<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 MARCH 31, 2001

                         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.)


               5 Cambridge Center, 9th Floor, Cambridge, MA 02142
                    (Address of principal executive offices)

                                 (617) 234-3000
              (Registrant's telephone number, including area code)

                                      None
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

         Yes     X                                        No
               -----                                           -----

As of May 14, 2001, there were 1,173,998 shares of common stock outstanding.

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

<PAGE>


                        SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q - MARCH 31, 2001


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

                                      INDEX


<TABLE>
<CAPTION>
Part I.  Financial Information:                                                                        Page
                                                                                                       ----

Item 1.  Financial Statements

<S>                                                                                                    <C>
     Balance Sheets - March 31, 2001 and December 31, 2000.......................................        3

     Statements of Operations - Three Months Ended March 31, 2001 and 2000.......................        4

     Statement of Partners' Equity - Three Months Ended March 31, 2001...........................        5

     Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000.......................        6

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..............................       16


Part II. Other Information:

Item 4.       Submission of Matters to a Vote of Securityholders.................................       17

Item 6.       Exhibits and Reports on Form 8-K...................................................       17

Signatures.......................................................................................       18
</TABLE>






                                       2

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q - MARCH 31, 2001



                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                   MARCH 31, 2001         DECEMBER 31, 2000
                                                   --------------         -----------------
ASSETS

<S>                                                 <C>                       <C>
Real estate - net                                    $ 44,349,637              $ 44,633,773
Cash and cash equivalents                              10,684,668                10,222,394
Other assets                                            1,844,994                 1,610,180
Receivables - net                                         305,151                    83,415
                                                     ------------              ------------

                                                     $ 57,184,450              $ 56,549,762
                                                     ============              ============





LIABILITIES AND PARTNERS' EQUITY

Accounts payable and accrued expenses                $    932,755              $    821,472
Due to affiliates                                         265,169                   335,041
                                                     ------------              ------------

                                                        1,197,924                 1,156,513
                                                     ------------              ------------

Commitments and contingencies

PARTNERS' EQUITY:

Limited partners' equity (371,766 units
   issued and outstanding)                             53,187,181                52,623,568
General partners' equity                                2,799,345                 2,769,681
                                                     ------------              ------------

                                                       55,986,526                55,393,249
                                                     ------------              ------------

                                                     $ 57,184,450              $ 56,549,762
                                                     ============              ============
</TABLE>



                       See notes to financial statements.



                                       3

<PAGE>

                        SHELBOURNE PROPERTIES III, INC.

                          FORM 10-Q - MARCH 31, 2001



                           STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                   FOR THE THREE MONTHS ENDED
                                                                            MARCH 31,
                                                                 ------------------------------
                                                                    2001                2000
                                                                    ----                ----

<S>                                                             <C>                 <C>
Rental Revenue                                                   $2,050,012          $2,055,166
                                                                 ----------          ----------

Costs and Expenses:

     Operating expenses                                             446,814             461,616
     Depreciation and amortization                                  408,231             387,513
     Partnership asset management fee                               215,360             167,420
     Administrative expenses                                        483,941             255,106
     Property management fee                                         54,200              61,989
                                                                 ----------          ----------

                                                                  1,608,546           1,333,644
                                                                 ----------          ----------

Income before interest and other income                             441,466             721,522

     Interest income                                                142,111              77,152
     Other income                                                     9,700                  --
                                                                 ----------          ----------

Net income                                                       $  593,277          $  798,674
                                                                 ==========          ==========


Net income attributable to:

     Limited partners                                            $  563,613          $  758,740
     General partners                                                29,664              39,934
                                                                 ----------          ----------

Net income                                                       $  593,277          $  798,674
                                                                 ==========          ==========

Net income per unit of limited partnership
     interest (371,766 units outstanding)                          $   1.52            $   2.04
                                                                   ========            ========

Net income per share of common stock of Shelbourne
     (1,173,998 shares outstanding)                                 $  0.51             $  0.68
                                                                    =======             =======
</TABLE>


                       See notes to financial statements.



