<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 0-16341

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

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

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

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



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

                   Yes [X]                       No [ ]


 As of November 13, 2002, there were 894,792 shares of common stock outstanding.

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

<PAGE>



                         SHELBOURNE PROPERTIES II, 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 II, Inc.'s predecessor in
interest, High Equity Partners L.P. - Series 86 (the "Predecessor Partnership").
On April 17, 2001, the Predecessor Partnership was merged with and into
Shelbourne Properties II, L.P., a limited partnership wholly owned, directly and
indirectly, by Shelbourne Properties II, Inc.


                                      INDEX

<TABLE>
<CAPTION>

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

Item I.  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........................................................      16

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.................................      27

Item 4.  Controls and Procedures....................................................................      27

Part II. Other Information:

Item 1.  Legal Proceedings..........................................................................      28

Item 6.  Exhibits and Reports on Form 8-K...........................................................      29

Signatures..........................................................................................      32

Certifications......................................................................................      33

Exhibit Index.......................................................................................      37

</TABLE>


                                       2

<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                      (UNAUDITED)
                                                                  SEPTEMBER 30, 2002     DECEMBER 31, 2001
                                                                 --------------------  ----------------------
       <S>                                                       <C>                    <C>
       ASSETS

       Real estate, net                                              $ 22,431,320          $ 41,327,041
       Real estate held for sale, net                                   2,143,085                     -
       Cash and cash equivalents                                       11,149,124            26,011,761
       Other assets                                                     1,547,615             3,191,467
       Receivables, net                                                    66,635               151,706
       Investment in joint ventures                                    21,901,876                     -
                                                                    --------------      ----------------

       TOTAL ASSETS                                                  $ 59,239,655          $ 70,681,975
                                                                    ==============      ================


       LIABILITIES AND EQUITY

       Accounts payable and accrued expenses                            $ 873,563           $ 1,168,273
       Note payable                                                    29,779,343                     -
                                                                    --------------      ----------------

       Total Liabilities                                               30,652,906             1,168,273
                                                                    --------------      ----------------

       COMMITMENTS AND CONTINGENCIES

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

       CLASS A 5% PREFERRED PARTNERSHIP INTERESTS,
          AT LIQUIDATION VALUE                                          1,015,148                     -
                                                                    --------------      ----------------

       EQUITY

       Common stock:
          $.01 par value share; authorized 2,500,000 shares;
          issued 1,237,916 shares; outstanding 894,792 and
          1,237,916, respectively                                          12,379                12,379
       Additional capital                                              66,329,959            66,329,959
       Treasury stock, at cost                                        (17,866,603)                    -
       Retained earnings                                              (20,904,134)            3,171,364
                                                                    --------------      ----------------

       Total Equity                                                    27,571,601            69,513,702
                                                                    --------------      ----------------

       TOTAL LIABILITIES AND EQUITY                                  $ 59,239,655          $ 70,681,975
                                                                    ==============      ================
</TABLE>




            See notes to condensed consolidated financial statements.

                                       3

<PAGE>


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


                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                      (SEE NOTE 1 - BASIS OF PRESENTATION)
                                   (UMAUDITED)

<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                                          $ 989,360            2,924,694         $  3,216,106          $ 8,830,813
                                                        -------------       -------------      -------------         -------------

Costs and expenses
        Operating expenses                                 257,751              969,247              817,367            2,557,350
        Depreciation and amortization                      485,730              546,459            1,060,685            1,582,996
        Asset management fee                                     -              335,499              157,582            1,001,525
        Transition management fee                           83,300                    -              208,250                    -
        Purchase of advisory agreements                          -                    -           23,049,398                    -
        Administrative expenses                            706,262               48,894            4,087,065              871,540
        Property management fee                             30,558               88,990               96,575              265,168
                                                        -------------       -------------      -------------         -------------
                                                         1,563,601            1,989,089           29,476,922            6,278,579
                                                        -------------       -------------      -------------         -------------

