<PAGE>



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

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


                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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, MA 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 November 13, 2002, there were 788,772 shares of common stock outstanding.

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

                                       1

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         FORM 10-Q - SEPTEMBER 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

<TABLE>
<CAPTION>

Part I.  Financial Information:                                                                        Page
                                                                                                       ----
<S>                                                                                                    <C>
Item 1.  Condensed Consolidated Financial Statements

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

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

     Condensed Consolidated Statement of' Equity -
          Nine Months Ended September 30, 2002...................................................        5

     Condensed Consolidated Statements of Cash Flows -
          Nine Months Ended September 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.....................................................       17

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..............................       28

Item 4.  Controls and Procedures.................................................................       28

Part II. Other Information:

Item 1.       Legal Proceedings..................................................................       29

Item 6.       Exhibits and Reports on Form 8-K...................................................       30

Signatures.......................................................................................       33

Certifications  .................................................................................       34

Exhibit Index   .................................................................................       38
</TABLE>



                                       2
<PAGE>


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

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (SEE NOTE 1 - BASIS OF PRESENTATION)

<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
       ASSETS                                                              September 30, 2002         December 31, 2001
                                                                          ---------------------      ---------------------
<S>                                                                               <C>                        <C>
       Real estate, net                                                           $ 15,169,781               $ 40,493,332
       Real estate held for sale                                                     1,950,724                  2,961,146
       Cash and cash equivalents                                                     4,025,899                 11,122,456
       Other assets                                                                  8,306,477                  1,921,600
       Receivables, net                                                                 13,919                     42,928
       Investment in joint ventures                                                 19,032,253                          -
                                                                          ---------------------      ---------------------

       TOTAL ASSETS                                                               $ 48,499,053               $ 56,541,462
                                                                          =====================      =====================

       LIABILITIES AND EQUITY

       Accounts payable and accrued expenses                                      $    542,902               $    816,904
       Note payable                                                                 19,718,457                          -
                                                                          ---------------------      ---------------------

       Total Liabilities                                                            20,261,359                    816,904
                                                                          ---------------------      ---------------------

       COMMITMENTS AND CONTINGENCIES

       CLASS B PARTNERSHIP INTERESTS                                                         -                          -
                                                                          ---------------------      ---------------------

       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                                                           (16,699,455)                  (370,750)
                                                                          ---------------------      ---------------------

       Total Equity                                                                 27,565,516                 55,724,558
                                                                          ---------------------      ---------------------

       TOTAL LIABILITIES AND EQUITY                                               $ 48,499,053               $ 56,541,462
                                                                          =====================      =====================
</TABLE>


           See notes to condensed consolidated financial statements.



                                       3
<PAGE>


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

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (SEE NOTE 1 - BASIS OF PRESENTATION)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                          FOR THE THREE MONTHS ENDED                FOR THE NINE MONTHS ENDED
                                                      September 30,        September 30,         September 30,      September 30,
                                                           2002                 2001                  2002               2001
                                                       ----------          -------------          ------------      -------------
<S>                                                     <C>                 <C>                   <C>                <C>
Rental revenues                                         $ 887,383           $ 2,049,343           $ 2,714,274        $ 5,936,477
                                                       ----------          -------------          ------------      -------------

Costs and Expenses:
       Operating expenses                                 231,196               510,737               680,645          1,315,541
       Depreciation and amortization                      287,030               408,923               645,302          1,204,715
       Asset management fee                                     -               217,938               105,863            650,103
       Transition management fee                           83,300                     -               208,250                  -
       Purchase of advisory agreements                          -                     -            15,262,114                  -
       Administrative expenses                            640,434                97,839             3,486,275            834,393
       Property management fee                             32,806                61,063                80,997            171,427
                                                       ----------          -------------          ------------      -------------
                                                        1,274,766             1,296,500            20,469,446          4,176,179
                                                       ----------          -------------          ------------      -------------

(Loss) income before equity income from joint
       ventures, interest and other income               (387,383)              752,843           (17,755,172)         1,760,298

       Equity income from joint ventures                  712,799                     -             2,117,941                  -
       Interest expense                                  (210,288)                    -              (493,115)                 -
       Interest income                                     17,002                86,570                45,381            339,395
       Other income                                             -                 5,200                     -             47,934
                                                       ----------          -------------          ------------      -------------

Net income (loss) from continuing operations              132,130               844,613           (16,084,965)         2,147,627
Net loss from discontinued operations                     (72,186)              (54,275)             (222,454)          (188,108)
                                                       ----------          -------------          ------------      -------------
Net income (loss)                                          59,944               790,338           (16,307,419)         1,959,519
Preferred dividends                                        (8,589)                    -               (21,286)                 -
                                                       ----------          -------------          ------------      -------------
Net income (loss) available for common shares            $ 51,355             $ 790,338          $(16,328,705)       $ 1,959,519
                                                       ==========          =============          ============      =============
EARNINGS PER SHARE - BASIC AND DILUTED
Net income (loss) from continuing operations               $ 0.16                $ 0.72              $ (18.90)            $ 1.83
Net loss from discontinued operations                       (0.09)                (0.05)                (0.26)             (0.16)
                                                       ----------          -------------          ------------      -------------
Earnings (loss) per share                                  $ 0.07                $ 0.67              $ (19.16)            $ 1.67
                                                       ==========          =============          ============      =============
Weighted average common shares                            788,772             1,173,998               852,271          1,173,998
                                                       ==========          =============          ============      =============
</TABLE>







           See notes to condensed consolidated financial statements.


                                       4
<PAGE>



                         SHELBOURNE PROPERTIES III, INC.
                         FORM 10-Q - SEPTEMBER 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                             -                  -                    -            (21,286)           (21,286)

Net loss                                        -                  -                    -        (16,307,419)       (16,307,419)
                                     -------------  -----------------  -------------------  -----------------  -----------------

Balance, September 30, 2002              $ 11,739       $ 56,083,569        $ (11,830,337)      $(16,699,455)      $ 27,565,516
                                     =============  =================  ===================  =================  =================
</TABLE>


















           See notes to condensed consolidated financial statements.