                                       4

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q - MARCH 31, 2001



                          STATEMENT OF PARTNERS' EQUITY


<TABLE>
<CAPTION>
                                         GENERAL      LIMITED
                                        PARTNERS'     PARTNERS'
                                         EQUITY        EQUITY          TOTAL
                                        ---------     ---------        -----
<S>                                  <C>            <C>            <C>
Balance, January 1, 2001              $ 2,769,681    $52,623,568    $55,393,249

Net income for the three months
   ended March 31, 2001                    29,664        563,613        593,277
                                      -----------    -----------    -----------

Balance, March 31, 2001               $ 2,799,345    $53,187,181    $56,986,526
                                      ===========    ===========    ===========
</TABLE>









                       See notes to financial statements.




                                       5


<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q - MARCH 31, 2001



                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                FOR THE THREE MONTHS ENDED
                                                                          MARCH 31,
                                                            ---------------------------------
                                                                 2001                2000
                                                                 ----                ----

<S>                                                        <C>                    <C>
Cash Flows From Operating Activities:

     Net income                                             $   593,277            $ 798,674
     Adjustments to reconcile net income
     to net cash provided by operating activities:
         Depreciation and amortization                          408,231              387,513
         Straight line adjustment for stepped
           lease rentals                                          8,170              (10,524)
     Changes in assets and liabilities:
         Accounts payable and accrued expenses                  111,283             (107,872)
         Receivables                                           (221,736)              (2,618)
         Due to affiliates                                      (69,872)            (227,027)
         Other assets                                          (289,547)            (187,022)
                                                            -----------           ----------

     Net cash provided by operating activities                  539,806              651,124
                                                            -----------           ----------

Cash Flows From Investing Activities:

     Improvements to real estate                                (77,532)              (9,798)
                                                            -----------           ----------

Increase in Cash and Cash Equivalents                           462,274              641,326

Cash and Cash Equivalents, Beginning of Year                 10,222,394            6,433,530
                                                            -----------           ----------

Cash and Cash Equivalents, End of Quarter                   $10,684,668           $7,074,856
                                                            ===========           ==========
</TABLE>






                       See notes to financial statements.



                                       6

<PAGE>


                        SHELBOURNE PROPERTIES III, INC.

                          FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


1. GENERAL

   The accompanying financial statements, notes and discussions should be read
   in conjunction with the financial statements, related notes and discussions
   contained in the Annual Report on Form l0-K of High Equity Partners, L.P. -
   Series 88 (the "Partnership") for the year ended December 3l, 2000.

   The financial information contained herein is unaudited; however, in the
   opinion of management, all adjustments (consisting only of normal recurring
   adjustments) necessary for a fair presentation of such financial information
   have been included. Results of operations for the three months ended March
   31, 2001 are not necessarily indicative of the results to be expected for the
   entire year.

   Except as otherwise indicated herein, the statements set forth in these Notes
   to Financial Statements speak as to the period from January 1, 2001 through
   March 31, 2001 and do not give effect to the merger of the Partnership into
   Shelbourne Properties III, LP. See Note 7.

2. SIGNIFICANT ACCOUNTING POLICIES

   Investment in Joint Ventures

   Certain properties were purchased in joint venture ownership with affiliated
   partnerships that had the same, or affiliated, general partners as the
   Partnership. The Partnership owned as undivided interest and was severally
   liable for indebtedness it incurred in connection with its ownership interest
   in those properties. Therefore, the Partnership's financial statements
   present the assets, liabilities, revenues, and expenses of the joint venture
   on a pro rata basis in accordance with the Partnership's percentage of
   ownership.

