumulated depreciation               (7,873,306)         (17,681,128)
                                            -----------         ------------
                                            $17,299,546          $40,493,332
                                            ===========          ===========

See footnote 2 "Investment in Joint Ventures" for the impact on real estate as a
result of the change to equity accounting for joint ventures

     On January 14, 2002, one of the Company's joint ventures sold a supermarket
     in Edina, Minnesota for $3,500,000 that resulted in a gain on sale to the
     Company of $649,092. On January 30, 2002, a supermarket in Toledo, OH was
     sold for $3,600,000 that resulted in a net loss to the Company of $186,380.
     These amounts are included in the Company's equity earnings from joint
     ventures. These two properties were classified as of December 31, 2001 in
     "Real estate held for sale."

                                       10
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

5.   INVESTMENT IN JOINT VENTURES

     The Company invests in three joint ventures, (568 Broadway, the Supervalus
     and Tri-Columbus Associates). The joint ventures condensed consolidated
     statement of operations for the investment in joint ventures for the three
     and six months ending June 30, 2002 are as follows:


<TABLE>
<CAPTION>
                                                FOR THREE MONTHS ENDED         FOR SIX MONTHS ENDED
                                                      JUNE 30,                     JUNE 30,

                                                         2002                        2002
                                              ----------------------          ----------------------
<S>                                                   <C>                         <C>
Rental Revenues                                       $3,368,077                  $6,674,687

Costs and Expenses                                     1,840,382                   3,271,761
                                                  --------------                  ----------
Income before interest and other income                1,527,695                   3,402,926

Interest Income                                            6,803                      46,135
Other income                                                 -                           -
Gain on Sale                                                 -                       462,712
                                                  --------------                  ----------
Net income for joint ventures                         $1,534,498                  $3,911,773
                                                  ==============                  ==========

Equity income from joint ventures
  for Shelbourne Properties III, Inc.                  $ 308,864                  $1,405,142
                                                  ==============                  ==========
</TABLE>

6.   FEDERAL INCOME TAX CONSIDERATIONS

     As of April 17, 2001, the Predecessor Partnership was converted into a
     corporation that elects to be taxed as a real estate investment trust
     (REIT) under the provisions of the Internal Revenue Code. As a result, the
     shareholders of the REIT are 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.

7.   CONVERSION

     As the first step in reorganizing the Predecessor Partnership into the
     publicly-traded REIT, a registration statement was filed with the
     Securities and Exchange Commission on February 11, 2000. On or about
     February 15, 2001, a prospectus/consent solicitation statement was mailed
     to the limited partners of the Predecessor Partnership seeking their
     consent to the reorganization of the Predecessor Partnership into a real
     estate investment trust. The consent solicitation period expired on April
     16, 2001, and holders of a majority of the Units approved the conversion.

     On April 17, 2001 the conversion was accomplished by merging the
     Predecessor Partnership into our operating partnership. Pursuant to the
     merger, each limited partner received three shares of stock in the

                                       11
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     Company for each unit they owned, and the general partners received an
     aggregate of 58,701 shares of stock of the Company in exchange for their
     general partner interests. The common stock of the Company is listed on the
     American Stock Exchange under the symbol HXF.

8.   NOTE PAYABLE

     On May 1, 2002, the operating partnerships of the Companies and certain of
     the operating partnerships' subsidiaries entered into a $75,000,000
     revolving credit facility with Bayerische Hypo-Und Vereinsbank AG, New York
     Branch, as agent for itself and other lenders (referred to as the "Credit
     Facility" or the "Note Payable"). The Credit Facility has a term of three
     years and is prepayable in whole or in part at any time without penalty or
     premium. The Companies initially borrowed $73,330,075 under the Credit
     Facility. The Company's share of the proceeds amounted to $19,718,457, of
     which $14,589,936 was used to repay the note issued in the Transaction,
     $142,871 to pay associated accrued interest and $556,712 to pay costs
     associated with the Credit Facility. The excess proceeds of $4,428,938 were
     deposited into the Company's operating cash account. The Companies have the
     right, from time to time, to elect an annual interest rate equal to (i)
     LIBOR plus 2.5% or (ii) the greater of (a) agent's prime rate or (b) the
     federal funds rate plus 1.5%. The Companies are required to pay the
     lenders, from time to time, a commitment fee equal to .25% of the
     unborrowed portion of the Credit Facility. Interest is payable monthly in
     arrears. The interest rate at June 30, 2002 was approximately 4.19%.

     The Credit Facility is secured by (i) a pledge by the operating
     partnerships of their membership interest in their wholly-owned
     subsidiaries that hold their interests in joint ventures with the other
     Companies and (ii) mortgages on certain real properties owned directly or
     indirectly by the operating partnerships. All of the properties of the
     Company are security for the Credit Facility, except for its property
     located in Illinois and its joint ventures that own real property in
     Georgia and Indiana.

     Under the terms of the Credit Facility, the Companies may only sell the
     pledged property if certain conditions are met. In addition, the Companies
     must maintain certain debt yield maintenance ratios and comply with
     restrictions relating to engaging in certain equity financings, business
     combinations and other transactions that may result in a change of control
     (as defined under the Credit Facility).

     The Companies are jointly and severally liable under the Credit Facility
     but have entered into a Contribution and Cross-Indemnification Agreement.