                                       5
<PAGE>


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

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        FOR THE NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                         2002                 2001
                                                                    --------------        ------------
<S>                                                                 <C>                   <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income                                                   $ (16,307,419)        $ 1,959,519
Adjustments to reconcile net (loss) income
    to net cash provided by operating activities:
         Depreciation and amortization                                    645,302           1,204,715
         Straight-line adjustment for stepped lease rentals                31,453             (79,478)
         Increase in bad debt reserve                                      40,000                   -
         Purchase of advisory agreement                                15,262,114                   -
         Equity income from joint venture                              (2,117,941)                  -
         Loss from discontinued operations                                222,454             188,108
Change in assets and liabilities:
       Accounts payable and accrued expenses                                8,382             (97,364)
       Receivables                                                        (29,394)            (89,651)
       Due to affiliates                                                        -            (335,041)
       Other assets                                                    10,785,673            (439,437)
                                                                    --------------        ------------

Net Cash Provided by Operating Activities                               8,540,624           2,311,371
                                                                    --------------        ------------

CASH FLOW FROM INVESTING ACTIVITIES -
       Discontinued operations                                           (150,654)           (121,943)
       Improvements to real estate                                       (501,744)           (202,462)
                                                                    --------------        ------------

Net Cash Used in Investing Activities                                    (652,398)           (324,405)
                                                                    --------------        ------------

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)                  -
                                                                    --------------        ------------

Increase in cash and cash equivalents                                   1,186,410           1,986,966
                                                                    --------------        ------------

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                           $   4,025,899        $ 12,209,360
                                                                    ==============        ============
Supplemental Disclosure of Cash Flow Information:
       Cash paid for interest                                       $     493,115                 $ -
                                                                    ==============        ============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       6
<PAGE>


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION

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
10-K Shelbourne Properties III, Inc. a Delaware corporation (the "Company"), for
the year ended December 31, 2001.

As a result of the Company's incurring debt, the Company is no longer allowed to
account for its investments in joint ventures on a pro-rata consolidation basis.
The Company must instead utilize the equity method of accounting. As required,
the Company's condensed consolidated statements of operations reflect the equity
method of accounting subsequent to January 1, 2002 and pro-rata consolidation
prior to that date. (See Note 2 - Investments in Joint Ventures).

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
nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the entire year.

As a result of the approval of the Plan of Liquidation (see Note 11 - Subsequent
Events), the Company will adopt liquidation accounting during the last quarter
of 2002.

2.       SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

Cash equivalents consist of short-term, highly liquid debt instruments with
maturities of three months or less at acquisition. Items classified as cash
equivalents include insured bank certificates of deposit and commercial paper.
At times, cash balances at a limited number of banks may exceed insurable
amounts. The Company believes it mitigates its risk by investing in or through
major financial institutions.

Accounts Receivable

Accounts Receivable are stated net of allowance for doubtful accounts of $68,745
and $35,245 as of September 30, 2002 and December 31, 2001, respectively.

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 9, the Company is no
longer able to account for its investments in joint


                                       7
<PAGE>
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 September 30, 2002 and the Company's condensed
consolidated statements of operations for the three months and nine months ended
September 30, 2002 reflect the equity method of accounting.

If the change to equity accounting had been reflected upon the December 31, 2001
condensed consolidated balance sheet, the change would have been to reduce 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.

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 conversion.

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.



                                       8
<PAGE>
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



Deferred Leasing and Loan Costs

Cost incurred in the execution of new tenant leases and renewals of existing
leases are amortized over the life of the lease using a straight-line method.
All un-amortized costs, due to early termination or eviction of existing tenant,
are expensed.

Costs incurred with obtaining debt are amortized over the life of the debt.

Treasury Stock

Treasury stock is stated at cost.

Amounts Per Share

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

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 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
Extinguishment 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.



                                       9
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is
effective prospectively for exit and disposal activities initiated after
December 31, 2002 with earlier adoption encouraged. The Company does not expect
that this statement will have a material 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 of the Company. Pursuant to the Transaction the
Company paid PCIC $11,830,337 in cash. Additionally, 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 July 1, 2002 to September 30,
2002, the Company paid PCIC $83,300 for transition services and for the period
from February 15, 2002 to September 30, 2002, the Company paid PCIC $208,250 for
transition services. As a result of the settlement of the lawsuit brought by HX
Investors L.P. (see note 9) this agreement was terminated effective September
30, 2002. Effective October 1, 2002, Kestrel Management L.P. ("Kestrel"), an
affiliate of the Companies, entered into an agreement with the Companies to
provide the services that PCIC had previously provided for a fee of $600,000 per
year, $50,000 per month, allocated equally among the Companies.

Prior to the Transaction, under the terms of the Advisory Agreements, Shelbourne
Management provided the Company with all management and advisory 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 entitled to receive
an asset management fee for the period of January 1, 2002 through February 14,
2002


                                       10
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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
September 30, 2001, Shelbourne Management received $50,000 for non-accountable
expenses and $217,938 for the asset management fee. For the nine months ended
September 30, 2001, the managing general partner received $59,444 and Shelbourne
Management received $90,556 for non-accountable expenses. For the nine months
ended September 30, 2001, the managing general partner received $393,791 and
Shelbourne Management received $256,312 for the asset management fee.

Since October 2000, Kestrel has performed all property management services
directly for the Predecessor Partnership and as of April 17, 2001, Kestrel has
performed all property management services directly for 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 September 30, 2002,
Kestrel earned $70,463 that consisted of $32,806 earned from wholly owned
properties and $37,657 earned from joint venture investment properties. For the
three months ended September 30, 2001, Kestrel earned $61,063 that consisted of
$25,497 from wholly owned properties and $35,566 earned from joint venture
investment properties. For the nine months ended September 30, 2002, Kestrel
earned $184,274 that consisted of $80,997 from wholly owned properties and
$103,277 from joint venture investment properties. For the nine months ended
September 30, 2001, Kestrel earned $171,427 that consisted of $73,450 from
wholly owned properties and $97,977 earned from joint venture investment
properties.