   Real Estate

   Real Estate is carried at cost, net of adjustments for impairment. Repairs
   and maintenance are charged to expense as incurred. Replacement and
   betterments are capitalized. The Partnership evaluated the recoverability of
   the net carrying value of its real estate and related assets at least
   annually, and more often if circumstances dictated. If this review indicated
   that the carrying value of a property may not be recoverable, the Partnership
   estimated the future 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 took 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 cash flows, undiscounted, was less than the
   carrying amount of the property, the Partnership recognized an impairment
   loss, and reduced the carrying amount of the property to its estimated fair
   value. Fair value is the amount at which the property could be bought or sold
   in a current transaction between willing parties, that is, other than in a
   forced or liquidation sale. Management estimated fair value using discounted
   cash flows or market comparables, as most appropriate for each property.
   Independent certified appraisers were utilized to assist management, when
   warranted.


                                       7

<PAGE>


                        SHELBOURNE PROPERTIES III, INC.

                          FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   Real Estate (continued)

   Impairment write-downs recorded by the Partnership did not affect the tax
   basis of the assets and were not included in the determination of taxable
   income or loss.

   Because the expected cash flows used to evaluate the recoverability of the
   property and their fair values were based upon projections of future economic
   events, such as property occupancy rates, rental rates, operating cost
   inflation and market capitalization rates, the amounts ultimately realized at
   disposition may differ materially from the net carrying values at the balance
   sheet dates. The cash flows and market comparables used in this process were
   based on good faith estimates and assumptions developed by management.
   Unanticipated events and circumstances may occur and some assumptions may not
   materialize; therefore, actual results may vary materially from the
   estimates. Shelbourne Properties III, Inc., the Partnership's successor in
   interest (see Note 7), may in the future provide additional write-downs,
   which could be material, if real estate markets or local economic conditions
   change.

   Recently Issued Accounting Pronouncements

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


3. RELATED PARTY TRANSACTIONS

   The Managing General Partner of the Partnership, Resources High Equity, Inc.,
   is a wholly owned subsidiary of Presidio Capital Corp. ("Presidio"). Presidio
   AGP Corp., a wholly owned subsidiary of Presidio, is the Associate General
   Partner (together with the Managing General Partner, the "General Partners").
   Affiliates of the General Partners are also engaged in businesses related to
   the acquisition and operation of real estate. Presidio is also the parent of
   other corporations (and affiliated with other entities) that are or may in
   the future be engaged in businesses that may be in competition with
   Shelbourne Properties III, Inc. Accordingly, conflicts of interest may arise
   between Shelbourne Properties III, Inc. and such other businesses. Subject to
   the right of the limited partners under the Limited Partnership Agreement,
   Presidio controlled the Partnership through its indirect ownership of the
   General Partners. NorthStar Capital Investment Corp., a Maryland corporation,
   indirectly controls Presidio.


                                       8

<PAGE>



                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


3. RELATED PARTY TRANSACTIONS (CONTINUED)

   From August 28, 1997 to October 21, 1999, Presidio was party to a management
   agreement with NorthStar Presidio Management Company LLC ("NorthStar
   Presidio"), an affiliate of NorthStar Capital Investment Corp., pursuant to
   which NorthStar Presidio provided the day-to-day management of Presidio and
   its direct and indirect subsidiaries and affiliates, including the
   Partnership. Effective October 21, 1999, Presidio entered into a Services
   Agreement with AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was
   retained to provide Asset Management and Investor Relation Services to the
   Partnership and other entities affiliated with the Partnership.

   As a result of this agreement, the Agent had the duty to direct the day to
   day affairs of the Partnership, including, without limitation, reviewing and
   analyzing potential sale, financing or restructuring proposals regarding the
   Partnership's assets, preparation of all reports, maintaining records and
   maintaining bank accounts of the Partnership. The Agent was not permitted,
   however, without the consent of Presidio, or as otherwise required under the
   terms of the Limited Partnership Agreement to, among other things, cause the
   Partnership to sell or acquire an asset or file for bankruptcy protection.

