UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
           For the fiscal year ended December 31, 2001
                                       or
 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
           For the transition period from____________ to ____________.

                         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 Identification No.)
   incorporation or organization)

  c/o First Winthrop Corporation
   7 Bulfinch Place - Suite 500                             02114
           Boston, MA
-------------------------------------       ------------------------------------
(Address of principal executive offices)                   (Zip Code)

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


Securities registered pursuant to Section 12(b) of the Act:
-----------------------------------------------------------

           Title of Each Class              Name of Exchange on Which Registered
      Common Stock, $0.01 par value                American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------

           Title of Each Class              Name of Exchange on Which Registered
                  None                                     None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 at least the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 25, 2002, 722,900 shares of common stock were issued and outstanding
and held by non-affiliates with an aggregate market value of $29,132,870.

<PAGE>

                                Table of Contents

                                                                            Page

PART I.........................................................................3


     Item 1.   Business........................................................3
     Item 2.   Properties.....................................................16
     Item 3.   Legal Proceedings..............................................19
     Item 4.   Submission of Matters to a Vote of Security Holders............20

PART II.......................................................................21

     Item 5.   Market for Registrant's Common Equity and Related Stockholder
               Matters........................................................21
     Item 6.   Selected Financial Data........................................23
     Item 7.   Management's Discussion and Analysis of Financial Condition and
               Results of Operations..........................................23
     Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.....32
     Item 8.   Financial Statements and Supplementary Data....................32
     Item 9.   Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure...........................................32

Part III......................................................................33

     Item 10.  Directors and Executive Officers...............................33
     Item 11.  Compensation...................................................36
     Item 12.  Security Ownership Of Certain Beneficial Owners And
               Management.....................................................37
     Item 13.  Certain Relationships and Related Transactions.................38

Part IV.......................................................................39

     Item 14.  Exhibits, Financial Statement Schedules and Reports on
               Form 8-K.......................................................39


                           Forward-Looking Statements

         This Form 10-K contains forward-looking statements relating to our
business and financial outlook, which are based on our current expectations,
estimates, forecasts and projections. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties, estimates and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from those expressed in these forward-looking statements. You should
not place undue reliance on any of these forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any such statement to reflect new
information, the occurrence of future events or circumstances or otherwise.

         A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under "Item 1. Business - Risk Factors"
in this Form 10-K.

                                       2
<PAGE>



                                     PART I

         Item 1.  Business

         In this Form 10-K, the terms "we," "us," "our" and "our company" refer
to the combined operations of all of Shelbourne Properties III, Inc., Shelbourne
Properties III GP, LLC and Shelbourne Properties III, LP.

                                    Overview

         Our company, Shelbourne Properties III, Inc., a Delaware corporation
(the "Corporation"), was formed on February 8, 2001 and is engaged in the
business of operating and holding for investment previously acquired
income-producing properties. Currently, we operate and hold one office building,
three shopping centers, two retail stores (supermarkets) and three industrial
warehouses. See "Item 2. Properties" for a description of our properties.

         We own our property portfolio through our directly and indirectly
wholly owned subsidiary, Shelbourne Properties III, LP (the "Operating
Partnership"), a Delaware limited partnership. The Operating Partnership is the
direct owner of our property portfolio. The general partner of the Operating
Partnership is Shelbourne Properties III GP, LLC, a Delaware limited liability
company that is wholly owned by the Corporation.

         Our primary business objective is to maximize the value of our common
stock. We seek to achieve this objective by managing our existing properties,
making capital improvements to and/or selling properties and by making
additional real estate-related investments. We may invest in a variety of real
estate-related investments, including undervalued assets and value-enhancing
situations, in a broad range of property types and geographical locations. We
may raise additional capital by mortgaging existing properties or by selling
equity or debt securities. We may acquire investments for cash or by issuing
equity securities, including limited partnership interests in the Operating
Partnership.

         Our Board of Directors currently consists of three directors. Two
directors' terms expire in 2003 and one expires in 2004. Kestrel Management L.P.
("Kestrel"), an entity affiliated with former executive officers of the
Corporation provides us with property management services for the properties
owned by the Operating Partnership. Shelbourne Management LLC ("Shelbourne
Management"), an affiliate of the Predecessor General Partners, managed the
day-to-day affairs of the Corporation under an advisory agreement until February
14, 2002. On that date, further to the transaction described under "Recent
Developments" below, Shelbourne Management ceased to provide those services to
us and Presidio Capital Investment Company, LLC ("PCIC"), a Delaware limited
liability company controlled by former directors and executive officers and a
current director of the Corporation, began providing the Corporation with
accounting, asset management, treasury, cash management and investor relation
services. PCIC has agreed to furnish us with those services until February of
2003 on a transition basis at a substantially reduced cost.

         We intend to be taxed as a real estate investment trust, or REIT, for
U.S. federal income tax purposes. To qualify as a REIT, we generally must
distribute to our stockholders at least 90% of our net taxable income each year,
excluding capital gains. As a REIT, if we distribute 100% of our taxable income
and comply with a number of organizational and operational requirements we
generally will not be subject to U.S. federal income tax.