9.   SUBSEQUENT EVENTS

     On July 1, 2002, the Company, along with Shelbourne Properties I, Inc. and
     Shelbourne Properties II, Inc., entered into settlement agreements with
     respect to certain outstanding litigation involving the Companies. In
     connection with the settlement, the Company entered into a stock purchase
     agreement (the "HX Investors Stock Purchase Agreement") with HX Investors,
     L.P. ("HX Investors") and Exeter Capital Corporation ("Exeter"), the
     general partner of HX Investors, pursuant to which HX Investors, the owner
     of approximately 12% of the outstanding common stock of the Company, agreed
     to conduct a tender offer for up to an additional 30% of the Company's
     outstanding stock at a price per share of $49.00 (the "HX Investors
     Offer"). The tender offer commenced on July 5, 2002 following the filing of
     the required tender offer documents with the Securities and Exchange
     Commission by HX Investors.

                                       12
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     Pursuant to the Stock Purchase Agreement, the board of directors of the
     Company approved a plan of liquidation for the Company (the "Plan of
     Liquidation") and agreed to submit the Plan of Liquidation to its
     stockholders for approval at the 2002 annual meeting of stockholders to be
     held on September 9, 2002 (the "Annual Meeting"). HX Investors agreed to
     vote all of its shares in favor of the Plan of Liquidation at the Annual
     Meeting. Under the Plan of Liquidation, HX Investors would have received an
     incentive payment of 25% of gross proceeds after the payment of a priority
     return of approximately $52.25 per share was made to the stockholders of
     the Company.

     Longacre Corp. ("Longacre") filed an action on July 29, 2002 in the United
     States District Court for the Southern District of New York against the
     Companies seeking (i) a declaration that HX Investors violated Sections
     13(e) and 14(d) and (e) of the Securities and Exchange Act of 1934, as
     amended, and the rules and regulations promulgated thereunder, and that the
     25% liquidation premium to be paid to HX Investors and Exeter Capital
     Corporation upon liquidation of the Companies is invalid and illegal; and
     (2) an injunction enjoining HX Investors from proceeding with the HX
     Investors Offer until HX Investors makes the appropriate filings and
     disclosures. A hearing on Longacre's Motion for an Injunction was held on
     August 1, 2002, and the request for a preliminary injunction was denied.

     On August 5, 2002, the Company entered into an amendment to the HX
     Investors Stock Purchase Agreement. Pursuant to the terms of the amendment,
     the purchase price per share offered under the HX Investors Offer was
     increased from $49.00 to $58.30. The amendment also reduced the incentive
     payment payable to HX Investors under the Plan of Liquidation from 25% to
     15% of gross proceeds after payment of the approximately $52.25 per share
     priority return to stockholders of the Company, and included certain
     corporate governance provisions.

     The HX Investors Offer is scheduled to expire at midnight on Friday, August
     16, 2002.

     On August 5, 2002, one of the Company's joint ventures sold a supermarket
     in Norcross, GA. The proceeds of approximately $325,000 from the sale were
     approximately equal to the joint ventures net book value of the property.

                                       13
<PAGE>

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 III, 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 III, 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 February 14, 2002 the Companies announced the consummation of the Transaction
whereby the Companies (i) purchased each of the Advisory Agreements between the
Companies and PCIC and (ii) repurchased all of the shares of common stock in the
Companies held by PCIC (the "Shares").

Pursuant to the Transaction, the Company paid PCIC $11,830,337 in cash and its
operating partnership, Shelbourne Properties III L.P., issued preferred
partnership interests with an aggregate liquidation preference of $672,178 and
issued a note in the amount of $14,589,936.

The Transaction was unanimously approved by the Boards of Directors of each of
the Companies after recommendation by their respective Special Committees
comprised of the Companies' three independent directors.

Houlihan Lokey Howard & Zukin Capital served as financial advisor to the Special
Committees of the Companies and rendered a fairness opinion to the Special
Committees with respect to the Transaction.

On May 1, 2002, the operating partnerships of the Companies and certain of the
operating partnerships' subsidiaries entered into a $75,000,000 revolving credit
facility with Bayerische Hypo-Und Vereinsbank AG, New York Branch, as agent for
itself and other lenders (the "Credit Facility"). The Credit Facility has a term
of three years and is prepayable in whole or in part at any time without penalty
or premium. The Companies initially borrowed $73,330,075 under the Credit
Facility. The Company's share of the proceeds amounted to $19,718,457, of which
$14,589,936 was used to repay the note issued in the Transaction, $142,871 to
pay associated accrued interest and $556,712 to pay costs associated with the
Credit Facility. The excess proceeds of $4,428,938 were deposited into the
Company's operating cash account. The Companies have the right, from time to
time, to elect an annual interest rate equal to (i) LIBOR plus 2.5% or (ii) the
greater of (a) the agent's prime rate or (b) the federal funds rate plus 1.5%.
The Companies are required to pay the lenders, from time to time, a commitment
fee equal to .25% of the unborrowed portion of the Credit Facility.

                                       14
<PAGE>

The Credit Facility is secured by (i) a pledge by the operating partnerships of
their membership interest in their wholly-owned subsidiaries that hold their
interests in joint ventures with the other Companies and (ii) mortgages on
certain real properties owned directly or indirectly by the operating
partnerships. All of the properties of the Company are security for the Credit
Facility, except for its property located in Illinois and its joint ventures
that own real property in Georgia and Indiana.

Under the terms of the Credit Facility, the Companies may only sell the pledged
property if certain conditions are met. In addition, the Companies must maintain
certain debt yield maintenance ratios and comply with restrictions relating to
engaging in certain equity financings, business combinations and other
transactions that may result in a change of control (as defined under the Credit
Facility).

The Companies are joint and severally liable under the Credit Facility but have
entered into a Contribution and Cross-Indemnification Agreement.