   In order to facilitate the Agent's provision of the asset management services
   and the investor relation services, effective October 25, 1999, the officers
   and directors of the General Partners resigned and nominees of the Agent were
   elected as the officers and directors of the General Partners. The Agent is
   an affiliate of Winthrop Financial Associates, a Boston based company that
   provides asset management services, investor relation services and property
   management services to over 150 limited partnerships which own commercial
   property and other assets. The General Partners do not believe this
   transaction had a material effect on the operations of Partnership.

   Effective October 2000, Kestrel Management L.P. ("Kestrel"), an affiliate of
   the Agent, began performing all property management services directly for the
   Partnership. For the quarter ended March 31, 2001, Kestrel earned $54,200.

   Prior to October 2000, the Partnership had a property management services
   agreement with Resources Supervisory Management Corp. ("Resources
   Supervisory"), an affiliate of the Managing General Partner, to perform
   certain functions relating to the management of the properties of the
   Partnership. Portions of the property management fees were paid to
   unaffiliated management companies that performed certain management functions
   for certain properties.

   For the quarter ended March 31, 2000, Resources Supervisory was entitled to
   receive $61,989 of which $58,206 was paid to unaffiliated management
   companies for property management services with the balance being retained by
   Resources Supervisory.

   For the administration of the Partnership, the Managing General Partner was
   entitled to receive reimbursement of expenses of a maximum of $200,000 per
   year. For each of the quarters ended March 31, 2001 and 2000, the Managing
   General Partner received $50,000.


                                       9

<PAGE>



                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS

3. RELATED PARTY TRANSACTIONS (CONTINUED)

   For managing the affairs of the Partnership, the Managing General Partner was
   entitled to receive an annual partnership asset management fee. The
   partnership management fee was 1.25% of the Gross Asset Value of the
   Partnership (as defined). For each of the quarters ended March 31, 2001 and
   2000 the Managing General Partner earned $215,360 and $167,420, respectively.

   The General Partners were allocated 5% of the net income of the Partnership,
   which amounted to $29,664 and $39,934 for the quarters ended March 31, 2001
   and 2000, respectively.

   Pursuant to the settlement of a class action lawsuit (see Note 7), an
   affiliate of the General Partners, Millennium Funding IV, LLC, a subsidiary
   of Presidio, completed a tender offer in January 2000 purchasing
   approximately 6.7% or 25,034 units for $113.15 per unit or $2,832,597. As a
   result of these purchases as well as the other purchases of units by
   affiliates of the General Partners, affiliates of the General Partners owned
   as of March 31, 2001 108,765 units representing approximately 29.26% of the
   total outstanding units.


4. REAL ESTATE

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

   <TABLE>
   <CAPTION>
                                          MARCH 31, 2001       DECEMBER 31, 2000
                                          --------------       -----------------
   <S>                                    <C>                    <C>
   Land                                    $ 8,040,238            $ 8,040,238
   Buildings and improvements               54,062,701             53,985,169
                                           -----------            -----------


                                            62,102,939             62,025,407
   Less: Accumulated depreciation          (17,753,302)           (17,391,634)
                                           -----------            -----------

                                           $44,349,637            $44,633,773
                                           ===========            ===========
   </TABLE>



                                       10

<PAGE>



                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


   5. DUE TO AFFILIATES

                                            MARCH 31, 2001    DECEMBER 31, 2000
                                            --------------    -----------------

   Partnership asset management fee           $  215,169          $  285,041
   Non-accountable expense reimbursement          50,000              50,000
                                              ----------          ----------

                                              $  265,169          $  335,041
                                              ==========          ==========


   Such amounts were paid in the subsequent quarters.