At September 30, 2002, $6,729,455 of receivables related 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 September
30, 2002:

                                       11
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                    SEPTEMBER 30, 2002           DECEMBER 31, 2001
                                                ---------------------------   ------------------------
                                                       (UNAUDITED)
<S>                                                            <C>                        <C>
Land                                               $             3,349,422      $           7,552,248
Buildings and improvements                                      19,273,830                 50,622,212
Less: Accumulated depreciation                                  (7,453,471)               (17,681,128)
                                                ---------------------------   ------------------------

Total Real Estate, net                             $            15,169,781      $          40,493,332
                                                ===========================   ========================

Real Estate held for Sale:
Land                                               $               638,088
Building and improvements, net                                   1,312,636
                                                ---------------------------

Total Real Estate held for Sale, net               $             1,950,724
                                                ===========================
</TABLE>


See Note 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, the same joint venture sold a supermarket in
Toledo, OH 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."

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

The Company has entered into a contract to sell Melrose Crossing II for a price
of $2,200,000. The purchase price, exclusive of closing cost, will be paid with
$400,000 in cash, and by delivery of a note for the balance of the purchase
price. The note will mature on the first anniversary of the sale date, shall
bear interest at 7% per annum and will be secured by the property. On October 2,
2002 a non-refundable deposit was received from the buyer in the amount of
$160,000. The sale date is tentatively scheduled for the first quarter of 2003.
Operations of Melrose Crossing II have been reclassified as discontinued
operations on the statement of operations. The property is classified on the
balance sheet as real estate held for sale at September 30, 2002.

5.  INVESTMENT IN JOINT VENTURES

The Company invests in three joint ventures, (568 Broadway, the Supervalue and
Tri-Columbus Associates) which are accounted for under the equity method. The
joint ventures' condensed consolidated statements of operations for the
investment in joint ventures for the three months and nine months ended
September 30, 2002, are as follows:


                                       12
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                      FOR THE THREE                   FOR THE NINE
                                                       MONTHS ENDED                   MONTHS ENDED
                                                    SEPTEMBER 30, 2002             SEPTEMBER 30, 2002
                                                ---------------------------    ---------------------------
<S>                                                 <C>                            <C>
Rental revenues                                     $            3,678,718         $           10,353,406
Costs and expenses                                               1,389,878                      4,644,429
                                                ---------------------------    ---------------------------
Income before interest and other income                          2,288,840                      5,708,977
Interest income                                                     16,571                         62,707
Gain on sale                                                             -                        462,712
                                                ---------------------------    ---------------------------

Equity income from joint ventures                   $            2,305,411         $            6,234,396
                                                ===========================    ===========================

Equity income from joint ventures for
    Shelbourne Properties III, Inc.                 $              712,799         $            2,117,941
                                                ===========================    ===========================
</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 the operating partnership. Pursuant to the merger, each limited
partner received three shares of stock in the 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


                                       13
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 1.5% for the
portion of the Note Payable secured by mortgages on certain real properties
(Conversion rate), (ii) LIBOR plus 2.5% for the portion of the Note Payable
secured by a pledge of partnership interests (LIBOR rate) or (iii) the greater
of (a) agent's prime rate or (b) the federal funds rate plus 1.5% (Base rate).
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. There has
been no fee paid to date. Interest is payable monthly in arrears. The interest
rate at September 30, 2002 was approximately 4.16%.

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 (Melrose Crossing II) 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. If properties are sold, the Companies
must pay a fixed release amount to the lender except in the case of core
properties, which have been defined as 568 Broadway, Century Park, Seattle Tower
and Southport, in which case the Companies must pay the lender the greater of
the net proceeds or the release amount. 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.       CLASS A 5% PREFERRED PARTNERSHP INTERESTS

In connection with the Transaction, the Company's operating partnership issued
to Shelbourne Management 672.178 Class A 5% Preferred Partnership Units (the
"Class A Units"). The Class A Units entitle the holder to a quarterly
distribution equal to 1.25% of the aggregate liquidation preference of the Class
A Units ($672,178). In addition, upon the liquidation of the operating
partnership, each Class A Unit is entitled to a liquidation preference of $1,000
per unit. The Class A Units are not convertible into common units of the
operating partnership or shares in the Company and the holders of the Class A
Units do not have voting rights except in limited circumstances. Although the
holders of the Class A Units do not have redemption rights, pursuant to the
terms of the Purchase and Contribution Agreement entered into in connection with
the Transaction, Shelbourne Management has the right to cause the operating
partnership to reacquire the Class A Units upon the occurrence of certain events
including, without limitation, if the aggregate assets of the Companies is below
approximately $75 million or the outstanding debt under which the Companies are
obligated is less than $55 million for a purchase price equal to the liquidation
preference plus an amount (the "Put Premium") which is presently equal to
$4,713,581 and


                                       14
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

declines each February 13, May 13, August 13 and November 13 until it reaches
zero on May 13, 2007. The Company is currently seeking alternative arrangements
or transactions in an effort to eliminate the Put Premium if the Company's
assets are less than $75 million, which will enable the Company to proceed with
its Plan of Liquidation.

In connection with the settlement of the lawsuit brought by HX Investors,
Shelbourne Management agreed to pay to HX Investors 42% of the amounts paid to
Shelbourne Management with respect to the Class A Units.


10.      SETTLEMENT AGREEMENT

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 settlements, the Company entered into a stock purchase agreement (the "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 then 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. HX
Investors agreed to vote all of its shares in favor of the Plan of Liquidation.
Under the Plan of Liquidation, HX Investors was to receive 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.

Subsequently, on July 29, 2002, Longacre Corp.("Longacre"), commenced a lawsuit
individually and derivatively against the Company, Shelbourne Properties II,
Inc., Shelbourne Properties III, Inc., their boards, HX Investors, and Exeter
seeking preliminary and permanent injunctive relief and monetary damages based
on purported violations of the securities laws and mismanagement related to the
tender offer by HX Investors, the Stock Purchase Agreement, and the plan of
liquidation. The suit was filed in federal court in New York, New York. On
August 1, 2002, the court denied Longacre's motion for a preliminary injunction,
and, on September 30, 2002, the court dismissed the lawsuit at the request of
Longacre.