Corporate History

         Prior to the merger described below, the owner of the Corporation's
properties was High Equity Partners L.P. - Series 88, a Delaware limited
partnership (the "Predecessor Partnership"). The Predecessor Partnership was
formed as of February 24, 1987. In 1989, the Predecessor Partnership made a
public offering of 400,000 units of limited partnership interest (the "Units").
Upon final admission of limited partners, the Predecessor Partnership had
accepted subscriptions for 371,766 units for an aggregate of $92,941,500 in
gross proceeds, resulting in net proceeds from the offering of $90,153,255
(gross proceeds of $92,941,500 less organization and offering costs of
$2,788,245). Subsequent to the conversion discussed below, the Partnership Units
were converted into shares of the successor Corporation on a three for one
basis. Throughout the rest of this document, rather than referring to Units, we
will refer to shares on an as converted basis. In August of 1990, $6,305,151.36
in uninvested gross proceeds was

                                       3

<PAGE>

returned to the Shareholders as a special distribution of $5.65 per Share,
resulting in net proceeds from the offering of $83,848,104 (gross proceeds of
$86,636,349 less organization and offering costs of $2,788,245). The Predecessor
Partnership invested substantially all of its total adjusted net proceeds, after
establishing a working capital reserve, in real estate.

         Resources High Equity, Inc., a Delaware corporation and a wholly owned
subsidiary of Presidio Capital Corp., a British Virgin Islands corporation
("Presidio"), was the Predecessor Partnership's managing general partner (the
"Predecessor Managing General Partner"). Effective July 31, 1998, NorthStar
Capital Investment Corp., a Maryland corporation, acquired control of Presidio.
Until November 3, 1994, Resources High Equity, Inc. was a wholly owned
subsidiary of Integrated Resources, Inc. ("Integrated"). On November 3, 1994
Integrated consummated its plan of reorganization under Chapter 11 of the United
States Bankruptcy Code at which time, pursuant to such plan of reorganization,
the newly-formed Presidio purchased substantially all of Integrated's assets.
Presidio AGP Corp., which is a wholly-owned subsidiary of Presidio, became the
associate general partner (the "Predecessor Associate General Partner") of the
Predecessor Partnership on February 28, 1995 replacing Z Square G Partners II,
which withdrew as of that date. In this annual report, the Predecessor Managing
General Partner and the Predecessor Associate General Partner are referred to as
the "Predecessor General Partners".

         In April 1999, the California Superior Court approved the terms of the
settlement of a class action and derivative litigation involving the Predecessor
Partnership. Under the terms of the settlement, the Predecessor 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 Predecessor Partnership (the "Predecessor Partnership
Agreement") summarized below. The settlement became effective in August 1999
following approval of the amendments.

         As amended, the Predecessor Partnership Agreement (a) provided for a
Partnership Asset Management Fee equal to 1.25% of the Gross Asset Value of the
Predecessor Partnership (as defined in that agreement) and a fixed 1999
Partnership Asset Management Fee of $719,411 ($160,993 less than the amount that
would have been paid under the pre-amendment formula) and (b) fixed the amount
that the Predecessor General Partners would be liable to pay to limited partners
upon liquidation of the Predecessor Partnership as repayment of fees previously
received (the "Fee Give-Back Amount"). As amended, the Predecessor Partnership
Agreement provided that, upon a reorganization of the Predecessor Partnership
into a REIT or other public entity, the Predecessor General Partners would have
no further liability to pay the Fee Give-Back Amount. As a result of the
conversion of the Predecessor Partnership into a REIT on April 17, 2001, as
described below, the Predecessor General Partners liability to pay the Fee
Give-Back Amount was extinguished.

         As required by the settlement, an affiliate of the Predecessor General
Partners, Millennium Funding IV, LLC, made a tender offer to limited partners to
acquire up to 25,034 Unit (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. On a post conversion basis, the tender
offer was for the equivalent of 75,012 shares at a price of $37.71 per share.

         The final requirement of the settlement obligated the Predecessor
General Partners to use their best efforts to reorganize the Predecessor
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 Predecessor 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 Predecessor
Partnership seeking consent to the reorganization of the Predecessor Partnership
into a REIT.

         The consent of limited partners was sought to approve the conversion of
the Predecessor Partnership into the Operating Partnership. 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
Predecessor Partnership into the Operating Partnership. Pursuant to the merger,
each limited partner of the Predecessor Partnership received three shares of
stock of the Corporation for each unit they owned and the Predecessor General
Partners received an

                                       4

<PAGE>

aggregate of 58,701 shares of stock in the Corporation in exchange for their
general partner interests in the Predecessor Partnership. The common stock of
the Corporation is listed on the American Stock Exchange under the symbol HXF.

         As described above, the Predecessor Partnership invested all of the net
proceeds of its offering of Units in real estate. Revenues from the following
properties represented 10% or more of the Predecessor Partnership's and,
subsequently, our gross revenues during each of the last three fiscal years:
during 2001, Tri-Columbus, Sunrise, Livonia and 568 Broadway represented 27%,
25%, 18% and 24% of gross revenues, respectively; during 2000, Tri-Columbus,
Sunrise, Livonia and 568 Broadway represented 25%, 26%, 19% and 23% of gross
revenues, respectively; during 1999, Tri-Columbus, Sunrise, Livonia and 568
Broadway represented 22%, 25%, 19% and 23% of gross revenues, respectively. See
"Item 2. Properties" for a description of our properties.

Recent Developments

         On February 14, 2002, the Corporation, Shelbourne Properties I, Inc.
and Shelbourne Properties II, Inc. (together the "Companies") announced the
consummation of a transaction (the "Transaction") whereby the Companies (i)
purchased each of the advisory agreements (the "Advisory Agreements") between
the Companies and an affiliate of PCIC and (ii) repurchased all of the shares of
capital stock in the Companies held by a subsidiary of, PCIC, Millennium Funding
IV (the "Shares").