6. FEDERAL INCOME TAX CONSIDERATIONS

   Federal income taxes are not provided because the taxable income or loss of
   the Partnership is required to be reported by the individual partners on
   their respective tax returns. As of April 17, 2001, the Partnership was
   converted into a corporation that will elect to be taxed as a real estate
   investment trust (REIT) under the provisions of the Internal Revenue Code.
   See Note 7. As a result, the shareholders of the REIT will be required to
   include their proportionate share of any distribution of taxable income on
   their returns. REITs are required to distribute at least 90% of their
   ordinary taxable income to shareholders and meet certain income, asset and
   shareholder ownership requirements.

7. SETTLEMENT OF LAWSUIT

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

   As amended, the Partnership Agreement (a) provided for a Partnership Asset
   Management Fee equal to 1.25% of the Gross Asset Value of the Partnership (as
   defined) and (b) fixed the amount that the General Partners would be liable
   to pay to limited partners upon liquidation of the Partnership as repayment
   of fees previously received (the "Fee Give-Back Amount"). As of March 31,
   2001, the Fee Give-Back Amount was $3.07 per Unit, subject to reduction by
   approximately $.40 per Unit for each full calendar year after 2000 in which
   liquidation did not occur. As amended, the Partnership Agreement provided
   that, upon a reorganization of the Partnership into a REIT or other public
   entity, the General Partners would have no further liability to pay the Fee
   Give-Back Amount. In accordance with the terms of the settlement, Presidio
   Capital Corp., an affiliate of the General Partners, guaranteed payment of
   the Fee Give-Back Amount. As a result of the conversion of the Partnership
   into a REIT on April 17, 2001, as described below, the General Partners
   liability to pay the Fee Give-Back Amount has been extinguished.



                                       11

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


7. SETTLEMENT OF LAWSUIT(CONTINUED)

   As required by the settlement, an affiliate of the General Partners,
   Millennium Funding IV LLC, made a tender offer to limited partners to acquire
   up to 25,034 Units (representing approximately 6.7% of the outstanding Units)
   at a price of $113.15 per Unit. The offer closed in January 2000 and all
   25,034 Units were acquired in the offer.

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

   The consent of limited partners was sought to approve the conversion of the
   Partnership into a publicly traded REIT called Shelbourne Properties III,
   Inc. ("Shelbourne"). The consent solicitation expired 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 Partnership
   into a newly formed limited partnership called Shelbourne Properties III LP
   ("Shelbourne Properties"). Pursuant to the merger, each limited partner of
   the Partnership received three shares of stock of Shelbourne for each unit
   they owned and the General Partners received an aggregate of 58,701 shares of
   stock in Shelbourne in exchange for their general partner interests in the
   Partnership. The common stock of Shelbourne is listed on the American Stock
   Exchange under the symbol HXF.

   Shelbourne Properties will function as the operating partnership through
   which Shelbourne will conduct all of its business. Shelbourne is a limited
   partner of Shelbourne Properties and a wholly owned subsidiary of Shelbourne
   is the general partner of Shelbourne Properties.

   Shelbourne's primary business objective is to maximize the value of its
   common stock. Shelbourne will seek to achieve this objective by making
   capital improvements to and/or selling properties and by making additional
   real estate-related investments. Shelbourne may raise additional capital by
   mortgaging existing properties and/or by selling equity or debt securities,
   including limited partnership interests in Shelbourne Properties.

   Shelbourne has a Board of Directors consisting of nine directors, three of
   whom are independent directors. Shelbourne Management LLC ("Shelbourne
   Management"), an affiliate of the General Partner, will manage the day-to-day
   affairs of Shelbourne under an advisory agreement which has a 10 year term.
   Shelbourne Management will receive (1) an annual asset management fee,
   payable quarterly, equal to 1.25% of the gross asset value of Shelbourne as
   of the last day of each year, (2) property management fees of up to 6% of
   property revenues, (3) $200,000 for non-accountable expenses and (4)
   reimbursement of expenses incurred in connection with the performance of its
   services. Gross asset value is the gross asset value of all assets owned by
   Shelbourne Properties III, LP based on the latest appraisal of real estate
   assets


                                       12


<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


                          NOTES TO FINANCIAL STATEMENTS


7. SETTLEMENT OF LAWSUIT(CONTINUED)

   by an independent appraiser of national reputation selected by the advisor
   and the amount of other assets as reflected on the balance sheet. Since the
   asset management fee is based on gross assets, the amount payable to
   Shelbourne Management will increase to the extent Shelbourne acquires new
   investments, whether for cash, by causing Shelbourne to incur indebtedness or
   otherwise. Shelbourne Management has retained Kestrel to perform property
   management services for Shelbourne.