Contemporaneous with filing its July 29, 2002 lawsuit, Longacre publicly
announced that its 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 $58.30. Over the course of the next several days,
Longacre and HX Investors submitted competing proposals to the board of
directors of the Company and made those proposals public. On August 4, 2002,
Longacre notified the Company that it was no longer interested in proceeding
with its proposed offer.

                                       15
<PAGE>
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

On August 5, 2002, the Company entered into an amendment to the 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.

On August 16, 2002, the HX Investors Offer expired, and HX Investors acquired
236,631 shares representing 30% of the outstanding shares.

On August 19, 2002, as contemplated by the Stock Purchase Agreement, the
existing Board of Directors and executive officer of the Company resigned, and
the Board was reconstituted to consist of six members, four of whom are
independent directors. In addition new executive officers were appointed.

Also on August 19, 2002, the Board of Directors of the Company authorized the
issuance by the operating partnership of the Company of Class B Units to HX
Investors which Class B Units provide distribution rights consistent with the
intent and financial terms of the incentive payment provided for in the Stock
Purchase Agreement described above and which distributions are payable only in
the event that the Plan of Liquidation was adopted. On August 19, 2002, the
operating partnership issued the Class B Units to HX Investors in full
satisfaction of the incentive fee payment otherwise required under the Plan of
Liquidation.


11.      SUBSEQUENT EVENTS

The Company has entered into a contract to sell Melrose Crossing II for a price
of $2,200,000. The purchase price, exclusive of closing cost, will be paid with
$400,000 in cash, and by delivery of a note for the balance of the purchase
price. The note will mature on the first anniversary of the sale date, shall
bear interest at 7% per annum and will be secured by the property. On October 2,
2002 a non-refundable deposit was received from the buyer in the amount of
$160,000. The sale date is tentatively scheduled for the first quarter of 2003.
Operations of Melrose Crossing II have been reclassified as discontinued
operations on the statements of operations. The property is classified on the
balance sheet as real estate held for sale at September 30, 2002.

On October 29, 2002, the Company held a special meeting of the Stockholders, at
which time the Plan of Liquidation was approved by a majority of the
shareholders.

On October 31, 2002, 568 Broadway Joint Venture, a joint venture in which the
Company indirectly holds a 22.15% interest, entered into a contract to sell its
property located at 568 Broadway, New York, New York for a gross sales price of
$87,500,000. It is anticipated that the sale of this property will occur, during
the first quarter of 2003 and that all or substantially all of the proceeds from
the sale will be required to pay off the Note Payable.

On November 5, 2002, the Board of Directors authorized the payment of a dividend
in the amount of $8.25 per common share. The dividend will be paid to holders of
record on November 15, 2002 and will be paid on November 21, 2002.



                                       16
<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.

PCIC TRANSACTION

On February 14, 2002, the Company, Shelbourne Properties II, Inc. and Shelbourne
Properties III, 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
former senior management of the Company. Pursuant to the Transaction, the
Company paid PCIC $11,830,337 in cash. Additionally, 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.

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.

HYPO LOAN

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

                                       17
<PAGE>

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 1.5% for the
portion of the Note Payable secured by mortgages on certain real properties
(Conversion rate), (ii) LIBOR plus 2.5% for the portion of the Note Payable
secured by a pledge of partnership interests (LIBOR rate) or (iii) the greater
of (a) agent's prime rate or (b) the federal funds rate plus 1.5% (Base rate).
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. There has
been no fee paid to date. Interest is payable monthly in arrears. The interest
rate at September 30, 2002 was approximately 4.16%.

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 (Melrose Crossing II) 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. If properties are sold, the Companies
must pay a fixed release amount to the lender except in the case of core
properties, which have been defined as 568 Broadway, Century Park, Seattle Tower
and Southport, in which case the Companies must pay the lender the greater of
the net proceeds or the release amount. 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 (who,
effective August 19, 2002, became a director and chief executive officer of the
Companies) - 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 the Company's Current Report on Form 8-K filed on
May 14, 2002, which is incorporated herein by reference.

CHANGE IN CONTROL

On July 1, 2002, the Company, along with Shelbourne Properties I, Inc. and
Shelbourne Properties II, Inc., entered into a settlement agreement with respect
to certain outstanding litigation brought by HX


                                       18
<PAGE>


Investors in the Chancery Court of Delaware against the Companies. At the same
time, the Company, along with Shelbourne Properties I, Inc. and Shelbourne
Properties II, Inc. entered into a letter agreement settling other outstanding
litigation brought by shareholders against the Companies, subject to approval by
the court of a stipulation of settlement. In connection with the settlements,
the Company entered into a stock purchase agreement (the "Stock Purchase
Agreement") with HX Investors and Exeter Capital Corporation ("Exeter"), the
general partner of HX Investors, pursuant to which HX Investors, the then owner
of approximately 11.5% 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. HX
Investors agreed to vote all of its shares in favor of the Plan of Liquidation.
Under the Plan of Liquidation, HX Investors was to receive 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.

Subsequently, on July 29, 2002, Longacre Corp("Longacre"), commenced a lawsuit
individually and derivatively against the Company, Shelbourne Properties II,
Inc., Shelbourne Properties III, Inc., their boards, HX Investors, and Exeter
seeking preliminary and permanent injunctive relief and monetary damages based
on purported violations of the securities laws and mismanagement related to the
tender offer by HX Investors, the Stock Purchase Agreement, and the plan of
liquidation. The suit was filed in federal court in New York, New York. On
August 1, 2002, the court denied Longacre's motion for a preliminary injunction,
and the court dismissed the lawsuit on September 30, 2002, at the request of
Longacre.

Contemporaneous with filing its July 29, 2002 lawsuit, Longacre publicly
announced that its 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,
Longacre and HX Investors submitted competing proposals to the board of
directors of the Company and made those proposals public. On August 4, 2002,
Longacre notified the Company that it was no longer interested in proceeding
with its proposed offer.