Following a request by HX Investors, L.P. ("HX Investors") - the largest
stockholder of the Company and an entity controlled by Mr. Michael Ashner - on
April 30, 2002 the board of directors of the Company waived a provision in its
certificate of incorporation (as it applies to HX Investors) that otherwise
prohibits a stockholder from beneficially owning more than 8% of the common
stock of the Company to allow HX Investors to own up to 12% of the common stock
of each Company. Pursuant to a Stockholder Agreement among the Company,
Shelbourne Properties I, Inc., Shelbourne Properties II, Inc., HX Investors and
the general partner of HX Investors, HX Investors agreed that until January 1,
2003, with respect to all matters submitted for the approval of the Company's
stockholders (1) with the approval and recommendation of the Company's board of
directors or (2) by HX Investors or its affiliates, HX Investors and its
affiliates would vote all shares beneficially owned by them in excess of the 8%
threshold in proportion to the votes cast by the stockholders of the Company
(including the 8% of the shares beneficially owned by HX Investors). Mr. Ashner
is associated with Kestrel, the property manager for the Company's properties.

The foregoing descriptions of the Stockholder Agreement and the Credit Facility
are qualified in their entirety by reference to such agreements, copies of which
are attached as exhibits to our Current Report on Form 8-K filed on May 14,
2002, which is incorporated herein by reference.

Recent Developments

On July 1, 2002, the Company, along with Shelbourne Properties I, Inc. and
Shelbourne Properties II, Inc., entered into settlement agreements with respect
to certain outstanding litigation involving the Companies. In connection with
the settlement, the Company entered into a stock purchase agreement (the "HX
Investors Stock Purchase Agreement") with HX Investors and Exeter, the general
partner of HX Investors, pursuant to which HX Investors, the owner of
approximately 12% of the outstanding common stock of the Company, agreed to
conduct a tender offer for up to an additional 30% of the Company's outstanding
stock at a price per share of $49.00 (the "HX Investors Offer"). The tender
offer commenced on July 5, 2002 following the filing of the required tender
offer documents with the Securities and Exchange Commission by HX Investors.

Pursuant to the Stock Purchase Agreement, the board of directors of the Company
approved a plan of liquidation for the Company (the "Plan of Liquidation") and
agreed to submit the Plan of Liquidation to its stockholders for approval at the
2002 annual meeting of stockholders to be held on September 9, 2002 (the "Annual
Meeting"). HX Investors agreed to vote all of its shares in favor of the Plan of
Liquidation at the Annual Meeting. Under the Plan of Liquidation, HX Investors
would have received an incentive

                                       15
<PAGE>

payment of 25% of gross proceeds after the payment of a priority return of
approximately $52.25 per share was made to the stockholders of the Company.

Subsequently, on July 29, 2002, Longacre Corp., an affiliate of Carl C. Icahn
("Icahn"), commenced a litigation against the Company, and Icahn publicly
announced that his related companies, together with outside investors, were
prepared to initiate a competing tender offer for the same number of shares of
common stock of the Company as were tendered for under the HX Investors Offer,
at a price per share of $53.90. Over the course of the next several days, Icahn
and HX Investors submitted competing proposals to the board of directors of the
Company and made those proposals public. On August 4, 2002, Icahn notified the
Company that he was no longer interested in proceeding with his proposed offer.

On August 5, 2002, the Company entered into an amendment to the HX Investors
Stock Purchase Agreement. Pursuant to the terms of the amendment, the purchase
price per share offered under the HX Investors Offer was increased from $49.00
to $58.30. The amendment also reduced the incentive payment payable to HX
Investors under the Plan of Liquidation from 25% to 15% of gross proceeds after
payment of the approximately $52.25 per share priority return to stockholders of
the Company, and included certain corporate governance provisions.

The HX Investors Offer is scheduled to expire at midnight on Friday, August 16,
2002.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying financial statements and related footnotes. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported related to the accounting
policies described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.

Impairment of long-lived assets. At June 30, 2002 and December 31, 2001, the
Company had approximately $17,299,546 and $17,149,117 of real estate (net),
accounting for approximately 36% and 31%, respectively, of the Company's total
assets. Property and equipment is carried at cost net of adjustments for
impairment. The fair value of the Operating Partnership's property and equipment
is dependent on the performance of the properties.

The Company evaluates recoverability of the net carrying value of its real
estate and related assets at least annually, and more often if circumstances
dictated. If there is an indication that the carrying value of a property might
not be recoverable, the Company prepares an estimate 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.

If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the property, the Company recognizes an impairment loss, and
reduces the carrying amount of the asset to its estimated fair value. Fair value
is the amount at which the asset could be bought or sold in a current
transaction

                                       16
<PAGE>

between willing parties, that is, other than in a forced or liquidation sale.
Management estimates fair value using discounted cash flows or market
comparables, as most appropriate for each property. Independent certified
appraisers are utilized to assist management, when warranted.

For the years ended December 31, 2001, 2000, and 1999, no impairment losses have
been recorded. Cumulative impairment losses from previous years for all
properties included in real estate in the accompanying balance sheets would
amount to $15,481,000. Impairment write-downs recorded by the Corporation do not
affect the tax basis of the assets and are not included in the determination of
taxable income or loss.

Because the cash flows used to evaluate the recoverability of the assets and
their fair values are based upon projections of future economic events, such as
property occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, 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 are 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 from the estimates and variances
may be material. The Company may provide additional write-downs, which could be
material in subsequent years if real estate markets or local economic conditions
change.