                                       13


<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001


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

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Statements contained herein may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
section 21E of the Securities Exchange Act of 1934, as amended. Any statements
contained herein which are not statements of historical facts and that address
activities, events or developments that Shelbourne Properties 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 April 17, 2001 the Partnership was merged with and into Shelbourne Properties
III, LP, a limited partnership owned, directly and indirectly, by Shelbourne
Properties III, Inc. Shelbourne Properties III, LP and Shelbourne Properties
III, Inc. are collectively referred to as "Shelbourne". Set below is a
discussion and analysis of the financial condition of the Partnership and
Shelbourne and the historical operations of the Partnership.

LIQUIDITY AND CAPITAL RESOURCES

The Partnership used its working capital reserves and any cash from operations
as its primary source of liquidity. Upon the effectiveness of the Partnership's
merger with Shelbourne, the Partnership's cash became an asset of, and potential
source of liquidity for, Shelbourne. In addition to cash, Shelbourne has as
potential sources of liquidity, capital raised by either borrowing money on a
long-term or short-term basis, or issuing additional equity securities. Due to
the restrictions on debt incurrence in the Partnership and the resulting lack of
mortgage debt on the properties, it is anticipated that Shelbourne will have
significantly enhanced capital resources as compared to the Partnership.
Shelbourne's use of these sources of capital will likely result in the
encumbrance of its current and future assets with substantial amounts of
indebtedness. As a result, Shelbourne may have an increased risk of default on
its obligations and thus a decrease in its long-term liquidity.

The Partnership had $10,684,668 in cash and cash equivalents at March 31, 2001.
Cash and cash equivalents are temporarily invested in short-term instruments.
The Partnership's level of liquidity based upon cash and cash equivalents
increased by $462,274 for the three months ended March 31, 2001 as compared to
December 31, 2000. The increase is due to $539,806 of cash provided by operating
activities that was partially offset by $77,532 of cash used in investing
activities for capital expenditures. The Partnership's primary source, and
Shelbourne's initial primary source of funds, is cash flow from the


                                       14

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
        RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

operation of its properties, principally rents received from tenants, which
amounted to $2,050,012 for the three months ended March 31, 2001. Unlike the
Partnership, because Shelbourne may acquire additional assets, its cash flow
from operations may be derived from a larger, more diverse, and potentially
riskier group of assets than the Partnership. Likewise, Shelbourne's ability to
pay dividends may be affected by the trading value of its stock, the planned
leveraging of its assets and reinvestment of sale and financing proceeds for the
acquisition of additional assets.


For the three months ended March 31, 2001, the Partnership made $77,532 in
capital expenditures which were funded from cash flow and the Partnership's
working capital reserves. In addition to tenant improvements at the properties,
capital expenditures consisted of signage improvements at Sunrise Market Place.

The budgeted expenditures for capital improvements and capitalized tenant
procurement costs in 2001 aggregate $1,922,000. These costs are anticipated to
be incurred in the normal course of business and funded from cash flow from the
operation of the properties and working capital reserves which are temporarily
invested in short-term money market instruments, as well as other sources of
capital including financing proceeds and the issuance of additional equity.
However, the actual amount of such expenditures depends upon the level of
leasing activity and other factors which cannot be predicted with certainty.
Because it is expected that Shelbourne will have significant mortgage
indebtedness and a substantially larger pool of real estate assets, the risk
that it may be unable to fund the necessary capital and tenant procurement costs
at its properties will likely be increased

Budgeted expenditures for 2001 include amounts allocated to fund potential
tenant improvements and leasing commissions for the SuperValu building in
Toledo, Ohio and Melrose Crossing II in Melrose Park, Illinois. Those
properties, which are currently vacant, are being marketed to a variety of
potential tenants. There is no assurance that Shelbourne will be successful in
finding tenants for the properties.