         Pursuant to the Transaction, for the Advisory Agreements and the
Shares, the Companies paid PCIC an aggregate of $44 million in cash, issued
preferred partnership interests in their respective operating partnerships with
a liquidation preference of $2.5 million, and issued notes with a stated amount
of between $54.3 million and $58.3 million, depending upon the timing of the
repayment of the notes.

         Pursuant to the Transaction, the Corporation paid PCIC approximately
$11.8 million in cash and the Operating Partnership issued preferred partnership
interests with an aggregate liquidation preference of $672,178 and a note with
an aggregate stated amount of between approximately $14.6 million and $15.7
million, depending upon the timing of the repayment of the note.

         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.

         The foregoing description of the Transaction does not purport to be
complete, and it is qualified in its entirety by reference to the Purchase and
Contribution Agreement, dated as of February 14, 2002, the Secured Promissory
Note, dated February 14, 2002 and the Partnership Unit Designations of Class A
Preferred Partnership Units of Shelbourne Properties III, L.P., copies of which
are attached as Exhibits 99.1, 99.2 and 99.3 respectively to our current report
on form 8-K filed on February 14, 2002, and are incorporated by reference
herein.

         On March 27, 2002, Michael Bebon resigned as a director of the
Corporation.

Competition

         The leasing of real estate is highly competitive. We compete for
tenants with lessors and developers of similar properties located in our
respective markets primarily on the basis of location, rent charged, services
provided, and the design and condition of our buildings. These factors are
discussed more particularly in "Item 2. Properties" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Real
Estate Market". In addition, various limited partnerships have been formed by
the Predecessor General Partners and/or their affiliates and agents that engage
in businesses that may be competitive with the Corporation. We will also
experience competition for potential buyers at such time as we seek to sell any
of our properties.

                                       5

<PAGE>

Industry Segments and Seasonality

         Our primary business is the ownership and management of office, retail
and industrial properties. Our long-term tenants are in a variety of businesses
and no single tenant is significant to our business. Our business is not
seasonal.

Employees

         The Corporation has no employees. On May 3, 1998 Presidio entered into
a management agreement with NorthStar Presidio Management Company, LLC
("NorthStar Presidio"). Under the terms of the management agreement, NorthStar
Presidio, as the parent of the General Partner of the Predecessor Partnership,
agreed to provide the services associated with day-to-day management of Presidio
and its direct and indirect subsidiaries and affiliates, including the
Predecessor Partnership. Presidio determined that it would be more cost
effective for AP-PCC III, L.P. (the "Agent") to provide asset management and
investor relation services for the Corporation. Accordingly, on October 21, 1999
Presidio entered into a Services Agreement with the Agent pursuant to which the
Agent was retained to provide asset management and investor relation services to
the Predecessor Partnership and other entities affiliated with the Predecessor
Partnership. The Agent continues to provide services to the Corporation pursuant
to that agreement.

         As a result of this agreement, the Agent has the duty to direct the day
to day affairs of the Corporation in accordance with instructions from the Board
of Directors, including, without limitation, reviewing and analyzing potential
sale, financing or restructuring proposals regarding the Corporation 's assets
and making recommendations to the Board of Directors on such proposals,
preparation of all reports, maintaining records and maintaining bank accounts of
the Corporation. All of the Agent's activities are performed under the
Presidio's direct supervision.

         In order to facilitate the Agent's provision of the asset management
services and the investor relation services, effective October 25, 1999, the
officers and directors of the Predecessor General Partners resigned and nominees
of the Agent were elected as the officers and directors of the Predecessor
General Partners and served as officers until August 15, 2001. See "Item 10.
Directors and Executive Officers of the Partnership". The Agent is an affiliate
of Winthrop Financial Associates ("Winthrop"), a Boston based limited
partnership that provides asset management services, investor relation services
and property management services to over 150 limited partnerships which own
commercial property and other assets. The CEO of Winthrop, Mr. Michael L.
Ashner, beneficially owned, as of February 14, 2002, 6.73% of the common stock
of the Corporation. In addition, until August 15, 2001, Mr. Ashner served as
President of the Corporation.

         In connection with the conversion, effective April 17, 2001 the
Corporation entered into a contract with Shelbourne Management pursuant to which
Shelbourne Management provided the Corporation with all management, advisory and
property management services. For providing these services, Shelbourne
Management received (1) an annual asset management fee, payable quarterly, equal
to 1.25% of the gross asset value of the Corporation 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 performance of its services. This agreement was contributed
to the Corporation pursuant to the Transaction described in "Recent
Developments" above.

         On February 14, 2002, PCIC entered into a Purchase and Contribution
Agreement with the Corporation, among others, which in part provided that PCIC
would provide accounting, asset management, treasury, cash management and
investor related services to the Corporation on a transition basis at a
substantially reduced cost. As a result of the contribution of the Advisory
Agreements to the Corporation, Shelbourne Management ceased to provide
management services for the Corporation. According to the terms of the
agreement, the Corporation may terminate PCIC at any time, and PCIC's obligation
to provide such services terminates on February 14, 2003.

         Until the Transaction, the Agent continued to provide the services for
the Corporation on behalf of Shelbourne Management that it had provided
previously and continues to provide those services for the Corporation on behalf
of PCIC.

                                       6
<PAGE>

         On-site personnel perform services for the Corporation at the
properties. Salaries for such on-site personnel are paid by the management
company that services the Corporation's properties. As described above,
effective October 2000, Kestrel, an affiliate of the Agent and the Predecessor
General Partners, began providing such services.

                                       7
<PAGE>

                                  RISK FACTORS

         You should carefully consider the risks described below. These risks
are not the only ones that our company may face. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations and hinder our ability to make expected distributions to our
stockholders.