Useful lives of long-lived assets. Property and equipment, and certain other
long-lived assets are amortized over their useful lives. Depreciation and
amortization are computed using the straight-line method over the useful life of
the property and equipment. The cost of properties represents the initial cost
of the properties to the Company plus acquisition and closing costs less
impairment adjustments. Tenant improvements and leasing costs are amortized over
the applicable lease term. Useful lives are based upon management's estimate
over the period that the assets will generate revenue.

Revenue Recognition. Base rents are recognized on a straight-line basis over the
terms of the related leases. Percentage rents charged to retail tenants based on
sales volume are recognized when earned pursuant to Staff Accounting Bulletin No
101, "Revenue Recognition in Financial Statements," issued by the Securities and
Exchange Commission in December 1999, and the Emerging Issues Tax Force's
consensus on Issue 98-9, "Accounting for Contingent Rent in Interim Financial
Periods." The Company defers recognition of contingent rental income (i.e.,
percentage/excess rent) in interim periods until the specified target (i.e.,
breakpoint) that triggers the contingent rental income is achieved. Recoveries
from tenants or taxes, insurance and other operating expenses are recognized as
revenue in the period the applicable taxes are incurred.

New Accounting Policies

Certain properties are owned in joint ventures with Shelbourne Properties I,
L.P. and/or Shelbourne Properties II, L.P. Prior to April 30, 2002, the Company
owned an undivided interest in the assets owned by these joint ventures and was
severally liable for indebtedness it incurred in connection with its ownership
interest in those properties. Therefore, for periods prior to April 30, 2002,
the Company's condensed consolidated financial statements presented the assets,
liabilities, revenues and expenses of the joint ventures on a pro rata basis in
accordance with the Company's percentage of ownership.

                                       17
<PAGE>

After April 30, 2002, as a result of the Company's incurring debt in connection
with entering into the Note Payable discussed in Note 8 in the "Notes to
Condensed Consolidated Financial Statements", after April 30, 2002, the Company
is no longer allowed to account for its investments in joint ventures on a
pro-rata consolidation basis in accordance with its percentage of ownership but
must utilize the equity method of accounting. Accordingly, the Company's
condensed consolidated balance sheet at June 30, 2002 and the Company's
condensed consolidated statements of operations for the three and six month
period ended June 30, 2002 reflect the equity method of accounting.

Pro-Forma Financial Information

The following tables show (i) pro-forma condensed consolidated balance sheet as
of December 31, 2001 and (ii) pro-forma statement of operations for the three
and six months ended June 30, 2001, both reflecting the impact of the change to
equity accounting for the investment in joint ventures. The pro-forma
information is provided for the purpose of comparing results of operations for
2002 and 2001 in the review of management's discussion and analysis. The
Company's total equity did not change.

           CONDENSED CONSOLIDATED PRO-FORMA BALANCE SHEET INFORMATION


<TABLE>
<CAPTION>
                                        Previously Reported       Pro Forma        Equity Method
                                         December 31, 2001       Adjustments     December 31, 2001
                                        -------------------    --------------   -------------------
<S>                                            <C>             <C>                    <C>
ASSETS

Real estate, net                               $ 40,493,332    $ (23,344,215)         $ 17,149,117
Real estate held for sale                         2,961,146       (2,961,146)                    -
Cash and cash equivalents                        11,122,456       (8,282,967)            2,839,489
Other assets                                      1,921,600       17,357,319            19,278,919
Receivables, net of allowances of
   $89,995 and $35,245, respectively                 42,928          (18,403)               24,525
Investment in joint ventures                              -       16,914,312            16,914,312
                                        -------------------    --------------   -------------------

Total Assets                                   $ 56,541,462       $ (335,100)         $ 56,206,362
                                        ===================    ==============   ===================

LIABILITIES

Accounts payable and accrued expenses             $ 816,904       $ (335,100)            $ 481,804
                                        -------------------    --------------   -------------------

Total Liabilities                                 $ 816,904       $ (335,100)            $ 481,804
                                        ===================    ==============   ===================
</TABLE>

                                       18
<PAGE>

            CONDENSED CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                             For the Three Months Ended            For the Three Months Ended
                                                                      June 30,                                June 30,

                                                        Previously         Pro forma          Previously    Pro forma
                                                         Reported         Adjustments          Reported    Adjustments
                                                           2001         2001       Total         2001          2001        Total
                                                       -----------  ------------ ----------   ----------   ------------  ----------
<S>                                                     <C>         <C>          <C>          <C>          <C>           <C>
Rental revenues                                         $1,837,133  (1,131,013)  $ 706,120    $3,887,145    (2,185,539)  $1,701,606

Costs and expenses                                       1,404,978    (495,870)    909,108     3,013,524      (977,597)   2,035,927
                                                       -----------  ------------ ----------   ----------   ------------  ----------
Income (loss) before equity in                             432,155    (635,143)   (202,988)      873,621    (1,207,942)    (334,321)
   joint ventures, interest and other income
     Equity income from joint ventures                           -     756,811     756,811             -     1,435,387    1,435,387
     Interest income                                       110,715     (88,634)     22,081       252,826      (194,411)      58,415
     Other income                                           33,034     (33,034)          -        42,734       (33,034)       9,700
                                                       -----------  ------------ ----------   ----------   ------------  ----------
Net income                                               $ 575,904   $       -   $ 575,904    $1,169,181    $        -   $1,169,181
                                                       ===========  ============ ==========   ==========   ============  ==========
</TABLE>