On August 5, 2002, the Company entered into an amendment to the 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.

On August 16, 2002, the HX Investors Offer expired and HX Investors acquired
236,631 shares representing 30% of the outstanding shares.

On August 19, 2002, as contemplated by the Stock Purchase Agreement, the
existing Board of Directors and executive officer of the Company resigned, and
the Board was reconstituted to consist of six members, four of whom are
independent directors. In addition new executive officers were appointed.


                                       19
<PAGE>

Also on August 19, 2002, the Board of Directors of the Company authorized the
issuance by the operating partnership of the Company of Class B Units to HX
Investors which Class B Units provide distribution rights to HX Investors only
in the event that the Plan of Liquidation were adopted and consistent with the
intent and financial terms of the incentive payment provided for in Stock
Purchase Agreement described above. On August 19, 2002, the operating
partnership issued the Class B Units to HX Investors in full satisfaction of the
incentive fee payment otherwise required under the Plan of Liquidation.

RECENT DEVELOPMENTS

The Company has entered into a contract to sell Melrose Crossing II for a price
of $2,200,000. The purchase price, exclusive of closing cost, will be paid with
$400,000 in cash, and by delivery of a note for the balance of the purchase
price. The note will mature on the first anniversary of the sale date, shall
bear interest at 7% per annum and will be secured by the property. On October 2,
2002 a non-refundable deposit was received from the buyer in the amount of
$160,000. The sale date is tentatively scheduled for the first quarter of 2003.
Operations of Melrose Crossing II have been reclassified as discontinued
operations on the statements of operations. The property is classified on the
balance sheet as real estate held for sale at September 30, 2002.

On October 29, 2002, the Company held a special meeting of the Stockholders at
which time the Plan of Liquidation was approved by a majority of the
shareholders.

On October 31, 2002, 568 Broadway Joint Venture, a joint venture in which the
Company indirectly holds a 22.15% interest, entered into a contract to sell its
property located at 568 Broadway, New York, NY for a gross sales price of
$87,500,000. It is anticipated that the sale of this property will occur during
the first quarter of 2003 and that all or substantially all of the proceeds from
the sale will be required to pay off the Note Payable.

On November 5, 2002, the Board of Directors authorized the payment of a dividend
in the amount of $8.25 per common share. The dividend will be paid to holders of
record on November 15, 2002 and will be paid on November 21, 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 Notes. 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 September 30, 2002 and December 31, 2001,
the Company had approximately $17,120,505 and $17,149,117 of real estate (net),
accounting for approximately 35% and 31%, respectively, of the Company's total
assets. The Company has entered into an agreement to sell Melrose Crossing II
and at September 30, 2002 is classified as Real Estate Held for Sale. 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.



                                       20
<PAGE>


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 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 $13,481,000. 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


                                       21
<PAGE>



tenants for taxes, insurance and other operating expenses are recognized as
revenue in the period the applicable expenses 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.

After April 30, 2002, as a result of the Company's incurring debt in connection
with entering into the Note Payable discussed in Note 9 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. As required, effective January 1,
2002, the Company's condensed consolidated balance sheet and the condensed
consolidated statements of operations 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 condensed consolidated statement of
operations for the three months and nine months ended September 30, 2001, both
reflecting the impact of the change to equity accounting for the investments 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>
                                                         AS 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                                                    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>


                                       22
<PAGE>

CONDENSED CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                   FOR THE THREE MONTHS ENDED              FOR THE NINE MONTHS ENDED
                                                         SEPTEMBER 30,                              SEPTEMBER 30,
                                                 As        Pro-forma                        As        Pro-forma
                                              Reported    Adjustments                    Reported    Adjustments
                                                2001          2001          Total          2001          2001           Total
                                             ----------   ------------    ---------    -----------   -------------   -----------
<S>                                          <C>          <C>             <C>          <C>           <C>             <C>
Rental revenues                              $2,049,343   $(1,249,658)    $ 799,685    $ 5,936,477   $ (3,435,196)   $ 2,501,281
Costs and expenses                            1,296,500      (504,346)      792,154      4,176,179     (1,481,944)     2,694,235
                                             ----------   ------------    ---------    -----------   -------------   -----------
Income (loss) before equity income in
joint ventures, interest and other income       752,843      (745,312)        7,531      1,760,298     (1,953,252)      (192,954)
      Equity income from joint ventures               -       815,560       815,560              -      2,250,946      2,250,946
      Interest income                            86,570       (70,248)       16,322        339,395       (264,660)        74,735
      Other income                                5,200                       5,200         47,934        (33,034)        14,900
                                             ----------   ------------    ---------    -----------   -------------   -----------
Net income from continuing operations         $ 844,613           $ -     $ 844,613    $ 2,147,627            $ -    $ 2,147,627
                                             ==========   ============    =========    ===========   =============   ===========
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company uses its working capital reserves and any cash from operations as
its primary source of liquidity. On October 29, 2002, the Company's shareholders
approved the Plan of Liquidation. Accordingly, it is expected that the Company
will seek to sell its properties in the near term.

In this regard, on October 31, 2002, 568 Broadway Joint Venture, a joint venture
in which the Company indirectly holds a 22.15% interest, entered into a contract
to sell its property located at 568 Broadway, New York, New York for a gross
sales price of $87,500,000. It is anticipated that the sale of this property
will occur during the first quarter of 2003 and that all or substantially all of
the proceeds from the sale will be required to pay off the Note Payable.

The Company had $4,025,899 in cash and cash equivalents at September 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 $1,186,410 from $2,839,489 for the year ended December 31, 2001. The increase
resulted from $8,389,970 of cash provided by operating activities partially
offset by $6,701,816 used in financing activities and $501,744 used in
investment activities. Additionally, the Company's joint ventures held cash at
September 30, 2002 of which the Company's allocable share was $4,030,919.

Cash used in financing activities consisted of $11,830,337 paid to PCIC in
connection with the Transaction and $14,589,936 paid to retire the note that was
issued in relation to the Transaction which was partially offset by the receipt
of proceeds from the initial borrowing under the Credit Facility of $19,718,457.

