<PAGE>

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

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


                                    FORM 10-Q

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

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

                         Commission file number 0-16343
                                                -------

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


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

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

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

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

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

            Yes [X]                                   No [ ]


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

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


<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


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

                                      INDEX

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

Item 1.  Financial Statements

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

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

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

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

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

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations..........................................     13

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...................     17

Part II. Other Information:

Item 6.       Exhibits and Reports on Form 8-K........................................     18

Signatures............................................................................     19
</TABLE>





                                       2
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


                                 BALANCE SHEETS

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

Real estate - net                                                        $ 40,753,235              $ 44,633,773
Real estate held for sale                                                   2,983,928                        --
Cash and cash equivalents                                                  12,209,360                10,222,394
Other assets                                                                1,985,125                 1,610,180
Receivables - net                                                             173,066                    83,415
                                                                         ------------              ------------
                                                                         $ 58,104,714              $ 56,549,762
                                                                         ============              ============
LIABILITIES AND EQUITY
----------------------

Accounts payable and accrued expenses                                    $    751,946              $    821,472
Due to affiliates                                                                   -                   335,041
                                                                         ------------              ------------
                                                                              751,946                 1,156,513
                                                                         ------------              ------------
Equity:

Common Stock:
$.01 Par Value per share; Authorized 2,500,000 shares; issued
and outstanding 1,173,998 shares                                               11,739                         -
Additional Capital                                                         56,083,569                         -
Retained Earnings                                                           1,257,460                         -

Limited partners' equity (371,766 units
   issued and outstanding)                                                          -                52,623,568
General partners' equity                                                            -                 2,769,681
                                                                         ------------              ------------
                                                                           57,352,768                55,393,249
                                                                         ------------              ------------

                                                                         $ 58,104,714              $ 56,549,762
                                                                         ============              ============
</TABLE>


                       See notes to financial statements.



                                       3
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               FOR THE THREE MONTHS ENDED           FOR THE NINE MONTHS ENDED
                                                      SEPTEMBER 30,                       SEPTEMBER 30,
                                               --------------------------         ----------------------------
                                                  2001            2000                2001            2000
                                                  ----            ----                ----            ----
<S>                                           <C>              <C>                <C>              <C>
Rental Revenue                                $ 2,049,343      $ 1,816,723        $ 5,936,488      $ 5,598,423
                                              -----------      -----------        -----------      -----------
Costs and Expenses:

     Operating expenses                           551,141          346,730          1,455,797        1,248,417
     Depreciation and amortization                422,793          409,030          1,246,328        1,179,700
     Asset management fee                         217,938          183,415            650,103          518,255
     Administrative expenses                       97,839          210,132            840,643          776,891
     Property management fee                       61,063           65,440            171,427          165,338
                                              -----------      -----------        -----------      -----------
                                                1,350,774        1,214,747          4,364,298        3,888,601
                                              -----------      -----------        -----------      -----------

Income before interest and other income           698,569          601,976          1,572,190        1,709,822

     Interest income                               86,569          117,206            339,395          290,360

     Other income                                   5,200           16,750             47,934           24,950
                                              -----------      -----------        -----------      -----------

Net income                                    $   790,338      $   735,932        $ 1,959,519      $ 2,025,132
                                              ===========      ===========        ===========      ===========
Earnings Per Share - Basic and Diluted
Net income per common share                   $       .67      $       .63        $      1.67      $      1.72
                                              ===========      ===========        ===========      ===========

Weighted average common shares                  1,173,998        1,173,998          1,173,998        1,173,998
                                              ===========      ===========        ===========      ===========
</TABLE>



                       See notes to financial statements.



                                       4
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                               STATEMENT OF EQUITY
                                   (UNAUDITED)

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

Net income through April 17, 2001         35,103         666,956              -               -             -       702,059

Conversion of partnership into REIT   (2,804,784)    (53,290,524)        11,739      56,083,569             -             -

Net income subsequent to conversion  $         -               -              -               -     1,257,460     1,257,460
                                     -----------     -----------      ---------     -----------    ----------   -----------
Balance, June 30, 2001               $         -     $         -      $  11,739     $56,083,569    $1,257,460   $57,352,768
                                     ===========     ===========      =========     ===========    ==========   ===========
</TABLE>

                       See notes to financial statements.