(Loss) income before equity income from joint
         ventures, interest and other income              (574,241)             935,605          (26,260,816)           2,552,234
        Equity income from joint ventures                1,147,206                    -            3,111,087                    -
        Interest expense                                  (317,701)                   -             (744,912)                   -
        Interest income                                     43,759              147,558              139,177              563,560
        Other income                                             -                6,100                  548               28,502
                                                        -------------       -------------      -------------         -------------
Net income (loss) from continuing operations               299,023            1,089,263          (23,754,916)           3,144,296
Loss from discontinued operations                          (69,231)             (65,040)            (288,436)            (295,053)
                                                        -------------       -------------      -------------         -------------
Net income (loss)                                          229,792            1,024,223          (24,043,352)           2,849,243
Preferred dividends                                        (12,971)                   -              (32,146)                   -
                                                        -------------       -------------      -------------         -------------
Net income (loss) available for common shares            $ 216,821            1,024,223         $(24,075,498)         $ 2,849,243
                                                        =============       =============      =============         =============
EARNINGS PER SHARE - BASIC AND DILUTED

Net income (loss) from continuing operations             $    0.32           $      .88         $     (25.00)         $      2.54

Net loss from discontinued operations                        (0.08)               (0.05)               (0.30)               (0.24)
                                                        -------------       -------------      -------------         -------------

Earnings (loss) per share                                $    0.24           $     0.83         $     (25.30)         $      2.30
                                                        =============       =============      =============         =============

Weighted average common shares                             894,792            1,237,916              951,351            1,237,916
                                                        =============       =============      =============         =============
</TABLE>

            See notes to condensed consolidated financial statements.


                                       4

<PAGE>



                         SHELBOURNE PROPERTIES II, 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            $ 12,379        $66,329,959       $           -         $   3,171,364        $  69,513,702

Purchase of treasury stock                 -                  -         (17,866,603)                    -          (17,866,603)

Preferred dividends                        -                  -                   -               (32,146)             (32,146)

Net loss                                   -                  -                   -           (24,043,352)         (24,043,352)
                                   -------------  -----------------  -------------------  -------------------  -------------------

Balance, September 30, 2002         $ 12,379        $66,329,959       $ (17,866,603)        $ (20,904,134)       $  27,571,601
                                   =============  =================  ===================  ===================  ===================
</TABLE>


            See notes to condensed consolidated financial statements.


                                       5

<PAGE>



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

                 CONDENSED CONSOLIDATED STATEMENT 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                                                             $ (24,043,352)        $ 2,849,243
Adjustments to reconcile net (loss) income
   to net cash provided by operating activities:
         Depreciation and amortization                                            1,060,685           1,582,996
         Straight-line adjustment for stepped lease rentals                          14,071              53,185
         Purchase of advisory agreements                                         23,049,398                   -
         Equity income from joint venture                                        (3,111,087)                  -
         Loss from discontinued operations                                          288,436             295,053

Change in assets and liabilities:
       Accounts payable and accrued expenses                                        109,076             123,517
       Receivables                                                                   34,605             (75,139)
       Due to affiliates                                                                  -            (512,473)
       Other assets                                                               7,613,060            (321,737)
                                                                              --------------        -----------
Net Cash Provided by Operating Activities                                         5,014,892           3,994,645
                                                                              --------------        -----------

CASH FLOW FROM INVESTING ACTIVITIES:
       Discontinued operations                                                     (350,555)           (142,349)
       Improvements to real estate                                                 (467,164)         (1,026,995)
                                                                              --------------        -----------
Net cash used in Investing Activities                                              (817,719)         (1,169,344)
                                                                              --------------        -----------
CASH FLOW FROM FINANCING ACTIVITIES:
       Purchase of treasury stock                                               (17,866,603)                  -
       Proceeds from note payable                                                29,779,343                   -
       Payoff of note payable                                                   (22,034,250)                  -
                                                                              --------------        -----------
Net Cash Used in Financing Activities                                           (10,121,510)                  -
                                                                              --------------        -----------

(Decrease) increase in cash and cash equivalents                                 (5,924,337)          2,825,301

Cash and cash equivalents, beginning of year                                     26,011,761          17,607,533
Cash and cash equivalents, related to investment in joint ventures               (8,938,300)                  -
                                                                              --------------        -----------

Adjusted cash and cash equivalents, beginning of year                            17,073,461          17,607,533
                                                                              --------------        -----------
Cash and cash equivalents, end of quarter                                      $ 11,149,124          20,432,834
                                                                              ==============        ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest                                                         $    744,912         $         -
                                                                              ==============        ===========

</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 l0-K of Shelbourne Properties II, 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 - Investment 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 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 $54,554 and $105,200 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 III, 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.