         This Form 10-K also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below or elsewhere in this Form 10-K.

                         Risks Relating to Our Business

Our economic performance and the value of our real estate assets are subject to
the risks incidental to the ownership and operation of real estate properties

         Our economic performance, the value of our real estate assets and,
therefore, the value of your investment are subject to the risks normally
associated with the ownership and operation of real estate properties,
including:

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

         o   changes in the general and local economic        o   the attractiveness of our properties
             climate;                                             to tenants;

         o   the cyclical nature of the real estate           o   changes in market rental rates and our
             industry and possible oversupply of, or              ability to rent space on favorable terms;
             reduced demand for, space in our core markets;

         o   trends in the retail industry, in                o   the bankruptcy or insolvency of
             employment levels and in consumer spending           tenants;
             patterns;

         o   changes in household disposable income;          o   the need to periodically renovate,
                                                                  repair and re-lease space and the costs
                                                                  thereof;

         o   changes in interest rates and the                o   increases in maintenance, insurance
             availability of financing;                           and operating costs; and

         o   competition from other properties;               o   civil unrest, acts of terrorism,
                                                                  earthquakes and other natural disasters or
                                                                  acts of God that may result in uninsured
                                                                  losses.
</TABLE>


         In addition, applicable federal, state and local regulations, zoning
and tax laws and potential liability under environmental and other laws may
affect real estate values. Real estate investments are relatively illiquid and,
therefore, our ability to vary our portfolio quickly in response to changes in
economic or other conditions is limited. Further, throughout the period that we
own real property, regardless of whether the property is producing any income,
we must make significant expenditures, including property taxes, maintenance
costs, insurance costs and related charges and mortgage payments from February
14, 2001 on certain of our properties.. The risks associated with real estate
investments may adversely affect our operating results and financial position,
and therefore the funds available for distribution to you as dividends.

Our inability to enter into renewal or new leases on favorable terms for all or
a substantial portion of space that is subject to expiring leases would
adversely affect our cash flows and operating results

         Scheduled lease expirations in our property portfolio over the next
five fiscal years average approximately 10% annually, based on occupied space at
December 31, 2001. When leases for our properties expire, we may be unable to
promptly renew leases with existing tenants or lease the properties to new
tenants. In addition, even if we

                                       8

<PAGE>

were able to enter into renewal or new leases in a timely manner, the terms of
those leases may be less favorable to us than the terms of expiring leases
because:

         o  the rental rates of the renewal or new leases may be significantly
            lower than those of the expiring leases; or

         o  tenant installation costs, including the cost of required
            renovations or concessions to tenants, may be significant.

         In order to enter into renewal or new leases for space in these
properties, we may incur higher tenant installation costs. If we are unable to
enter into renewal or new leases on favorable terms for all or a substantial
portion of space that is subject to expiring leases, our cash flows and
operating results would suffer.

If a significant number of our tenants defaulted or sought bankruptcy
protection, our cash flows and operating results would suffer

         A tenant may experience a downturn in its business, which could cause
the loss of that tenant or weaken its financial condition and result in the
tenant's inability to make rental payments when due. In addition, a tenant of
any of our properties may seek the protection of bankruptcy, insolvency or
similar laws, which could result in the rejection and termination of such
tenant's lease and cause a reduction in our cash flows.

         We cannot evict a tenant solely because of its bankruptcy. A court,
however, may authorize a tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid, future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent owed under the lease. In any event, it is unlikely that a bankrupt tenant
will pay in full amounts it owes us under a lease. The loss of rental payments
from tenants would adversely affect our cash flows and operating results.

         One of our tenants, Cub Foods, declared bankruptcy and rejected the
lease at the Supervalu property in Norcross, GA on January 31, 2002 resulting in
a loss of future revenue of $738,042. The tenant also has a lease at the
Supervalu property in Indianapolis, Indiana that has not been rejected.

Our business is substantially dependent on the economic climates of seven
markets

         Our real estate portfolio consists of an office property in New York,
retail properties in five markets (Melrose Park, IL, Livonia, MI, Las Vegas, NV,
Norcross, GA and Indianapolis, IN) and industrial properties in a single market
(Columbus, Ohio). As a result, our business is substantially dependent on the
economies of these markets. A material downturn in demand for office, industrial
or retail space in any one of these markets could have a material impact on our
ability to lease the office, industrial or retail space in our portfolio and may
adversely impact our cash flows and operating results.

Our competitors may adversely affect our ability to lease our properties, which
may cause our cash flows and operating results to suffer

         We face significant competition from developers, managers and owners of
office, industrial, retail and mixed-use properties in seeking tenants for our
properties. Substantially all of our properties face competition from similar
properties in the same markets. These competing properties may have vacancy
rates higher than our properties, which may result in their owners being willing
to make space available at lower prices than the space in our properties.
Competition for tenants could have a material adverse effect on our ability to
lease our properties and on the rents that we may charge or concessions that we
must grant. If our competitors adversely impact our ability to lease our
properties, our cash flows and operating results may suffer.

                                       9

<PAGE>

The September 2001 terrorist attacks may adversely affect the property operating
income from our properties, as well as our ability to sell properties that we
are holding for disposition on a timely basis or on acceptable terms

         The September 2001 terrorist attacks in New York and Washington, D.C.
and related circumstances may adversely affect the U.S. economy and, in
particular, the economies of the U.S. cities that comprise part of our markets.
This could have a material adverse impact on our ability to lease the office
space in our portfolio. As a result, the property operating income from our
office properties, and therefore our operating results, may suffer.