Liquidity and Capital Resources

The Company uses its working capital reserves and any cash from operations as
its primary sources of liquidity. Unlike the Predecessor Partnership, which
could not incur indebtedness or issue additional equity, the Company has as
potential sources of liquidity, in addition to cash, capital raised by either
borrowing money on a long-term or short-term basis or issuing additional equity
securities. Due to the restrictions on the incurrence of debt on the Predecessor
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 Predecessor 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 had $5,516,241 in cash and cash equivalents at June 30, 2002. Cash
and cash equivalents are temporarily invested in short-term instruments. The
Company's level of liquidity based upon cash and cash equivalents increased by
$2,676,752 to $5,516,241 for the six months ended June 30, 2002 from $2,839,489
at December 31, 2001. The increase in cash and cash equivalents is due to the
$9,837,762 in cash provided by operating activities. The Company also received
proceeds from the initial borrowing under the Credit Facility of $19,718,457, of
which $14,589,936 was used to retire the note issued in relation to the
Transaction. The Company paid $11,830,337 to Presidio in connection with the
Transaction. The Company incurred $459,194 relating to improvements to real
estate.

Currently, the Company's primary source of funds is cash flow from the operation
of its properties, principally rents billed to tenants, that amounted to
$991,242 and $1,826,891 for the three and six months ended June 30, 2002. In the
event the Company were to acquire additional assets, its cash flow from
operations would be derived from a larger, more diverse, and potentially riskier
group of assets than what

                                       19
<PAGE>

is 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 six months ended June 30, 2002, the Company made payments
amounting to $459,194 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 a new roof at the Livonia
Plaza property.

The budgeted expenditures for the remainder of 2002 capital improvements and
capitalized tenant procurement costs are an aggregate of $169,364. These costs
are to be incurred in the normal course of business and funded from cash flows
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, which could include 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. In the event that the Company were to purchase additional real estate
assets or incur additional mortgage indebtedness, the Company's expenses would
increase, which would raise the risk that the Company would be unable to fund
the necessary capital and tenant procurement costs at its properties.

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.

Results of Operations

Six months ended June 30, 2002 vs. June 30, 2001

Net income

The Company's net income decreased by $17,536,544 to a net loss of ($16,367,363)
for the six months ended June 30, 2002 from $1,169,181 for the six months ended
June 30, 2001. This is primarily due to the Transaction , as well as legal fees
related to the Transaction and subsequent lawsuits, and the payment of
consulting fees to Lazard Freres & Co LLC ("Lazard"). The Company paid
$15,262,114 in relation to the Transaction, consisting of a note payable in the
amount of $14,589,936 and Class A 5% cumulative preferred partnership interest
with a liquidation value of $672,178. Legal costs for the six months, which were
associated with the Transaction and related litigation, were $974,222 higher
than for legal services rendered during the first six months of 2001. The
Company also incurred $878,827 in fees to Lazard for consulting services.

The decrease in net income was also due to an increase in operating expenses of
$71,491, or 13% to $569,782 for the six months ended June 30, 2002 from $498,193
for the same period in 2001 primarily due to an increase in insurance costs as a
result of an increase in insurance rates stemming from the terrorist attacks of
September 11, 2001 and to the incurrence of additional real estate taxes. The
decrease was also due to a decrease in equity income from joint ventures of
$30,245. The increases in expenses

                                       20
<PAGE>

were partially offset by an increase in rental revenue of $125,285 due to
increases in base rent, percentage rent and common area maintenance charges.

Rental Revenues

Rental revenues increased by $125,285, or 7.4%, to $1,826,891 during the six
months ended June 30, 2002 from $1,701,606 for the same period in 2001. This is
primarily due to increased occupancy at Sunrise Marketplace and Livonia Plaza,
which resulted in increases of $103,846 and $21,439, respectively, in rental
revenues.

Income

Income (defined as rental revenues, equity income from joint venture, interest
and other income) increased by $55,304, or 1.7%, to $3,260,412 for six-month
period ended June 30, 2002 from $3,205,108 in the same period in 2001. The
increase is due to the increase in rental revenue, which was partially offset by
the decrease in equity income from joint ventures, interest and other income.
Equity income from joint ventures decreased by $30,245, or 2.1%, to $1,405,142
for the six months ended June 30, 2002 from $1,435,387 for the same period in
2001. The income from 568 Broadway increased by $94,742 due to increase rental
revenue. Income from the investment of the Supervalu properties increased by
$24,530 primarily due to the gains on sale of the Edina, Minnesota and Toledo,
Ohio properties total claims $462,712, which was offset by an impairment
allowance of $325,000 on the Norcross, Georgia property. Income from our
investment in the Tri-Columbus properties decreased by $149,517 primarily due to
reduced interest income and the absence of a tax abatement that had been granted
the previous year.

These increases were offset by a decrease of interest income of $30,036, or
51.4%, to $28,379 for the six months ended June 30, 2002 from $58,415 for the
same period in 2001. The Company had no other income for the six months ended
June 30, 2002 as compared to $9,700 in the same period ended June 30, 2001, due
to the absence, as a result of the conversion of the Predecessor Partnership
into a REIT, of transfer fees that were previously generated by the transfer of
partnership interests.

Costs and Expenses

Total costs and expenses, including interest expense, for the six months ended
June 30, 2002 amounted to $19,627,775, an increase of $17,591,848 from the same
period in 2001. The Company incurred a one-time expense of $15,262,114 in
relation to the purchase of the Advisory Agreements and incurred interest
expense of $142,811 on the note issued in the Transaction and $139,956 in
interest on the proceeds received from the initial borrowing under the Credit
Facility. The remaining costs and expenses amounted to $4,082,834 for the six
months ended June 30, 2002, an increase of $2,046,907 from the $2,035,927
incurred for the same period in 2001. This increase is the result of an increase
in general and administrative expenses, particularly, legal, professional and
consulting fees.