                                       7
<PAGE>


         After April 30, 2002, as a result of the Company's incurring debt in
         connection with entering into the Note Payable discussed in Note 8, 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 instead utilize the equity method of
         accounting. Accordingly, the Company's condensed consolidated balance
         sheet at September 30, 2002 and the Company's condensed consolidated
         statements of operations for the three and nine month period 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 changes would have
         been to reduce real estate by $16.3 million, cash and cash equivalents
         by $8.9 million, receivables by $0.1 million, accounts payable and
         accrued expenses by $0.5 million and increased other assets by $6.1
         million and investment in joint ventures by $18.8 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 will evaluate the
         recoverability of the net carrying value of its real estate and related
         assets at least annually, and more often if circumstances dictate. If
         this review indicates that the carrying value of a property might not
         be recoverable, the 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 is 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>

         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 have a material
         effect on 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.

         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


                                       9
<PAGE>



         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 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 343,124
         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. The Company's operating partnership,
         Shelbourne Properties II, L.P., issued preferred partnership interests
         with an aggregate liquidation preference of $1,015,148 and a note in
         the amount of $22,034,250. 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 10) 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 equal to 1.25% of the gross
         asset value of the Company. For that period, Shelbourne Management
         received $157,582.

         On April 17, 2001, High Equity Partners Series 86, (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 Predecessor 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 $335,499 for the asset management fee. For
         the nine months ended September 30, 2001, the managing general partner
         received $59,444 and Shelbourne



                                       10
<PAGE>



         Management received $90,556 for non-accountable expenses. For the nine
         months ended September 30, 2001 the managing general partner received
         $394,808 and Shelbourne Management received $606,717 for the asset
         management fee.

         In October 2000, Kestrel began performing all property management
         services directly for the Predecessor Partnership and, effective April
         17, 2001, Kestrel began performing 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
         $93,299 that consists of $33,383 earned from wholly owned properties
         and $59,916 earned from joint venture investment properties. For the
         three months ended September 30, 2001, Kestrel earned $92,162 that
         consists of $41,040 earned from wholly owned properties and $51,122
         earned from joint venture investment properties. For the nine months
         ended September 30, 2002, Kestrel earned $275,083 that consists of
         $104,900 earned from wholly owned properties and $170,183 earned from
         joint venture investment properties. For the nine months ended
         September 30, 2001, Kestrel earned $274,464 that consists of $123,366
         earned from wholly owned properties and $151,098 earned from joint
         venture investment properties.

         At September 30, 2002, $427,789 of payables from joint ventures was
         included in other assets.


4.       REAL ESTATE

<TABLE>
<CAPTION>


                                             SEPTEMBER 30, 2002               DECEMBER 31, 2001
                                           -----------------------          -------------------------
                                                  (Unaudited)
<S>                                        <C>                              <C>
Land                                         $     5,443,615                  $        9,636,715
Buildings and improvements                        29,374,819                          57,034,945
Less:  Accumulated depreciation                  (12,387,114)                        (25,344,619)
                                           -----------------------          -------------------------

Total Real Estate, net                       $    22,431,320                  $       41,327,041
                                           =======================          =========================

Real Estate Held for Sale
Land                                         $     1,056,090
Buildings and improvements, net                    1,086,995
                                           ----------------------

Total Real Estate held for sale, net         $     2,143,085
                                           ======================

</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

The Company has entered into a contract to sell Melrose Crossing I for a price
of $3,300,000. The purchase price, exclusive of closing costs, will be paid
$600,000 in cash, and 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 $240,000.
The sale date is tentatively scheduled for the first quarter of 2003. Operations
of Melrose Crossing I have been reclassified as discontinued operations on the



                                       11
<PAGE>



statements of operations. The property is classified on the balance sheet as
real estate held for sale at September 31, 2002.

..