Our financial covenants could adversely affect our financial condition and
results of operations

         The financings, as of February 14, 2002, secured by our properties
contain customary covenants such as those that limit our ability, without the
prior consent of the lender, to further mortgage the applicable property or to
discontinue insurance coverage. We expect to establish a credit facility to
finance our acquisition of the Advisory Agreements and the capital stock a
subsidiary of PCIC held in the Companies. If we are unable to establish a credit
facility, or to refinance existing indebtedness, our financial condition and
results of operations would likely be adversely impacted. If we breach covenants
in the mortgages or security interest we have granted to PCIC on the 568
Broadway office building, Livonia Plaza, Sunrise Marketplace and Tri-Columbus
properties, PCIC can declare a default and require us to repay the debt
immediately and can immediately take possession of the property securing the
loan.

If we cannot refinance our debt at maturity on favorable terms, our financial
condition could be adversely affected

         The Note we issued and distributed to preferred shareholders as part of
the stock buy-back transaction described in "Item 1. Business - Recent
Developments" above with a principal amount at maturity of $15,665,421 is due on
August 14, 2002. We do not expect to have sufficient cash or other liquid assets
to pay this debt. As such, we intend to refinance this debt. However, financing
may not be available on terms favorable to us at that time. If we are unable to
refinance this debt on favorable terms or at all, we may need to liquidate
assets in order to meet our payment obligations on the Note. Prevailing market
conditions for a sale of assets may not be favorable at that time. As a result,
the selling price for any assets we may sell might be lower than if we had been
able to sell at a more favorable time.

Our degree of leverage may adversely affect our business and the market price of
our common stock

         Our leverage, which we define as the principal amount of our debt at
maturity divided by shareholders' equity as of our most recent financial
statements, is currently approximately 28.11%. Our degree of leverage could
adversely affect our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, developments or other general corporate
purposes. Our degree of leverage could also make us more vulnerable to a
downturn in our business or the economy generally. We have entered into certain
financial agreements that contain financial and operating covenants limiting our
ability under certain circumstances to incur additional secured and unsecured
indebtedness. There is also a risk that a significant increase in the ratio of
our indebtedness to the measures of asset value used by financial analysts may
have an adverse effect on the market price of our common stock.

Because we must distribute a substantial portion of our net income to qualify as
a REIT, we may be dependent on third-party sources of capital to fund our future
capital needs

         To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains.
Because of this distribution requirement, it is not likely that we will be able
to fund all of our potential future capital needs, including capital for any
property acquisitions or developments we may undertake, from our net income.
Therefore, we may have to rely on third-party sources of capital, which may not
be available on favorable terms or at all. Our access to third-party sources of
capital depends on a number of things, including the market's perception of our
growth potential and our current and potential future earnings. Moreover,
additional debt financings may substantially increase our leverage.

                                      10
<PAGE>

Environmental problems at our properties are possible, may be costly and may
adversely affect our operating results or financial condition

         We are subject to various federal, state and local laws and regulations
relating to environmental matters. Under these laws, we are exposed to liability
primarily as an owner or operator of real property and, as such, we may be
responsible for the cleanup or other remediation of contaminated property.
Contamination for which we may be liable could include historic contamination,
spills of hazardous materials in the course of our tenants' regular business
operations and spills or releases of hydraulic or other toxic oils. An owner or
operator can be liable for contamination or hazardous or toxic substances in
some circumstances whether or not the owner or operator knew of, or was
responsible for, the presence of such contamination or hazardous or toxic
substances. In addition, the presence of contamination or hazardous or toxic
substances on property, or the failure to properly clean up or remediate such
contamination or hazardous or toxic substances when present, may materially and
adversely affect our ability to sell or rent such contaminated property or to
borrow using such property as collateral.

         Environmental laws and regulations can change rapidly, and we may
become subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations could
have a material adverse effect on our operating results or financial condition.
We believe that our exposure to environmental liabilities under currently
applicable laws is not material. We cannot assure you, however, that we
currently know of all circumstances that may give rise to such exposure.

If we were required to accelerate our efforts to comply with the Americans with
Disabilities Act, our cash flows and operating results could suffer

         All of our properties must comply with the Americans with Disabilities
Act, or the ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to people with disabilities. Compliance with ADA
requirements could require us to remove access barriers, and non-compliance
could result in the imposition of fines by the U.S. government or an award of
damages to private litigants. We believe that the costs of compliance with the
ADA will not have a material adverse effect on our cash flows or operating
results. However, if we must make changes to our properties on a more
accelerated basis than we anticipate, our cash flows and operating results could
suffer.

Additional regulations applicable to our properties may require us to make
substantial expenditures to ensure compliance, which could adversely affect our
cash flows and operating results

         Our properties are, and properties that we may acquire in the future
will be, subject to various federal, state and local regulatory requirements
such as local building codes and other similar regulations. If we fail to comply
with these requirements, governmental authorities may impose fines on us or
private litigants may be awarded damages against us.

         We believe that our properties are currently in substantial compliance
with all applicable regulatory requirements. New regulations or changes in
existing regulations applicable to our properties, however, may require us to
make substantial expenditures to ensure regulatory compliance, which would
adversely affect our cash flows and operating results.

Our insurance may not cover some potential losses

         We carry comprehensive general liability, fire, flood, extended
coverage and rental loss insurance with policy specifications, limits and
deductibles customarily carried for similar properties. Some types of risks,
generally of a catastrophic nature such as from war or environmental
contamination, however, are either uninsurable or not economically insurable. We
are not insured against acts of terrorism.