Operating expenses increased by $71,589, or 14.4%, to $569,782 for the first
quarter of 2002 from $498,193 for the same period in 2001 due to an increase
premiums as a result of the September 11, 2001 terrorist attacks and to the
incurrence of additional real estate taxes. Property management fees increased
slightly due to the increase in rental collections. Expenses related to asset
management fees decreased by $201,352 for the six months ended June 30, 2002
from $432,165 for the same period in 2001. For the first six months of 2002,
$105,863 in asset management fees was paid to Shelbourne Management prior to
February 14, 2002 and $124,950 to PCIC therefore in accordance with PCIC's
agreement to provide

                                       21
<PAGE>

transition services to the Company upon the consummation of the Transaction.

Interest expense for the six months ended June 30, 2002 on the proceeds received
on the initial borrowing under the Credit Facility was $142,871. Prior to the
conversion to a Real Estate Investment Trust, no debt was allowed on any of the
properties.

Inflation

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

Three months ended June 30, 2002 vs. June 30, 2001

Net income

The Company incurred a net loss of $1,643,728 or a decrease of $2,219,632 for
the three months ended June 30, 2002 from a net income of $575,904 in the same
period in 2001. This was primarily due to the incurrence of legal, professional
and consulting fees resulting from lawsuits filed subsequent to the Transaction,
as well as by a decrease in equity income from joint ventures of $447,947. The
decrease in net income was also due to an increase in operating expenses of
$71,589 (primarily due to an increase in insurance premiums as a result of the
terrorist attacks of September 11, 2001). The increases in expenses were
partially offset by an increase in rental revenue of $285,122.

Rental Revenues

Rental revenues increased by $285,122, or 40%, to $991,242 during the three
months ended June 30, 2002 from $706,120 for the same period in 2001, due to
increased occupancy at the Sunrise Marketplace and Livonia Plaza properties.

Income

Income (defined as rental revenue, equity income from joint ventures, interest
and other income) decreased by $168,203, or 11.3% to $1,316,809 for the three
months ended June 30, 2002 from $1,485,012 in the same period in 2001. Equity
income from joint ventures decreased by $447,947 due to reduced income from the
Supervalu properties due to the sale of Edina, Minnesota and Toledo, Ohio and a
$325,000 impairment allowance taken on the Norcross, Georgia property. Income
was lower for the Tri-Columbus property as compared to the same period for the
previous year due to lower interest and the absence of a real estate tax
abatement that had been granted in the prior year. These decreases were offset
by increases in rental revenues in the amount of $285,122.

Costs and Expenses

Total costs and expenses, including interest expense, for the three months ended
June 30, 2002 amounted to $2,960,537, an increase of $2,051,429 from the same
period in 2001. The increase is primarily due to an increase in general and
administrative expenses due to the increased legal, professional and consulting
fees relating to the Transaction. The remaining costs and expenses, including
interest expense, amounted to $803,995 a decrease of $105,113 for the same
period in 2001.

Operating expenses increased by $37,429, or 13% to $285,325 for the three months
ended June 30, 2002 from $247,896 for the same period in 2001 due to an increase
in insurance premiums as a result of the

                                       22
<PAGE>

September 11, 2001 terrorist attacks. Depreciation and Amortization increased by
$43,757, or 26%, to $213,238 for the three months ended June 30, 2002 from
$169,481 for the same period in 2001 primarily due to the amortization of
deferred loan costs. Expenses related to the partnership asset management fee
decreased by $133,505 for the three months ended June 30, 2002 from the same
period in 2001 as the obligation to pay the partnership asset management fee
terminated with the consummation of the Transaction.

Interest expense for the three months ended June 30, 2002 on the proceeds
received on the initial borrowing under the Credit Facility was $139,956 and
$58,277 on the note issued in the Transaction. Prior to the conversion to a Real
Estate Investment Trust, no debt was allowed on any of the properties.

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.

FFO for the three-month and six-month periods ended June 30, 2002 and 2001 are
summarized in the following table:

<TABLE>
<CAPTION>
                                                Three Months                              Six months
                                                    Ended                                    Ended
                                      June 30, 2002       June 30, 2001        June 30, 2002       June 30, 2001
                                      -------------       -------------        -------------       -------------
<S>                                   <C>                    <C>               <C>                  <C>
Net (Loss) Income (A)                 $ (1,643,728)          $ 575,904         $(16,367,363)        $ 1,169,181

Plus:  Depreciation related
  to real estate and tenant
  improvements                              154,767             153,410              308,765             302,753

Plus: Amortization of leasing
        commissions                         19,147              16,072               37,924              31,777

Plus: Adjustments for
        unconsolidated joint
        ventures (B)                       209,957             245,822              502,290             489,005
                                      -------------       -------------        -------------       -------------
 Funds From Operations (A)            $ (1,259,857)          $ 991,208         $(15,518,384)        $ 1,992,716
                                      =============       =============        =============       =============
</TABLE>

                                       23
<PAGE>

(A)  Net Income and Funds From Operations for the six months ended June 30, 2002
     include $15,262,114 related to the purchase of the Advisory Agreements.

(B)  Adjustments for unconsolidated joint ventures includes all adjustments to
     convert the Company's share of net income from unconsolidated joint
     ventures to FFO.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The primary market risk we face is interest rate sensitivity. Our long-term debt
bears interest at a floating rate, and therefore we are exposed to the risk of
interest rate changes. At August 13, 2002, borrowings under our secured
revolving credit facility totaled $19,718,457 and initially bore an interest
rate of LIBOR plus 2.5%. Based on the balance outstanding on our credit facility
at August 13, 2002 and the interest rate at that date, a 10% increase in LIBOR
would increase our interest expense in 2002 by approximately $34,200.
Conversely, a 10% decrease in LIBOR would decrease our interest expense in 2002
by the same amount. The gain or loss we ultimately realize with respect to
interest rate fluctuations will depend on the actual interest rates during that
period. We do not believe that we have any risk related to derivative financial
instruments.