5.       INVESTMENT IN JOINT VENTURES

The Company invests in four joint ventures, (568 Broadway, Century Park, Seattle
Landmark and Tri-Columbus) which are accounted for under the equity method. The
joint ventures' condensed consolidated statements of operations for the three
and nine months ended September 30, 2002 and 2001, are as follows:


<TABLE>
<CAPTION>

                                                     FOR THE THREE                            FOR THE NINE
                                                     MONTHS ENDED                             MONTHS ENDED
                                                   SEPTEMBER 30,2002                       SEPTEMBER 30,2002
                                             ------------------------------         ---------------------------------
<S>                                          <C>                                    <C>
Rental revenues                               $           5,234,838                  $            14,744,822
Costs and expenses
                                                          2,291,128                                6,833,465
                                             ------------------------------         ---------------------------------
Income before interest and other income                   2,943,710                                7,911,357
Interest income                                              20,778                                   85,879
                                             ------------------------------         ---------------------------------
Equity income from joint ventures             $           2,964,488                  $             7,997,236
                                             ==============================         =================================

Equity income from joint ventures for
Shelbourne Properties II, Inc.                $           1,147,206                  $             3,111,087
                                             ==============================         =================================
</TABLE>


6.       FEDERAL INCOME TAX CONSIDERATIONS

         As of April 17, 2001, the Predecessor Partnership was converted into a
         corporation that elected to be taxed as a real estate investment trust
         ("REIT") under the provisions of the Internal Revenue Code. 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 a first step in reorganizing the Predecessor Partnership as a
         publicly-traded real estate investment trust, 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 partnership units approved the conversion.

         On April 17, 2001 the conversion was accomplished by merging the
         Predecessor Partnership into the current operating partnership.
         Pursuant to the merger, each limited partner received two shares of
         stock of the Company for each unit they owned, and the general partners
         received an aggregate of 61,896 shares



                                       12
<PAGE>



         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 HXE.


8.       NOTE PAYABLE

         On May 1, 2002, the operating partnerships of the Companies and certain
         of the operating partnerships' subsidiaries entered into a $75,000,000
         revolving credit facility with Bayerische Hypo-Und Vereinsbank AG, New
         York Branch, as agent for itself and other lenders (referred to as the
         "Credit Facility" or the "Note Payable"). The Credit Facility has a
         term of three years and is prepayable in whole or in part at any time
         without penalty or premium. The Companies initially borrowed
         $73,330,073 under the Credit Facility. The Company's share of the
         proceeds amounted to $29,779,343 of which $22,034,250 was used to repay
         the note issued in the Transaction, $215,768 to pay associated accrued
         interest and $840,624 to pay costs associated with the Credit Facility.
         The excess proceeds of approximately $6,688,701 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 two
         real properties located in Illinois.

         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 price 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 PARTNERSHIP INTERESTS

         In connection with the Transaction, the Company's operating partnership
         issued to Shelbourne Management 1,015.148 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 ($1,015,148). 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



                                       13
<PAGE>




         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 $7,118,624 and 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 Companies 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 III, Inc., entered into settlement agreements
         with respect to certain outstanding litigation involving the Companies.
         In connection with the settlement, the Company entered into a stock
         purchase agreement (the "Stock Purchase Agreement") with HX Investors,
         L.P. ("HX Investors") and Exeter Capital Corporation ("Exeter"), the
         general partner of HX Investors, pursuant to which HX Investors, the
         owner of approximately 12% of the outstanding common stock of the
         Company, agreed to conduct a tender offer for up to an additional 30%
         of the Company's outstanding stock at a price per share of $62.00 (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
         $66.25 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 I, 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



                                       14
<PAGE>



         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 $62.00 to $73.85. 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
         $66.25 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 268,444 shares 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 I for
         a price of $3,300,000. The purchase price, exclusive of closing costs,
         will be paid $600,000 in cash, and 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 $240,000. The sale date is tentatively
         scheduled for the first quarter of 2003. Operations of Melrose Crossing
         I 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 38.925% 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 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 $14.00 per common share. The dividend will be
         paid to holders of record on November 15, 2002 and will be paid on
         November 21, 2002.




                                       15
<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 II, Inc. expects,
believes or anticipates will or may occur in the future shall be deemed to be
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events, actual results and
performance financial and otherwise, could differ materially from those set
forth in or contemplated by the forward-looking statements herein. Factors that
could cause actual results to differ materially from those in forward-looking
statements include the terms of future property sales, investments and
financings, general economic and business conditions and various other risk
factors listed in the registration statement of Shelbourne Properties II, Inc.
filed with the Securities and Exchange Commission.