         We currently have insurance for earthquake risks, subject to certain
policy limits and deductibles, and will continue to carry such insurance if it
is economical to do so. We cannot assure you that earthquakes may not seriously
damage our properties and that the recoverable amount of insurance proceeds will
be sufficient to fully cover reconstruction costs and losses suffered. Should an
uninsured or underinsured loss occur, we could lose our

                                       11

<PAGE>

investment in, and anticipated income and cash flows from, one or more of our
properties, but we would continue to be obligated to repay any recourse mortgage
indebtedness on such properties.

         Additionally, although we generally obtain owner's title insurance
policies with respect to our properties, the amount of coverage under such
policies may be less than the full value of such properties. If a loss occurs
resulting from a title defect with respect to a property where there is no title
insurance or the loss is in excess of insured limits, we could lose all or part
of our investment in, and anticipated income and cash flows from, that property.

We do not have sole control over the properties that we hold with co-venturers
or partners or over the revenues and certain decisions associated with those
properties

         We participate in one office, two retail and three industrial property
joint ventures or partnerships. The office property that we own through a joint
venture totals approximately 300,000 square feet, with our ownership interest
totaling approximately 66,400 square feet. The retail properties that we own
through joint ventures or partnerships total approximately 258,600 square feet,
with our ownership interest totaling approximately 129,300 square feet. The
industrial properties that we own through joint ventures or partnerships total
approximately 1,010,500 square feet, with our ownership interest totaling
approximately 801,700 square feet. Though our co-venturer in the case of the
office and industrial properties is currently under common management with us,
the co-venturer for our retail properties is not. A joint venture or partnership
involves risks, including the risk that a co-venturer or partner:

         o  may have economic or business interests or goals that are
            inconsistent with our economic or business interests or goals;

         o  may take actions contrary to our instructions or requests, or
            contrary to our policies or objectives with respect to our real
            estate investments; and

         o  may have to give its consent with respect to certain major
            decisions, including the decision to distribute cash, refinance a
            property or sell a property.

         We do not have sole control of certain major decisions relating to the
properties in which we have less than a 100% interest. All decisions relating to
the joint venture property must be made jointly, including decisions relating
to:

         o  the sale of the properties;

         o  refinancing;

         o  timing and amount of distributions of cash from such properties to
            us;

         o  capital improvements; and

         o  calling for capital contributions.

         This joint decision-making power may inhibit our ability to sell our
interest in a property or a joint venture or partnership within our desired time
frame or on any other desired basis.

Our failure to qualify as a REIT would decrease the funds available for
distribution to our stockholders and adversely affect the market price of our
common stock

         Determination of REIT status is highly technical and complex. Even a
technical or inadvertent mistake could endanger our REIT status. The
determination that we qualify as a REIT requires an analysis of various factual
matters and circumstances that may not be within our control. For example, the
Internal Revenue Service, or IRS,

                                       12
<PAGE>

could change tax laws and regulations or the courts may issue new rulings that
make it impossible for us to maintain REIT status. We do not believe that any
pending or proposed law changes could change our REIT status.

         If we fail to qualify for taxation as a REIT in any taxable year:

         o  we would be subject to tax on our taxable income at regular
            corporate rates;

         o  we will not be able to deduct, and would not be required to make,
            distributions to stockholders in any year in which we fail to
            qualify as a REIT; and

         o  unless we are entitled to relief under specific statutory
            provisions, we would be disqualified from taxation as a REIT for the
            four taxable years following the year during which we lost our
            qualification.

The consequences of failing to qualify as a REIT would adversely affect the
market price of our common stock. We cannot guarantee that we will be qualified
and taxed as a REIT because our qualification and taxation as a REIT will depend
upon our ability to meet the requirements imposed under the Internal Revenue
Code of 1986, as amended, on an ongoing basis.

In order to maintain our status as a REIT, we may be forced to borrow funds
during unfavorable market conditions

         To qualify as a REIT, we generally must distribute to our stockholders
at least 90% of our net taxable income each year, excluding capital gains. This
requirement limits our ability to accumulate capital. We may not have sufficient
cash or other liquid assets to meet REIT distribution requirements. As a result,
we may need to incur debt to fund required distributions when prevailing market
conditions are not favorable. Difficulties in meeting distribution requirements
may arise as a result of:

         o  differences in timing between when we must recognize income for U.S.
            federal income tax purposes and when we actually receive income;

         o  the effect of non-deductible capital expenditures;

         o  the creation of reserves; or

         o  required debt or amortization payments.

         If we are unable to borrow funds on favorable terms, our ability to
make distributions to our stockholders and our ability to qualify as a REIT may
suffer.

                       Risks Relating to Our Capital Stock

Ownership limitations in our certificate of incorporation may adversely affect
the market price of our common stock

         Our certificate of incorporation contains an ownership limitation that
is designed to prohibit any transfer that would result in our being
"closely-held" within the meaning of Section 856(h) of the Internal Revenue Code
of 1986, as amended. This ownership limitation generally prohibits ownership,
directly or indirectly, by any single stockholder of more than 8% of the value
of outstanding shares of our capital stock.

         In addition, our certificate of incorporation prohibits transfers that
would result in our owning more than 10% of the ownership interest in one of our
tenants within the meaning of Section 856(d)(2)(B) of the Code; in shares of our
stock (both common and preferred) being beneficially owned by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code; in our being a
"pension held REIT" within the meaning of Section 856(h)(3)(D) of the Code; in
our failing to qualify as a "domestically-controlled REIT" within the meaning of
Section 897(h)(4)(B); or in our failing to qualify for REIT status.

                                       13

<PAGE>

         The inability of holders of our common stock to sell their shares to
persons other than qualifying U.S. persons, or the perception of this inability,
as well as the limitations on transfer, may adversely affect the market price of
our common stock.