The Supervalu Stores property located in Toledo, Ohio, which is held in a joint
venture, is under contract for sale with an unaffiliated third party for a
purchase price of $3,600,000. The sale, which is subject to the purchaser's
completion of its due diligence review, is anticipated to close, if at all,
during the fourth quarter of 2001.

Except as discussed herein, management is not aware of any other trends, events,
commitments or uncertainties that will have a significant impact on Shelbourne'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, Shelbourne 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.


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<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
        RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS

The Partnership experienced a decrease in net income of $205,397 or 25.7% for
the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000. The decrease is due to an increase in costs and expenses and a
slight decrease in rental revenue which more than offset increases in interest
income and other income.

Rental revenues for the three months ended March 31, 2001 decreased to
$2,050,012 or .25% from $2,055,166 for the same period in 2000. Rental revenues
decreased due to a tenant default at the premises at the Supervalu building at
5501 Airport Highway in Toledo, Ohio which was significantly offset by increased
income from common area maintenance and real estate tax recoveries.

Costs and expenses increased by $274,902 or 20.6% for the three months ended
March 31, 2001 as compared to 2000, primarily due to increases in administrative
expenses ($228,835), depreciation and amortization ($20,718) and partnership
asset management fees ($47,940). These increases were partially offset by
decreases in operating expenses ($14,802) and property management fees ($7,789).

Administrative expenses increased due to increased expenses associated with the
conversion of the Partnership into a real estate investment trust. Partnership
asset management fees also increased for the first quarter of 2001 as compared
to the first quarter of 2000 as appraisals were conducted for each property
during the second quarter of 2000, which significantly increased the Gross Asset
Value of the portfolio owned by the Partnership. See "Item 1 Financial
Statements Note 3". Depreciation and amortization has increased due to
additional tenant improvements and procurements costs at the Tri-Columbus
properties. Operating expenses decreased due to a real estate tax abatement at
Melrose Crossing II that was partially offset by the additional expenses
incurred due to the tenant's default at the Supervalu building in Toledo, Ohio.
The vacancy at this building is also the primary reason for the decrease in
management fees.

Interest income increased due to higher cash balances during the three months
ended March 31, 2001 as compared to the same period in 2000. Other income
increased during the three months ended March 31, 2001 as compared to 2000 due
to an increase in transfer servicing fees in 2001.

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


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<PAGE>




                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001



PART II.  OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Securityholders

Commencing February 15, 2001, consents of the limited partners of the
Partnership were solicited to the conversion of the Partnership into a
publicly-traded real estate investment trust. The consent solicitation period
ended on April 16, 2001. Holders of 219,865 units (59.14% of the outstanding
units) voted in favor of the conversion, holders of 17,028 units (4.58% of the
outstanding units) voted against the conversion and holders of 2,790 units (.75%
of the outstanding units) abstained. The conversion was consummated on April 17,
2001 and each outstanding limited partnership unit in the Partnership has been
converted into three shares of common stock of Shelbourne Properties III, Inc.

Item 6 - Exhibits and Reports on Form 8-K

(a)      Exhibits:

         None

(b)      Reports on Form 8-K

No report on Form 8-K was filed during this period.






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<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                           FORM 10-Q -- MARCH 31, 2001



                                   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.

Dated:   May 14, 2001                     By:  /s/  Michael L. Ashner
                                               ---------------------------
                                                  Michael L. Ashner
                                                  President and Director
                                                  (Principal Executive Officer)


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




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