                                       23
<PAGE>

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
$887,383 and $2,714,274 for the three months and nine months ended September 30,
2002.

As disclosed in Item 1. Financial Statements - Note 9, the operating partnership
of the Company has issued Class A Preferred Units (the "Class A Units") which
entitle the holder thereof to certain rights to require the operating
partnership to redeem such units at a significant premium if the aggregate
assets of the Companies fall below approximately $75 million or the outstanding
debt under which the Companies are obligated is less than approximately $55
million

The Company is currently negotiating to acquire an interest in a joint venture
with the other Companies that will hold an interest in 20 hotels leased to a
subsidiary of Accor S.A. (Motel 6) for a purchase price of $926,030, which
hotels will be subject to existing non-recourse debt of approximately $74.6
million. In connection with this acquisition, the terms of the Class A Units
will be amended to delete the right of PCIC (the holder of the Class A Units) to
put the preferred units to the operating partnership in the event that the value
of the Company's assets falls below a certain threshold. Further, the
transaction will provide additional non-recourse debt under which the Companies
will be obligated and will satisfy the debt level requirements for the Class A
unitholders. If the foregoing transaction is not consummated or an alternative
arrangement or transaction is not entered into, the sale of 568 Broadway would
enable the holder of the Class A Units to exercise its right to put the Class A
Units to the Company for a price equal to the liquidation preference for such
Class A Units plus the put premium. See "Item 1 Financial Statements - Note 9."

For the three months and nine months ended September 30, 2002, the Company made
payments amounting to $42,550 and $501,744 respectively in capital expenditures
that were funded from cash flow and the Company's working capital reserves. In
addition to tenant improvements at the properties, the nine-month total of
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 $15,855. 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. The actual amount
of such expenditures depends upon the level of leasing activity and other
factors that cannot be predicted with certainty.

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.

RESULTS OF OPERATIONS

The management's discussion and analysis compares the results of operations
reflecting the equity method of accounting for the three and nine months ended
September 30, 2002 to the pro-forma statement of operations for the same period
ended September 30, 2001.

                                       24
<PAGE>


Nine months ended September 30, 2002 vs. September 30, 2001

Net income

The Company's net income from continuing operations decreased by $18,232,592 to
a net loss of $16,084,965 for the nine months ended September 30, 2002 from
$2,147,627 for the nine months ended September 30, 2001. This decrease is
primarily attributable to expenses incurred in connection with the Transaction,
including the purchase of the Advisory Agreement, legal fees and consulting fees
to Lazard Freres & Co LLC ("Lazard") for its advisory and valuation services for
the Company. In addition, further contributing to this decrease were the legal
fees associated with defending the lawsuits brought in connection with the
Transaction. Partially offsetting the increase in costs and expenses was an
increase in rental revenue of $212,993.

Rental Revenues

Rental revenues increase by $212,993 or approximately 9% to $2,714,274 during
the nine months ended September 30, 2002 from $2,501,281 during the nine months
ended September 30, 2001 due to increases in base rent of $127,140 and common
area maintenance charges of $72,250 as well as an aggregate increase in all
other rental revenue categories of $13,603.

Costs and Expenses

Costs and expenses, for the nine months ended September 30, 2002 amounted to
$20,469,446, an increase of $17,775,211 from the same period in 2001. This
increase consists of a one-time expense of $15,262,114 in relation to the
purchase of the Advisory Agreements. The remaining costs and expenses amounted
to $5,207,332 for the nine months ended September 30, 2002, an increase of
$2,513,097 from the $2,694,235 incurred for the same period in 2001. This
increase is primarily due to an increase in administrative expenses related to
the Transaction, particularly legal, professional and consulting fees.

Operating expenses decreased slightly despite increased insurance costs.
Depreciation and amortization increased by $179,150 primarily due to increased
tenant improvements and procurement costs. Property management costs increased
slightly due to increased collections. The partnership asset management fee
decreased by $544,240 for the nine months ended September 30, 2002 from $650,103
for the same period in 2001 as the obligation to pay the partnership asset
management fee terminated with the consummation of the Transaction. For the nine
months ended September 30, 2002, $105,863 in partnership asset management fees
was paid to Shelbourne Management and $208,250 to PCIC thereafter in accordance
with PCIC's agreement to provide transition services to the Company upon the
consummation of the Transaction. This agreement was terminated as of September
30, 2002.

Non-operating Income and Expenses

Equity income from the investment in joint ventures decreased by $133,005 or
approximately 6% to $2,117,941 for the nine months ended September 30, 2002 from
$2,250,946 for the same period in 2001. This decrease was primarily due to the
decrease in net income from the Supervalu properties of $36,432, as a result of
the sale of the Edina, Minnesota and Toledo, Ohio properties in January 2002 and
the declaration of bankruptcy by the tenant at the Atlanta, GA property that was
sold on August 5, 2002. These decreases were partially offset by the increase in
568 Broadway net income of $229,733.

Interest expense of $142,871 was paid on the note issued in the Transaction. An
additional $350,244 in interest was incurred on the Credit Facility dated May 1,
2002. Interest from the Credit Facility is a first-time expense because prior to
the conversion from a partnership to a REIT, no debt was allowed on any of the
properties.

                                       25
<PAGE>

Interest income decreased by $29,354 or 39% to $45,381 for the current period as
compared to $74,735 for the comparable period in 2001 due to significantly lower
cash balances due to the Transaction and other fees paid.

Loss from discontinued operations (Melrose Crossing II which is under agreement
to be sold) increased $34,346 to $222,454 for the nine months ended September
30, 2002 from $188,108 for the nine months ended September 30, 2001 primarily
due to the increase insurance expenses.

Inflation

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

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

Net Income

The Company had net income from continuing operations of $132,130 for the three
months ended September 30, 2002, a decrease of $712,483 or 84% from $844,613
from the same period in 2001. This decrease was due to an increase of costs and
expenses primarily due to the incurrence of legal, professional and consulting
fees resulting from lawsuits partially offset by an increase in rental revenue
of $87,698.