Higher market interest rates may adversely affect the market price of our common
stock

         One of the factors that investors may consider important in deciding
whether to buy or sell shares of a real estate investment trust is the dividend
with respect to such real estate investment trust's shares as a percentage of
the price of those shares, relative to market interest rates. If market interest
rates go up, prospective purchasers of shares of our common stock may require a
higher yield on our common stock. Higher market interest rates would not,
however, result in more funds for us to distribute and, to the contrary, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. Thus, higher market interest rates could cause the market price of
our common stock to go down.

Limits on changes of control may discourage takeover attempts that may be
beneficial to holders of our common stock

         Provisions of our certificate of incorporation and bylaws, as well as
provisions of the Internal Revenue Code of 1986, as amended, and Delaware
corporate law, may:

         o  delay or prevent a change of control over us or a tender offer for
            our common stock, even if those actions might be beneficial to
            holders of our common stock; and

         o  limit our stockholders' opportunity to receive a potential premium
            for their shares of common stock over then-prevailing market prices.

         Primarily to facilitate the maintenance of our qualification as a REIT,
our certificate of incorporation generally prohibits ownership, directly or
indirectly, by any single stockholder of more than 8% of the value of
outstanding shares of our capital stock. Our board of directors may modify or
waive the application of this ownership limit with respect to one or more
persons if it receives a ruling from the Internal Revenue Service or an opinion
of counsel concluding that ownership in excess of this limit will not jeopardize
our status as a REIT. NorthStar Capital Investment Corp. until the Note issued
in connection with the stock repurchase described in "Item 1. Business - Recent
Developments" above is repaid and the Operating Partnership may hold in excess
of that 8% ownership limit provided that our REIT status will not be jeopardized
and we will not be deemed to be closely-held. The ownership limit, however, may
nevertheless have the effect of inhibiting or impeding a change of control over
us or a tender offer for our common stock.

         In addition, the Board of Directors has been divided into three
classes, the initial terms of which expire in 2002, 2003 and 2004 respectively,
with directors of a given class chosen for three-year terms upon expiration of
the terms of the members of that class. The staggered terms of the members of
Board of Directors may adversely affect the stockholders' ability to effect a
change in control of the Corporation, even if such a change in control were in
the best interests of some, or a majority, of the Corporation's stockholders.

         Our certificate of incorporation authorized the Board of Directors to
issue shares of preferred stock in series and to establish the rights and
preferences of any series of preferred stock so issued. The issuance of
preferred stock could also have the effect of delaying or preventing a change in
control of the Corporation.

         We have adopted a shareholder rights agreement that gives stockholders
the right to purchase securities from the Corporation at a discount if a person
or group acquires more than 15% of the outstanding shares of our common stock,
thereby diluting the acquiring person's holdings. In addition, the Board of
Directors can prevent the shareholder rights agreement from operating in the
event the Board approves of the acquiring person.

                                       14

<PAGE>

                  WHERE CAN YOU FIND MORE INFORMATION ABOUT US?

         We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which means that we file
periodic reports, including reports on Forms 10-K and 10-Q, and other
information with the Securities and Exchange Commission ("SEC"). As well, we
distribute proxy statements annually and file those reports with the SEC. You
can read and copy these reports, statements and other information at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549, as well as the regional offices at the Woolworth
Building, 233 Broadway Ave., New York, New York 10279 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may obtain
copies of this material for a fee by writing to the SEC's Public Reference
Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You may
obtain information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You can also access some of this information
electronically by means of the SEC's website on the Internet at
http://www.sec.gov, which contains reports, proxy and information statements and
other information that the underlying securities issuer and the underlying
securities guarantor have filed electronically with the SEC. In addition, you
may inspect reports and other information concerning us at the offices of the
American Stock Exchange LLC, which are located at 86 Trinity Place, New York, NY
10006 and can be contacted at (212) 306-1000.

                                       15

<PAGE>

Item 2.       Properties

Property Portfolio

         The Corporation owned the following properties as of December 31, 2001
and March 25, 2002:

         (1) 568 BROADWAY

         On December 2, 1986, a joint venture (the "Broadway Joint Venture")
comprised of the High Equity Partners L.P. - Series 86 ("HEP-86") and Integrated
Resources high Equity Partners L.P. - Series 85 ("HEP-85") acquired a fee simple
interest in 568-578 Broadway ("568 Broadway"), a commercial building in New York
City, New York. Until February 1, 1990, the HEP-86 and HEP-85 each had a 50%
interest in the Broadway Joint Venture. On February 1, 1990, the Broadway Joint
Venture admitted a third joint venture partner, the Predecessor Partnership,
which contributed $10,000,000 for a 22.15% interest in the joint venture. In a
transaction similar to the merger described under "Item 1. Business - Recent
Developments" above, on February 14, 2001, Shelbourne Properties I, LP became
the successor in interest to HEP-85's assets (Shelbourne I and HEP-85 are
collectively referred to as Shelbourne I) and Shelbourne Properties II, LP
became the successor in interest to HEP-86's assets (Shelbourne II and HEP-86
are collectively referred to as Shelbourne II), including their respective
interests in the Broadway Joint Venture. The Shelbourne Properties I, LP and
Shelbourne Properties II, LP each retain a 38.925% interest in the joint
venture.