                                       24
<PAGE>

PART II. OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

HX Investors, L.P. litigation

HX Investors, L.P. ("HX Investors") and other plaintiffs filed an action on May
22, 2002 against the Company, Shelbourne Properties, I Inc. and Shelbourne
Properties, II Inc. (collectively, the "Companies") seeking an order directing
that each of the Companies hold a stockholder election for the purpose of
electing directors to nine seats on the boards of each of the Companies. The
action (i) sought to compel the holding of an annual meeting of stockholders and
(ii) challenged an action taken by the boards of directors of the Companies
reclassifying the boards of each company from nine to four directors and
reappointing three directors in connection with such reclassification.

A stipulation of dismissal, with prejudice, was entered on July 3, 2002. In
connection with the settlement, HX Investors agreed to conduct tender offers for
up to 30% of the outstanding common stock (the "HX Investors Offer"), and the
board of directors approved plans of liquidation for each of the Companies,
subject to stockholder approval. Also pursuant to the settlement, the parties
agreed that the board of directors of each of the Companies would be increased
to six members, with two directors designated by HX Investors, and four
directors would be independent.

Delaware Plaintiffs litigation

As previously disclosed in the Company's report on Form 10-Q filed May 15, 2002,
a group of plaintiffs (the "Delaware Plaintiffs") brought suit derivatively on
behalf of the Companies against NorthStar, PCIC, Shelbourne Management and eight
former and present directors of the boards of directors of the Companies (the
"Individual Defendants"). The Delaware Plaintiffs filed a consolidated class and
derivative complaint on April 10, 2002 alleging that the boards of directors of
the Companies mismanaged the Companies making it less likely that they could pay
dividends. Plaintiffs seek disgorgement of profits, accounting for profits and
rescission of an agreement to repurchase shares of stock held by PCIC and
purchase the Advisory Agreements.

The Delaware Plaintiffs also filed an action under Section 211 of the General
Corporation Law of Delaware on May 7, 2002 (i) seeking to compel the holding of
an annual meeting of stockholders and (ii) challenging an action taken by the
Companies' boards of directors in which the boards of directors of each company
were reclassified from nine to four directors. This matter was consolidated with
the HX Investors action described above, for the limited purpose of discovery on
the statutory issues.

A letter of agreement of settlement was signed by the parties on July 1, 2002. A
stipulation of settlement was entered on July 3, 2002. The principal terms of
the settlement were that the Companies and their boards of directors would
facilitate the HX Investors Offer; conduct annual meetings on September 9, 2002
and expand the board of directors of each of the Companies from four members to
six, four of whom would be independent directors as well as implementing
corporate governance protections. The settlement also provided for a
contribution by Shelbourne Management of 42% of the Preferred Operating Units of
the Companies to HX Investors with the purpose of providing funds to HX
Investors in connection with the HX Investors Offer, as well as allowing for a
contribution of up to one million dollars, as approved by the court, for
plaintiffs' attorneys fees.

                                       25
<PAGE>

Icahn Litigation

As previously disclosed in the Company's report on Form 10-Q filed May 15, 2002,
in February 2002, Carl C. Icahn ("Icahn") brought suit derivatively in the New
York State Supreme Court on behalf of the Companies against NorthStar, PCIC,
Shelbourne Management and the Individual Defendants. On or about March 8 and
March 12, 2002, Icahn filed a motion seeking leave to intervene in the
unconsolidated actions in Delaware. On May 16, 2002, Icahn filed a Derivative
Complaint in Intervention. The matter has been settled with respect to NorthStar
and the actions in Delaware have been dismissed without prejudice.

Longacre Corp. litigation

Longacre Corp. ("Longacre") filed an action on July 29, 2002 in the United
States District Court for the Southern District of New York against the
Companies seeking (i) a declaration that HX Investors violated Sections 13(e)
and 14(d) and (e) of the Securities and Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder, and that the 25% liquidation
premium to be paid to HX Investors and Exeter Capital Corporation upon
liquidation of the Companies is invalid and illegal; and (2) an injunction
enjoining HX Investors from proceeding with the HX Investors Offer until HX
Investors makes the appropriate filings and disclosures. A hearing on Longacre's
Motion for an Injunction was held on August 1, 2002, and the request for a
preliminary injunction was denied.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibits furnished pursuant to the requirements of Form 10-Q:

Number                             Description
------                             -----------

(3.1)     Amended and Restated Certificate of Incorporation of the Company*
(3.2)     Amended and Restated Bylaws of the Corporation*
(4.1)     Amended and Restated Agreement of Limited Partnership of the operating
          partnership*
(4.2)     Shareholder Rights Agreement*
(4.3)     Amendment to Shareholder Rights Agreement**
(4.4)     Certificate of Designations, Preferences and Rights of Series A
          Preferred Stock*
(4.5)     Stockholder Agreement, among the Companies and HX Investors, LP and
          Exeter Capital Corporation, dated as of April 30, 2002***
(10.1)    Revolving Credit Agreement, dated as of April 30, 2002, among the
          operating partnerships of the Companies, such operating partnerships'
          wholly-owned subsidiaries, the lenders from time to time party thereto
          and Bayerische Hypo-Und Vereinsbank AG, New York branch, as agent for
          itself and the other lenders. ***
(10.2)    Promissory note, dated April 30, 2002, issued by the operating
          partnerships of the Companies and such operating partnerships'
          wholly-owned subsidiaries in favor of each lender in the aggregate
          principal amount of $75,000,000. ***
(10.3)    Cash Management Agreement, dated as of April 30, 2002, among the
          operating partnerships of the Companies, such operating partnerships'
          wholly-owned subsidiaries, the agent and Deposit Bank (as defined
          therein), as the same may be amended, restated, replaced, supplemented
          or otherwise modified from time to time. ***