Rental Revenue

Rental revenues increased by $87,698, or approximately 11% from $799,685 during
the three months ended September 30, 2001 to $887,383 during the three months
ended September 30, 2002. This was due to an increase in base rent of $28,136,
common area maintenance charges and real estate tax recovery of $83,051 that was
partially offset by an aggregate decrease in all other rental revenue categories
of $23,489.

Costs and Expenses

Costs and expenses for the three months ended September 30, 2002 amounted to
$1,274,766, an increase of $482,612 from $792,154 in the same period in 2001.
The increase is primarily due to an increase in administrative expenses due to
increased legal, professional and consulting fees. The remaining costs and
expense amounted to $634,322 for the three months ended September 30, 2002, a
decrease of $70,020 or approximately 10%, from the same period in 2001.

The Company experienced higher depreciation and amortization costs of $127,662
due to real estate improvements and tenant procurement costs. Property
management fees increased slightly to $32,806 from $25,497 due to increased
collections. These increases were offset by a decrease in operating costs of
$70,343 due reduced repair and maintenance costs. Expenses related to
partnership asset management fees decreased by $134,638 for the three months
ended September 30, 2002 from the same period in 2001 as the obligation to pay
the asset management fee terminated with the consummation of the Transaction.
PCIC was paid $83,300 for the three months ended September 30, 2002 in
accordance with PCIC's agreement to provide transition services to the Company
upon the consummation of the Transaction. This agreement was terminated as of
September 30, 2002.

                                       26
<PAGE>

Non-Operating Income and Expenses

Equity income from the investment in joint ventures decreased by $102,761 or
approximately 13% to $712,799 for the three months ended September 30, 2002 from
$815,560 for the same period in 2001. This was primarily due to the decrease in
net income from the Supervalu properties due to the sale of Edina, Minnesota and
Toledo, Ohio in January 2002 and the declaration of bankruptcy of the tenant in
the Atlanta, GA property that was sold on August 5, 2002. These decreases were
offset by the increase in the net income at 568 Broadway of $134,990.

Interest expense for the three months ended September 30, 2002 amounted to
$210,288 under the Credit Facility. Interest from the Credit Facility is a
first-time expense because prior to the conversion from a partnership to a REIT,
no debt was allowed on any of the properties.

Interest income increased by $680 to $17,002 for the current period as compared
to $16,322 for the comparable period in 2001.

Loss from discontinued operations, Melrose Crossing II which is under agreement
to be sold, increased $17,911 to $72,186 for the three months ended September
30, 2002 from $54,275 for the three months ended September 30, 2001 primarily
due to the costs of retaining of a property tax consultant.

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.



                                       27
<PAGE>



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

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED,                          NINE MONTHS ENDED,
                                                SEPTEMBER 30,       SEPTEMBER 30,         SEPTEMBER 30,           SEPTEMBER 30,
                                                   2002                  2001                  2002                    2001
                                            ------------------   --------------------   --------------------  --------------------
<S>                                                  <C>                   <C>                 <C>                    <C>
 Net (Loss) Income (A)                               $ 59,994              $ 790,338           $(16,307,419)          $ 1,959,519

 Plus:  Depreciation related
  to real estate and tenant improvements              221,591                151,344                530,356               454,096

Plus: Amortization of leasing
        commissions                                    19,343                 21,894                 57,265                53,669

Plus: Adjustments for
        unconsolidated joint ventures (B)             216,506                249,555                718,796               737,548
                                            ------------------   --------------------   --------------------  --------------------

 Funds From Operations (A)                          $ 517,434            $ 1,213,131           $(15,001,002)          $ 3,204,832
                                            ==================   ====================   ====================  ====================
</TABLE>


         (A) Net Income and Funds From Operations for the nine months ended
         September 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 the Company faces is interest rate sensitivity. The
Company's long-term debt bears interest at a floating rate, and therefore is
exposed to the risk of interest rate changes. At November 13, 2002, borrowings
under the 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
the credit facility at November 13, 2002 and the interest rate at that date, a
10% increase in LIBOR would increase the interest expense in 2002 by
approximately $21,000. Conversely, a 10% decrease in LIBOR would decrease the
interest expense in 2002 by the same amount. The gain or loss the Company
ultimately realizes with respect to interest rate fluctuations will depend on
the actual interest rates during that period. The Company does not believe that
it has any risk related to derivative financial instruments.


ITEM 4.     CONTROLS AND PROCEDURES

The Registrant's principal executive officer and principal financial officer
have, within 90 days of the filing date of this quarterly report, evaluated the
effectiveness of the Registrant's disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14(c) and have determined that such disclosure
controls and procedures are adequate. There has been no significant changes in
the Registrant's internal controls or in other factors that could significantly
affect such internal controls since the date of evaluation. Accordingly, no
corrective actions have been taken with regard to significant deficiencies or
material weaknesses.




                                       28
<PAGE>


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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. On May 15, 2002, the Delaware Plaintiffs filed
a second consolidated and amended class and derivative action complaint that
additionally sought to have the Company consider all available transactions to
maximize shareholder value.


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
nine, four of whom would be independent directors as well as implementing
corporate governance protections. The settlement also provided for, among other
things, a contribution of up to one million dollars, as approved by the court,
for plaintiffs' attorneys fees.

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 there under 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 a preliminary
injunction was denied. The court dismissed the lawsuit on September 30, 2002, at
the request of Longacre.