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

PCIC TRANSACTION
----------------

On February 14, 2002, the Company, Shelbourne Properties I, 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 343,124 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 $17,866,603 in cash. Additionally, the Company's operating
partnership, Shelbourne Properties II, L.P., issued preferred partnership
interests with an aggregate liquidation preference of $1,015,148 and a note in
the amount of $22,034,250 for the purchase of the Advisory Agreement. 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 $73,330,073 under the Credit
Facility. The Company's share of the proceeds amounted to $29,779,343 of which
$22,034,250 was used to repay the note issued in the



                                       16
<PAGE>



Transaction, $215,768 to pay associated accrued interest and $840,624 to pay
costs associated with the Credit Facility. The excess proceeds of $6,688,701
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% 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).

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 price 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.

At the request of 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
the Company's 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 the Company. Pursuant to a Stockholder Agreement among the Company,
Shelbourne Properties I, Inc., Shelbourne Properties III, 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 III, Inc., entered into settlement agreements with respect
to certain outstanding litigation brought by HX 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 III, 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 settlement, the Company entered into a



                                       17
<PAGE>



stock purchase agreement (the "Stock Purchase Agreement") with HX Investors and
Exeter, the general partner of HX Investors, pursuant to which HX Investors, the
then owner of approximately 11.25% 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 $62.00 (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
at the Annual Meeting. 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 $66.25 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.

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 $62.00 to $73.85. 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 $66.25 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
268,444 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 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.




                                       18
<PAGE>

RECENT DEVELOPMENTS
-------------------

The Company has entered into a contract to sell Melrose Crossing I for a price
of $3,300,000. The purchase price, exclusive of closing cost, will be paid
$600,000 in cash, and 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 $240,000.
The sale date is tentatively scheduled for the first quarter of 2003. Operations
of Melrose Crossing I 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 31, 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 38.925% 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 $14.00 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 $24,574,405 and $24,984,138 of real estate (net), accounting for
approximately 41% and 36%, respectively, of the Company's total assets.

At September 30, 2002, $2,143,085 of the $24,574,405 is classified as Real
Estate held for sale due to the impending sale of Melrose Crossing I. Property
and equipment carried at cost net of adjustments for impairment. The fair value
of the Operating Partnership's property and equipment is dependent on the
performance of the properties.

The Company evaluates recoverability of the net carrying value of its real
estate and related assets at least annually, and more often if circumstances
dictated. If there is an indication that the carrying value of a property might
not be recoverable, the Company prepares an estimate of the future undiscounted
cash flows expected to result from the use of the property and its eventual
disposition, generally over a five-year holding period. In performing this
review, management takes into account, among other things, the existing
occupancy, the expected leasing prospects of the property and the economic
situation in the region where the property was located.

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



                                       19
<PAGE>



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 $20,100,000. Impairment write-downs recorded by the Corporation do not
affect the tax basis of the assets and are not included in the determination of
taxable income or loss.

Because the cash flows used to evaluate the recoverability of the assets and
their fair values are based upon projections of future economic events, such as
property occupancy rates, rental rates, operating cost inflation and market
capitalization rates which are inherently subjective, the amounts ultimately
realized at disposition may differ materially from the net carrying values at
the balance sheet dates. The cash flows and market comparables used in this
process are based on good faith estimates and assumptions developed by
management.

Unanticipated events and circumstances may occur and some assumptions may not
materialize; therefore, actual results may vary from the estimates and variances
may be material. The Company may provide additional write-downs, which could be
material in subsequent years if real estate markets or local economic conditions
change.

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

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


NEW ACCOUNTING POLICIES
-----------------------

Certain properties were owned in joint ventures with Shelbourne Properties I,
L.P. and/or Shelbourne Properties III, 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 Credit Facility discussed in Note 8 to 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 condensed
consolidated statements of operations reflect the equity method of accounting.


                                       20
<PAGE>


PRO-FORMA INFORMATION
---------------------

The following tables show (i) the pro-forma condensed consolidated balance sheet
as of December 31, 2001 and (ii) the pro-forma condensed consolidated statement
of operations for the three 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 in the review of management's discussion and
analysis. The Company's total equity did not change.