                                       26
<PAGE>

(10.4)    Contribution and Cross-Indemnification Agreement, dated as of April
          30, 2002, among the operating partnerships of the Companies and such
          operating partnerships' wholly-owned subsidiaries. ***
(10.5)    Pledge and Security Agreement, dated as of April 30, 2002, by the
          operating partnerships of the Companies and such operating
          partnerships' wholly-owned subsidiaries in favor of the lenders. ***
(10.6)    Form of Mortgage, dated as of April 30, 2002, issued by Shelbourne
          Properties II, Inc. to Bayerische Hypo- Und Vereinsbank AG, New York
          Branch, as agent for itself and other lenders, with respect to its
          real property located in Las Vegas, Nevada and Livonia, Michigan. ***
(99.1)    Partnership Unit Designation of the Class A Preferred Partnership
          Units of the Operating Partnership **
(99.2)    Certification pursuant to Section906 of Sarbanes-Oxley Act of 2002, 48
          U.S.C. Section 1350.

*   incorporated by reference to the Registration Statement of the Company on
    Form S-4 filed on February 11, 2000, as amended
**  incorporated by reference to the Current Report of the Company on Form 8-K
    filed on February 14, 2002
*** incorporated by reference to the Current Report of the Company on Form 8-K
    filed on May 14, 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed on behalf of the Registrant during
the quarter ended June 30, 2002:


(i) Press release announcing that the Companies had entered into a Revolving
        Credit Facility with Hypo-Und Vereinsbank, AG.

Item reported:

Dated filed: April 14, 2002

(ii) Press release announcing that the Companies had retained Lazard Freres &
        Co. as a strategic advisor.

Item reported: 5

Date filed: April 23, 2002

(iii) Press release announcing the date of the Annual Meeting of Stockholders of
        the Company.

Item reported: 5

Date filed: May 9, 2002

(iv) Press release announcing a change in the date of the Annual Meeting of
        Stockholders of the Company.

Item reported: 5

Date filed: June 5, 2002

                                       27

<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 III, Inc.
                                      (Registrant)


Dated:  August 19, 2002               By: /s/ Michael L. Ashner
                                          _____________________
                                          Michael L. Ashner
                                          Chief Executive Officer



                                       28
<PAGE>

                                 EXHIBIT INDEX

Number                             Description
------                             -----------

(3.1)     Amended and Restated Certificate of Incorporation of the Company*
(3.2)     Amended and Restated Bylaws of the Corporation*
(4.1)     Amended and Restated Agreement of Limited Partnership of the operating
          partnership*
(4.2)     Shareholder Rights Agreement*
(4.3)     Amendment to Shareholder Rights Agreement**
(4.4)     Certificate of Designations, Preferences and Rights of Series A
          Preferred Stock*
(4.5)     Stockholder Agreement, among the Companies and HX Investors, LP and
          Exeter Capital Corporation, dated as of April 30, 2002***
(10.1)    Revolving Credit Agreement, dated as of April 30, 2002, among the
          operating partnerships of the Companies, such operating partnerships'
          wholly-owned subsidiaries, the lenders from time to time party thereto
          and Bayerische Hypo-Und Vereinsbank AG, New York branch, as agent for
          itself and the other lenders. ***
(10.2)    Promissory note, dated April 30, 2002, issued by the operating
          partnerships of the Companies and such operating partnerships'
          wholly-owned subsidiaries in favor of each lender in the aggregate
          principal amount of $75,000,000. ***
(10.3)    Cash Management Agreement, dated as of April 30, 2002, among the
          operating partnerships of the Companies, such operating partnerships'
          wholly-owned subsidiaries, the agent and Deposit Bank (as defined
          therein), as the same may be amended, restated, replaced, supplemented
          or otherwise modified from time to time. ***
(10.4)    Contribution and Cross-Indemnification Agreement, dated as of April
          30, 2002, among the operating partnerships of the Companies and such
          operating partnerships' wholly-owned subsidiaries. ***
(10.5)    Pledge and Security Agreement, dated as of April 30, 2002, by the
          operating partnerships of the Companies and such operating
          partnerships' wholly-owned subsidiaries in favor of the lenders. ***
(10.6)    Form of Mortgage, dated as of April 30, 2002, issued by Shelbourne
          Properties II, Inc. to Bayerische Hypo- Und Vereinsbank AG, New York
          Branch, as agent for itself and other lenders, with respect to its
          real property located in Las Vegas, Nevada and Livonia, Michigan. ***
(99.1)    Partnership Unit Designation of the Class A Preferred Partnership
          Units of the Operating Partnership **
(99.2)    Certification pursuant to Section906 of Sarbanes-Oxley Act of 2002, 48
          U.S.C. Section 1350.

*   incorporated by reference to the Registration Statement of the Company on
    Form S-4 filed on February 11, 2000, as amended
**  incorporated by reference to the Current Report of the Company on Form 8-K
    filed on February 14, 2002
*** incorporated by reference to the Current Report of the Company on Form 8-K
    filed on May 14, 2002.

                                       29