                                       29
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

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

Number   Description
------   -----------
(2.1)    Stock Purchase Agreement among HX Investors, Exeter Capital Corporation
         and the Company (4)

(2.2)    Amendment No. 1 to Stock Purchase Agreement (6)

(2.3)    Plan of Liquidation (7)

(3.1)    Amended and Restated Certificate of Incorporation of the Company(1)

(3.2)    Amended and Restated Bylaws of the Corporation (1)

(4.1)    Amended and Restated Agreement of Limited Partnership of the operating
         partnership (1)

(4.2)    Shareholder Rights Agreement (1)

(4.3)    Amendment to Shareholder Rights Agreement (2)

(4.4)    Certificate of Designations, Preferences and Rights of Series A
         Preferred Stock (1)

(4.5)    Stockholder Agreement, among the Companies and HX Investors, LP and
         Exeter Capital Corporation, dated as of April 30, 2002 (3)

(4.6)    Amendment No. 2 to Shareholder Rights Agreement (5)

(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 (3)

(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 (3)

(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 (3)

(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 (3)

                                       30
<PAGE>

(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 (3)

(10.6)   Form of Mortgage, dated as of April 30, 2002, issued by the Company to
         Bayerische Hypo-Und Vereinsbank AG, New York Branch, as agent for
         itself and other lenders (3)

(10.7)   Settlement Agreement and Mutual Release between HX Investors, the
         Companies and Shelbourne Management (4)

(10.8)   Amendment No. 1 to Settlement Agreement (6)

(99.1)   Partnership Unit Designation of the Class A Preferred Partnership Units
         of the Operating Partnership(2)

(99.2)   Partnership Unit Designation of the Class  B Partnership Units of the
         Operating Partnership

(99.3 )  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

------------
(1)      incorporated by reference to the Registration Statement of the Company
         on Form S-4 filed on February 11, 2000, as amended

(2)      incorporated by reference to the Current Report of the Company on Form
         8-K filed on February 14, 2002

(3)      incorporated by reference to the Current Report of the Company on Form
         8-K filed on May 14, 2002.

(4)      incorporated by reference to the Current Report of the Company on Form
         8-K filed on July 2, 2002.

(5)      incorporated by reference to the Current Report of the Company on Form
         8-K filed on July 8, 2002

(6)      incorporated by reference to the Current Report of the Company on Form
         8-K filed on August 5, 2002

(7)      incorporated by reference to Appendix A to the Company's Definitive
         Proxy Statement on Schedule 14A filed on September 27, 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 September 30, 2002:

(i)      Press release announcing that the Companies had entered into the HX
         Investors Stock Purchase Agreement.

         Item reported: 5

         Dated filed: July 2, 2002

(ii)     Amendment to Company's Shareholders Rights Agreement.

         Item reported: 5

                                       31
<PAGE>

         Dated filed: July 8, 2002

(iii)    Amendment to HX Investors Stock Purchase Agreement and Settlement
         Agreement.

         Item reported: 5

         Dated filed: August 5, 2002

(iv)     Change in Control of the Company.

         Item reported: 1

         Dated filed: August 21, 2002






                                       32
<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:   November 13, 2002                  By: /S/ Michael L. Ashner
                                                ---------------------
                                                Michael L. Ashner
                                                (Chief Executive Officer)


                                       33
<PAGE>







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

CERTIFICATIONS

I, Michael L. Ashner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties
III, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us, particularly during
the period in which this quarterly report is being prepared:

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and



                                       34
<PAGE>



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

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.




         Date:  November 13, 2002                    /s/ Michael L. Ashner
                                                     ---------------------
                                                     Michael L. Ashner
                                                     Chief Executive Officer



                                       35
<PAGE>





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

                                 CERTIFICATIONS

I, Carolyn B. Tiffany, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shelbourne Properties
III, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us, particularly during
the period in which this quarterly report is being prepared:

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and


                                       36
<PAGE>




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

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.




         Date: November 13, 2002                    /s/ Carolyn B. Tiffany
                                                    ----------------------
                                                    Carolyn B. Tiffany
                                                    Chief Financial Officer




                                       37
<PAGE>





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


EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit
Number   Description                                                                             Page
------   -----------                                                                             ----
<S>                    <C>                                                                       <C>
2.1      Stock Purchase Agreement among HX Investors, Exeter Capital Corporation
         and the Company                                                                         (4)
2.2      Amendment No. 1 to Stock Purchase Agreement                                             (6)
2.3      Plan of Liquidation                                                                     (7)
3.1      Amended and Restated Certificate of Incorporation of the Company                        (1)
3.2      Amended and Restated Bylaws of the Corporation                                          (1)
4.1      Amended and Restated Agreement of Limited Partnership of the operating partnership      (1)
4.2      Shareholder Rights Agreement                                                            (1)
4.3      Amendment to Shareholder Rights Agreement                                               (2)
4.4      Certificate of Designations, Preferences and Rights of Series A Preferred Stock         (1)
4.5      Stockholder Agreement, among the Companies and HX Investors, LP and
         Exeter Capital Corporation, dated as of April 30, 2002                                  (3)
4.6      Amendment No. 2 to Shareholder Rights Agreement                                         (5)
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                                                            (3)
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                   (3)
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       (3)
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                                                               (3)
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                                                    (3)
10.6     Form of Mortgage, dated as of April 30, 2002, issued by the Company to
         Bayerische Hypo-Und Vereinsbank AG, New York Branch, as agent for
         itself and other lenders                                                                (3)
10.7     Settlement Agreement and Mutual Release between HX Investors,
         the Companies and Shelbourne Management                                                 (4)
10.8     Amendment No. 1 to Settlement Agreement                                                 (6)
99.1     Partnership Unit Designation of the Class A Preferred Partnership
         Units of the Operating Partnership                                                      (2)
99.2     Partnership Unit Designation of the Class B Partnership Units of the
         Operating Partnership                                                                   40

                                       38
<PAGE>

99.3     Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                 44

------------------
(1)      incorporated by reference to the Registration Statement of the Company on Form S-4 filed on February 11,
         2000, as amended
(2)      incorporated by reference to the Current Report of the Company on Form 8-K filed on February 14, 2002
(3)      incorporated by reference to the Current Report of the Company on Form 8-K filed on May 14, 2002.
(4)      incorporated by reference to the Current Report of the Company on Form 8-K filed on July 2, 2002.
(5)      incorporated by reference to the Current Report of the Company on Form 8-K filed on July 8, 2002
(6)      incorporated by reference to the Current Report of the Company on Form 8-K filed on August 5, 2002
(7)      incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A
         filed on September 27, 2002
</TABLE>



                                       39