CONDENSED CONSOLIDATED PRO-FORMA BALANCE SHEET INFORMATION




                                         AS REPORTED           PRO-FORMA
                                      DECEMBER 31, 2001       ADJUSTMENTS
                                      -----------------       -----------
ASSETS

Real estate, net                      $      41,327,041      $ (16,342,903)
Cash and cash equivalents                    26,011,761         (8,938,300)
Other assets                                  3,191,467          6,097,689
Receivables, net                                151,706            (92,360)
Investment in joint ventures                          -         18,790,789
                                      -----------------      -------------
Total Assets                          $      70,681,975      $    (485,085)
                                      =================      =============



LIABILITIES

Accounts payable and accrued expenses $       1,168,273      $    (485,085)
                                      -----------------      -------------

Total Liabilities                     $       1,168,273      $    (485,085)
                                      =================      =============



                                       21
<PAGE>




            CONDENSED CONSOLIDATED PRO-FORMA STATEMENTS 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                     $ 2,924,694    $ (1,708,946)      $ 1,215,748       $8,830,813    $ (5,047,990)    $ 3,782,823

Costs and expenses                    1,989,089        (875,096)        1,113,993        6,278,579      (2,504,290)      3,774,289
                                   -------------   ---------------    ------------     ------------   --------------   -------------
Income (loss) before equity income
from joint ventures interest and
other income                            935,605        (833,850)          101,755        2,552,234      (2,543,700)          8,534

  Equity income from joint ventures           -         918,021           918,021                -       2,881,897       2,881,897

  Interest Income                       147,558         (84,171)           63,387          563,560        (329,595)        233,965

  Other Income                            6,100               -             6,100           28,502          (8,602)         19,900
                                   -------------   ---------------    ------------     ------------   --------------   -------------
Net Income from continued
operations                          $ 1,089,263    $          -       $ 1,089,263       $3,144,296    $          -     $ 3,144,296
                                   =============   ===============    ============     ============   ==============   =============

</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 38.925% interest, entered into a contract to sell its
property located at 568 Broadway, New York, New York for the 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 $11,149,124 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, decreased
by $5,924,337 from $17,073,461 at December 31, 2001. The decrease resulted from
$10,121,510 used in financing activities and $559,564 of improvements to real
estate (investment activities), which were partially offset by $4,756,737 of net
cash provide by operating activities. Additionally, the Company's joint ventures
held cash at September 30, 2002 of which the Company's allocable share was
approximately $3,151,000.

Cash used in financing activities consisted of $17,866,603 paid to PCIC in
connection with the Transaction and $22,034,250 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 $29,779,393.

Currently, the Company's primary source of funds is cash flow from the operation
of its properties; principally rents billed to tenants, which amounted to
$989,360 and $3,216,106 for the three 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





                                       22
<PAGE>


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 $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 $1,096,200,
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 nine months ended September 30, 2002, the Company made $559,564 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
Company's capital expenditures were for frontage repairs at the Matthews
Festival property due to a car accident.

The budgeted expenditures for 2002 capital improvements and capitalized tenant
procurement cost in 2002 are an aggregate of $412,690 due to tremendous and
unexpected leasing activity, the Company has exceeded the yearly budget through
September 30, 2002. 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.

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

Net income

The Company's net income decreased by $26,892,595 to a net loss of $24,043,352
for the nine months ended September 30, 2002 from a net income of $2,849,243 for
the same period in 2001. This decrease is primarily attributable to expenses
incurred in connection with the Transaction, including the purchase of the
Advisory Agreements, 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.

Rental Revenues

Rental revenues decreased by $566,717, or approximately 15%, to $3,216,106 for
the nine months ended September 30, 2002 from $3,782,823 for the same period in
2001. This is primarily due to the loss of rental revenue of $749,351 following
the sale of Commonwealth Industrial Park on December 6, 2001. Increases in
rental revenues at Matthews Festival of $153,372, Commerce Plaza of $18,974 and
Sutton Square of $10,624, which were due to increased occupancy and rental
rates, partially offset this decrease.



                                       23
<PAGE>


Costs and expenses

Costs and expenses for the nine months ended September 30, 2002, amounted to
$29,476,922 an increase of $25,702,633 as compared to $3,774,289 in the same
period in 2001. This increase consists of a one-time expense of $23,049,398 in
connection with the Transaction. The remaining costs and expenses amounted to
$6,427,524 for the nine months ended September 30, 2002, an increase of
$2,653,235, or approximately 70%, from $3,774,289 incurred for the same period
in 2001. The increase in the remaining costs and expenses is due to an increase
in administrative expenses primarily legal, professional and consulting fees.