                                       5
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

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

     Net income                                                 $ 1,959,519          $2,025,132
     Adjustments to reconcile net income
     to net cash provided by operating activities:
         Depreciation and amortization                            1,246,328           1,179,700
         Straight line adjustment for stepped lease rentals        (79,478)            (40,386)
     Changes in assets and liabilities:
         Accounts payable and accrued expenses                     (69,526)           (274,780)
         Receivables                                               (89,651)             224,241
         Due to affiliates                                        (335,041)           (209,121)
         Other assets                                             (442,723)           (186,480)
                                                                -----------          ----------
     Net cash provided by operating activities                    2,189,428           2,718,306
                                                                -----------          ----------
Cash Flows From Investing Activities:

     Improvements to real estate                                  (202,462)            (36,188)
                                                                -----------          ----------
Increase in Cash and Cash Equivalents                             1,986,966           2,682,118

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

Cash and Cash Equivalents, End of Quarter                       $12,209,360          $9,115,648
                                                                ===========          ==========
</TABLE>

                       See notes to financial statements.



                                       6
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. GENERAL

   The accompanying financial statements, notes and discussions should be read
   in conjunction with the financial statements, related notes and discussions
   contained in the Annual Report on Form l0-K of High Equity Partners, L.P. -
   Series 88 (the "Partnership") for the year ended December 31, 2000. Effective
   April 17, 2001, the Partnership was merged with and into Shelbourne
   Properties III, LP (the "Operating Partnership"), a limited partnership
   wholly owned, directly and indirectly, by Shelbourne Properties III, Inc.
   (together with the Operating Partnership, the "Company"). See Note 8.

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

2. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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



                                       7
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

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

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

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



                                       8
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                         NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

3. RELATED PARTY TRANSACTIONS

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

   The fees payable to the general partners to April 17, 2001 and to Shelbourne
   Management from and after April 17, 2001 consist of (i) a maximum
   non-accountable expense reimbursement of $150,000 per year, (ii) an annual
   management fee of 1.25% of the Gross Asset Value of the Partnership/Company
   (as defined), (iii) property management fees of up to 6% of property
   revenues, and (iv) reimbursement of expenses incurred in connection with the
   performance of its services. Gross Asset Value is the gross asset value of
   all assets owned by the Operating Partnership based on the latest appraisal
   of real estate assets by an independent appraiser of national reputation
   selected by the advisor and the amount of other assets as reflected on the
   balance sheet. Since the asset management fee is based on gross assets, the
   amount payable to Shelbourne Management will increase to the extent the
   Company acquires new investments, whether for cash, by causing the Company to
   incur indebtedness or otherwise.



                                       9
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

3. RELATED PARTY TRANSACTIONS (CONTINUED)

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

<TABLE>
<CAPTION>
                                       Nine Months Ended                          Nine Months Ended
                                       -----------------                          -----------------
                                       September 30, 2001                         September 30, 2000
                                       ------------------                         ------------------
                                           [unaudited]                               [unaudited]
                         General Partners           Shelbourne Management          General Partners
                         ----------------           ---------------------          ----------------
<S>                          <C>                           <C>                         <C>
Expense Reimbursement        $ 59,444                      $ 90,556                    $150,000
Asset Management Fee         $256,312                      $393,791                    $518,255
</TABLE>

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

   For the nine months ended September 30, 2000, Resources Supervisory was
   entitled to receive $165,338 for property management services, $99,189 was
   paid to Kestrel Management L.P ("Kestrel") an entity controlled by former
   executive officers and a director of the Company , and $66,149 was paid to
   unaffiliated management companies.

   Effective October 2000, Kestrel began performing all property management
   services directly for the Partnership and, effective April 17, 2001, the
   Company. For the quarter ended September 30, 2001, Kestrel earned $61,063.
   For the nine months ended September 30, 2001 Kestrel earned $171,427.

   In connection with the merger, the units of limited partnership interest held
   by affiliates of the general partners, including those acquired in tender
   offers made in connection with the settlement of a class action lawsuit were
   converted into shares of common stock of the Company. In this regard,
   affiliates of PCIC received 326,289 shares of common stock of the Company
   representing 27.8% of the total outstanding shares. In addition, pursuant to
   the terms of the merger, the general partners received an aggregate of 58,701
   shares. See Note 8.



                                       10
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

4. REAL ESTATE

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

<TABLE>
<CAPTION>
                                      SEPTEMBER 30, 2001        DECEMBER 31, 2000
                                      ------------------        -----------------
                                         (UNAUDITED)
<S>                                      <C>                       <C>
Land                                     $  8,040,238              $  8,040,238
Buildings and improvements                 54,187,631                53,985,169
                                         ------------              ------------
                                           62,227,869                62,025,407
Less: Accumulated depreciation           (18,490,706)              (17,391,634)
                                         ------------              ------------

                                         $ 43,737,163              $ 44,633,773
                                         ============              ============
</TABLE>


5. REAL ESTATE HELD FOR SALE

   For real estate properties to be disposed of, an impairment loss is
   recognized when the fair value of the real estate, less the estimated cost to
   sell, is less than the carrying amount of the real estate measured at the
   time it is certain that the Operating Partnership will sell the property.
   Real estate held for sale represents the lesser of historical cost or fair
   market value less estimated closing costs.