Operating expenses decreased by $127,195, or approximately 13% to $817,367 for
the nine months ended September 30, 2002 from $944,562 for the same period in
2001 primarily due to the sale of Commonwealth Industrial Park which was
partially offset by an increase in insurance expense. All other operating
expenses remained relatively the stable. The Company also experienced higher
depreciation and amortization due to real estate improvements and tenant
procurement costs, property management fees decreased by $17,495 primarily due
to the reduction of collections resulting from the sale of Commonwealth
Industrial Park on December 6, 2001.

Asset management fee expense decreased by $635,693 to $365,832 for the nine
months ended September 30, 2002 from $1,001,525 for the same period in 2001 as
the obligation to pay the partnership asset management fee terminated upon
consummation of the Transaction. Of the $1,001,525 in asset management fees for
the nine months ended September 30, 2001, $394,808 was paid to the managing
general partner of the Predecessor Partnership and $606,717 was paid to
Shelbourne Management. For the nine months ended September 30, 2002, $365,832 in
asset management fees, $157,582 was paid to Shelbourne Management prior to
February 14, 2002 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.

Non- operating income and expenses

Income from the investment in joint ventures increased by $229,190 or
approximately 8% to $3,111,087 from $2,881,897 for the same period in 2001. This
is due to increased net income at 568 Broadway of $421,205 that was partially
offset by a decrease in net income from Century Park, Seattle Tower, and Tri
Columbus Associates of $192,015.

Interest expense of $215,768 was paid on the note issued in the Transaction. An
additional $529,144 in interest was incurred on the proceeds received from the
initial borrowing under 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. Interest
income decrease $94,788, or approximately 41% to $139,177 for the current period
from $233,965 for the compared period in 2001 due to significantly lower cash
balances due to the transaction and other fees paid.

Other income decreased for the nine months ending September 30, 2002 as compared
to the same period ended September 30, 2001 by $19,352 or approximately 97% to
$548 from $19,900 due to the absence, as a result of the conversion of the
predecessor Partnership into a REIT, of transfer fees that were generated by the
transfer of the partnership interests.

Discontinued operations net loss decreased by $6,617. Rental revenues increased
by $81,108 due to increased occupancy. This was offset by an increase in cost
and expenses of $74,491 primarily due to the increased insurance cost and
increased depreciation and amortization due to tenant improvement and
procurement costs.

Inflation

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



                                       24
<PAGE>


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

Net income

The Company had net income from continuing operations of $299,023 for the three
months ended September 30, 2002, a decrease of $790,240 or 73% from $1,089,263
for the same period in 2001. This decrease was due to an increase in cost and
expenses, primarily due to the increase of legal, professional and consulting
fees resulting from lawsuits and the decrease in rental revenues of $226,388
partially offset by an increase in equity income from the investment in joint
ventures by $229,185.

Rental Revenues

Rental revenues decreased by $226,388 or 19% to $989,360 for the three months
ended September 30, 2002 from $1,215,748 for the same period in 2001. This is
primarily due to a loss of rental revenue following the sale of Commonwealth
Industrial Park on December 6, 2001. This loss was enhanced by a decrease of
rental revenue at Sutton Square of $6,105 and partially offset by increased
revenue at Commerce Plaza of $21,665 and at Matthews Festival of $14,457 due to
increased occupancy and rental rates.

Costs and Expenses

Costs and expenses, for the three months ended September 30, 2002 amounted to
$1,563,601, an increase of $449,608 from $1,113,993 for the three months ended
September 30, 2001. The increase is primarily due to an increase in
administrative expenses due to increased legal, professional and consulting
fees. The remaining costs and expenses, amounted to $857,339 for the three
months ending September 30, 2002, a decrease of $211,746 or 20% from $1,069,085
for the same period in 2001.

Depreciation and amortization increased due to real estate improvements and
tenant procurement costs. Operating expenses decreased by $135,368 primarily due
to the sale of Commonwealth Industrial Park which was partially offset by an
increase in insurance expense. Property management fees dropped slightly due to
a decrease in rental collections primarily resulting from the sale of
Commonwealth Industrial Park. Expenses related to partnership asset management
fees decreased by $252,199 for the three months ended September 30, 2002 from
the same period in 2001 as the obligation to pay partnership asset management
fees was reduced with the consummation of the Transaction.

Non-Operating Income and Expenses

Equity income from the investment in joint venture increased by $229,185 for the
three months ended September 30, 2002 as compared to the same period in 2001.
This is primarily due to an increase in net income at 568 Broadway.

Interest expense for the three months ended September 30, 2002 on the funds
borrowed by the Company under the Credit Facility dated May 1, 2002 was
$317,701. This 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 decreased $19,628 or 31% as compared to the same period in 2001
due to significantly lower cash balances due to the Transaction.

Other income decreased for the three months ended September 30, 2002 as compared
to the three months ended September 30, 2001 by $6,100.

The loss on discontinued operations, Melrose Crossing I, increased by $4,191.
This was due to an increase in operating expenses of $57,576 offset by a
increase in rental revenues of $53,385.


                                       25
<PAGE>


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

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

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

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

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

<TABLE>
<CAPTION>

                                                THREE MONTHS                              NINE MONTHS
                                                    ENDED                                    ENDED
                                   September 30, 2002   September 30, 2001  September 30, 2002   September 30, 2001
                                   ------------------   ------------------  ------------------   ------------------
<S>                                <C>                  <C>                 <C>                  <C>
Net (Loss) Income (A)              $         229,792    $        1,024,223  $     (24,043,352)   $        2,849,243

Plus:  Depreciation related
to real estate and tenant
improvements                                 431,968               294,122            969,297               873,077

Plus: Amortization of
     leasing commissions                      32,260                40,261             96,145               111,998

Plus: Adjustments for
     unconsolidated joint                    252,685               243,860            818,302               700,542
     ventures (B)                  ------------------   ------------------  ------------------   ------------------

Funds From Operations (A)          $         946,705    $        1,602,466  $      (2,159,608)   $        4,534,860
                                   =================    ==================  ==================   ==================

</TABLE>


(A)  Net Income and Funds From Operations for the nine months ended September
     30, 2002 include $23,049,398 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.


                                       26
<PAGE>



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 $29,779,343 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 $31,000. Conversely, a 10% decrease in LIBOR would decrease
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.



                                       27
<PAGE>



PART III. 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 sought 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 separately filed a class action under Section 211 of the
General Corporation Law of Delaware on May 7, 2002 (i) seeking to compel the
Companies to hold an annual meeting of shareholders 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 and trial on the statutory issues.

A letter agreement settling each of the actions brought by the Delaware
Plaintiffs' was signed by the parties on July 1, 2002, and remains subject to
court approval. The principal terms of the settlement were that the Companies
and their boards of directors would facilitate the completion of the HX
Investors Offer; conduct annual meetings on September 9, 2002 and expand the
board of directors of each of the Companies from four members to six, four of
whom would be independent directors, implement additional corporate governance
protections, propose and, if approved by shareholders, implement the plan of
liquidation. The settlement also provided for, among other things, a
contribution by Shelbourne Management 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 made 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.


                                       28
<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)

(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
                  Shelbourne Properties II, Inc.to Bayerische Hypo- Und
                  Vereinsbank AG, New York Branch, as agent for itself and other
                  lenders, with respect to its real property located in
                  Richmond, Virginia, Matthews, North Carolina and Raleigh,
                  North Carolina. (3)


                                       29
<PAGE>

(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

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

                                       31
<PAGE>

                                   SIGNATURES

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

                                         Shelbourne Properties II, Inc.
                                         (Registrant)


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


                                       32
<PAGE>

                         SHELBOURNE PROPERTIES II, 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 II, 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

                                       33
<PAGE>

                          SHELBOURNE PROPERTIES II, 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





                                       34
<PAGE>


                          SHELBOURNE PROPERTIES II, 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 II, 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



                                      35
<PAGE>

                          SHELBOURNE PROPERTIES II, 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












                                       36
<PAGE>

                          SHELBOURNE PROPERTIES II, 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)
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
<S>      <C>                                                                         <C>
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                                                           39

99.3     Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.                                                                           43
</TABLE>

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

(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



                                       38