6. DUE TO AFFILIATES

<TABLE>
<CAPTION>
                                            SEPTEMBER 30, 2001        DECEMBER 31, 2000
                                            ------------------        -----------------
                                               (UNAUDITED)
<S>                                              <C>                      <C>
Partnership asset management fee                 $      -                 $  285,041
Non-accountable expense reimbursement                   -                     50,000
                                                 --------                 ----------
   Total                                         $      -                 $  335,041
                                                 ========                 ==========
</TABLE>

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


7. FEDERAL INCOME TAX CONSIDERATIONS

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



                                       11
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

8. SETTLEMENT OF LAWSUIT

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

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

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

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

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

   On April 17, 2001 the conversion was accomplished by merging the Partnership
   into the Operating Partnership. Pursuant to the merger, each limited partner
   of the Partnership received three shares of stock in the Company for each
   unit they owned, and the general partners received an aggregate of 58,701
   shares of stock in the Company in exchange for their general partner
   interests in the Partnership. The common stock of the Company is listed on
   the American Stock Exchange under the symbol HXF.




                                       12
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

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

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

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

On April 17, 2001, Integrated Resources High Equity Partners, Series 88, a
California Limited Partnership (the "Partnership") was merged with and into
Shelbourne Properties III, LP, a limited partnership wholly owned, directly and
indirectly, by Shelbourne Properties III, Inc. Shelbourne Properties III, LP and
Shelbourne Properties III, Inc. are collectively referred to as the "Company".
Set below is a discussion and analysis of the financial condition of the Company
and the historical operations of the Partnership.

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

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

The Company is currently marketing it properties located in Edina, Minnesota;
and Toledo, Ohio for sale. In the event that these properties, or any of them,
are ultimately sold, the net proceeds from such sale will be distributed, held
in reserves or invested in existing or new properties, or a combination thereof.



                                       13
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


The Company had $12,209,360 in cash and cash equivalents at September 30, 2001.
Cash and cash equivalents are temporarily invested in short-term instruments.
The Company's level of liquidity based upon cash and cash equivalents increased
by $1,986,966 for the nine months ended September 30, 2001 as compared to
December 31, 2000. The increase in cash and cash equivalents is due to
$2,189,428 of cash provided by operating activities that was partially offset by
$202,462 of improvements to real estate (investing activities). Currently, the
Company's primary source of funds is cash flow from the operation of its
properties principally rents charged to tenants that amounted to $5,936,488 for
the nine months ended September 30, 2001. In addition, to the extent the Company
acquires additional assets, its cash flow from operations would be derived from
a larger, more diverse, and potentially riskier group of assets than currently
owned. Likewise, the Company's ability to pay dividends may be affected by the
leveraging of its assets and reinvestment of sale and financing proceeds for the
acquisition of additional assets.

For the three months and nine months ended September 30, 2001, the Company made
$52,154 and $202,462 respectively, in capital expenditures that were funded from
cash flow and the Company's working capital reserves. In addition to tenant
improvements at the properties, capital expenditures consisted of signage
improvements at Sunrise Market Place and booster pumps for sprinkler's at 568
Broadway.

Although the Company budgeted an aggregate of $1,922,000 for capital
improvements and capitalized tenant procurement costs in 2001, to date the
Company has only spent $202,462 for these items. It is not expected that the
full budgeted amount will be spent prior to year end and any additional
expenditures are expected to be incurred during the normal course of business
and will be funded from cash flow from the operation of the properties and
working capital reserves that are temporarily invested in short-term money
market instruments, as well as other sources of capital including financing
proceeds and the issuance of additional equity. However, the actual amount of
such expenditures depends upon the level of leasing activity and other factors
that cannot be predicted with certainty. Because it is possible that the Company
will have mortgage indebtedness and a substantially larger pool of real estate
assets, thereby increasing expenses, the risk that it may be unable to fund the
necessary capital and tenant procurement costs at its properties will likely be
increased.

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

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

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

The Company's net income experienced a decrease of $65,613 (3.2%) for the nine
months ended September 30, 2001 as compared to the same period in the prior
year. The decrease in net income from the comparable nine-month period was due
to an increase in costs and expenses $475,697 (12.2%) partially offset by
increases in rental income of $338,065 (6%), interest income of $49,035 (16.9%)
and other income of $22,984 (92.1%).


                                       14
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


Costs and expenses increased by $475,697 during the nine months ended September
30, 2001 compared to the same period in 2000 due to increases in all expense
categories. Operating expenses increased during the nine months ended September
30, 2001 as compared to 2000 due to an increase in real estate taxes, repair and
maintenance costs and insurance premiums. Depreciation and amortization
increased during the nine months ended September 30, 2001 as compared to 2000
due primarily to increased tenant improvement and tenant procurement costs at
the Tri-Columbus properties. Asset management fees increased for the nine months
ended September 30, 2001 as compared to the nine months ended June 30, 2000 as
appraisals were conducted in the second quarter of 2000 that significantly
increased the Gross Asset Value of the portfolio owned by the Company along with
the increased cash balance. Administrative expenses increased for the nine
months ended September 30, 2001 as compared to the same period in 2000 primarily
due to increased expenses associated with the conversion of the Partnership into
the Company. Property management fees increased due to the increased revenue
collection.

Rental revenues increased for the nine months ended September 30, 2001 as
compared to 2000 primarily due to the increased occupancy of 4251 Leap Road in
Columbus, Ohio and Sunrise Marketplace in Las Vegas, Nevada and increased
rentals at 568 Broadway that were partially offset by the Toledo Supervalu
building being vacant.

Interest income increased due to higher cash balances during the nine months
ended September 30, 2001 as compared to September 30, 2000. The increased cash
balance is due to the suspension by the Partnership of distributions until the
conditions of the settlement of the lawsuit were met. To the extent that
dividends are made in excess of net income, it is expected that interest income
will decline in subsequent quarters. Other income increased during the nine
months ended September 30, 2001 as compared to the same period in 2000 as a
result of a real estate tax abatement received at 4251 Leap Road of $33,034
combined for the years 1998, 1999 and 2000.

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

The Company's net income experienced an increase of $54,406 (7.4%) for the three
months ended September 30, 2001. The increase in net income for the comparable
three month periods was due to an increase in rental revenue of $232,620
(12.8%), offset by a an increase in costs and expenses of $136,027 (11.2%) and a
decrease interest income of $30,637 (26.1%) and other income of $11,550 (69%).

Rental revenues increased during the three months ended September 30, 2001 as
compared to the same period in 2000 due to increased rental rates for the
extension of the Volvo Lease at Tri-Columbus and the occupancy of the entire
building at 4251 Leap Road in Columbus, Ohio, along with collection of prior
year common area maintenance costs and real estate taxes from the above
referenced building. Rental revenues also increased due to an increase in
occupancy at Sunrise Marketplace.

Interest income decreased for the three months ended September 30, 2001 as
compared to the same period in 2000 due to lower yields available on cash
investments during the three months ended September 30, 2001 as compared to the
comparable period in 2000. Other income decreased for the comparable periods due
to the decease in transfer fee income.

Costs and expenses increased for the three months ended September 30, 2001 as
compared to 2000, primarily due to an increase in operating expenses and asset
management fees that was partially offset by a decrease in administrative
expense.


                                       15
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001

Operating expenses increased during the three-month period ended September 30,
2001 as compared to the same period in 2000, due to a major increase in
insurance premiums. Depreciation and amortization increased due to tenant
improvement and tenant procurement costs at the Tri-Columbus properties and
Sunrise Marketplace. Asset management fees increased for the three months ended
September 30, 2001 as compared to the three months ended September 30, 2000 as
appraisals were conducted in the second quarter of 2000 that significantly
increased the Gross Asset Value of the portfolio owned by the Company combined
with the increased cash balance. Property management fees remained relatively
stable for the three-month period ended September 30, 2001 as compared to the
same period in 2000. Administrative expenses decreased for the three months
ended September 30, 2001 as compared to the same period in 2000 primarily due to
the consummation of the conversion of the Partnership into the Company.

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

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

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

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

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

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

<TABLE>
<CAPTION>
                                               Three Months Ended                    Nine Months Ended
                                        September 30,     September 30,      September 30,      September 30,
                                        -------------     -------------      -------------      -------------
                                            2001              2000               2001               2000
                                            ----              ----               ----               ----
<S>                                       <C>                <C>              <C>                <C>
Net Income                                $ 790,338        $  735,932         $1,959,519         $2,025,132

Plus: Depreciation and
Amortization related to real estate         422,793           409,030          1,246,328          1,179,700
                                         ----------        ----------         ----------         ----------
Funds From Operations                    $1,213,131        $1,144,962         $3,205,847         $3,204,832
                                         ==========        ==========         ==========         ==========
</TABLE>



                                       16
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


OTHER MATTERS

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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



                                       17
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.

                         FORM 10-Q - SEPTEMBER 30, 2001


PART II. OTHER INFORMATION


Item 6:  Exhibits and Reports on Form 8-K

         (a)      Exhibits:

                  None

         (b)      Reports on Form 8-K:

                  None



                                       18
<PAGE>


                                   SIGNATURES

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


                                           Shelbourne Properties III, Inc.

Dated: November 14, 2001                   By: /s/ W. Edward Scheetz
                                               ---------------------------------
                                               W. Edward Scheetz
                                               President and Director
                                               (Principal Executive Officer)


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




                                       19