         568 Broadway is located in the SoHo district of Manhattan on the
northeast corner of Broadway and Prince Street. 568 Broadway is a 12-story plus
basement and sub-basement building constructed in 1898. It is situated on a site
of approximately 23,600 square feet, has a rentable square footage of
approximately 300,000 square feet and a floor size of approximately 26,000
square feet. Formerly catering primarily to industrial light manufacturing, the
building has been converted to an office building and is currently being leased
to art galleries, photography studios, retail and office tenants. 568 Broadway
competes with several other buildings in the SoHo area.

         Further to the transaction described under "Item 1. Business - Recent
Developments", as of February 14, 2002 we granted a security interest in our
joint venture interest in 568 Broadway to Shelbourne Management LLC as security
for the note we issued as a distribution to a preferred shareholder of the
Operating Partnership. For more information concerning this security interest,
please see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" below.

         (2) LIVONIA PLAZA

         On June 28, 1989, the Predecessor Partnership purchased a fee simple
interest in Livonia Plaza, a shopping center that was completed in December
1989, located in Livonia, Michigan.

         Livonia Plaza is a 133,198 square foot neighborhood shopping center
situated on a 13.9 acre site near the intersection of Five Mile Road and
Bainbridge Avenue in Livonia, a western suburb of Detroit. In October 1996, the
Predecessor Partnership signed an agreement to expand the Kroger store to 56,337
square feet and purchased 1.77 acre of land adjacent to the center to facilitate
the Kroger expansion. The expansion was completed in 1997 and Kroger incurred
the costs of the building and parking lot construction.

         Further to the transaction described under "Item 1. Business - Recent
Developments", as of February 14, 2002 we granted a mortgage on Livonia Plaza to
Shelbourne Management LLC as security for the note we issued as a distribution
to a preferred shareholder of the Operating Partnership. For more information
concerning this mortgage, please see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview" below.

         (3) MELROSE CROSSING SHOPPING CENTER - PHASE II

         On February 3, 1989, the Predecessor Partnership purchased the fee
simple interest in Phase II of the Melrose Crossing Shopping Center
("Melrose-Phase II"). Melrose-Phase II, located in Melrose Park, Illinois,
previously consisted of a 88,616 square foot retail store located on a parcel
totaling 7.02 acres.

                                       16

<PAGE>

         Melrose-Phase II lies to the north of Melrose Crossing on which an
88,000 square foot department store is located as well as 138,355 square feet of
retail space that is owned by Shelbourne II. Melrose-Phase II is situated in
Melrose Park, Illinois, an older working-class neighborhood near O'Hare Airport
at the intersection of Mannheim Road and North Avenue, less than 10 miles from
Chicago's Loop.

         (4) SUNRISE MARKETPLACE

         On February 15, 1989, the Predecessor Partnership purchased the fee
simple interest in Sunrise Marketplace ("Sunrise"), a 176,661 square foot
neighborhood shopping center in Las Vegas, Nevada. The center is situated on
15.15 acres of land at the northeast corner of Nellis Boulevard and Stewart
Avenue.

         Further to the transaction described under "Item 1. Business - Recent
Developments", as of February 14, 2002 we granted a mortgage on Sunrise to
Shelbourne Management LLC as security for the note we issued as a distribution
to a preferred shareholder of the Operating Partnership. For more information
concerning this mortgage, please see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview" below.

         (5) SUPER VALU STORES

         On February 16, 1989, the Predecessor Partnership acquired joint
venture interests in four supermarkets (the "Properties") owned by Super Valu
Stores ("Super Valu") located in Edina, Minnesota; Toledo, Ohio; Norcross,
Georgia and Indianapolis, Indiana. A fee simple interest in the Predecessor
Properties was acquired pursuant to a contract of sale among the seller, the
Predecessor Partnership and American Real Estate Holdings Limited Partnership
("AREH"). AREH is 99% owned by American Real Estate Partners L.P., a public
partnership originally sponsored by Integrated. At the closing, AREH and the
Predecessor Partnership assigned their contract rights with respect to each of
the Properties to three joint venture entities each of which has AREH and the
Predecessor Partnership as a 50% owner. Cub Foods, a tenant Norcross, GA and
Indianapolis, IN, has declared bankruptcy. The lease in Norcross GA was rejected
as of January 31, 2002, which will result in a loss of future revenue of
$738,042. As a result, the REIT will be maintaining the vacant building until it
either can be sold or relet. The lease in Indianapolis has not been rejected. In
January 2002, two of the SuperValu properties, one in Edina, Minnesota and one
in Toledo, Ohio, were sold.

         (6) TMR WAREHOUSES

         On September 15, 1988, Tri-Columbus Associates ("Tri-Columbus"), a
joint venture comprised of the Predecessor Partnership, Shelbourne II and IR
Columbus Corp. ("Columbus Corp."), at the time a wholly-owned subsidiary of
Integrated, purchased the fee simple interest in three warehouses (the "TMR
Warehouses") located in Columbus, Ohio. The Predecessor Partnership originally
purchased a 58.68% interest in Tri-Columbus on September 15, 1988. On June 29,
1990, the Predecessor Partnership closed in escrow on the purchase of an
additional 20.66% interest in Tri-Columbus. The Predecessor Partnership
purchased the additional joint venture interest from Columbus Corp. at
approximately 86% of Columbus Corp.'s original cost, pursuant to a right of
first refusal contained in the joint venture agreement. Due to Integrated's
bankruptcy, the transaction was submitted to the bankruptcy court for review,
the approval of the bankruptcy court was obtained on September 6, 1990 and the
funds were released from escrow. Purchase of this additional 20.66% interest
increased our interest in Tri-Columbus from 58.68% to 79.34%. The remaining
20.66% is held by Shelbourne II.

         We entered into an agreement with Volvo in late 2000 pursuant to which
Volvo agreed to extend its lease term until December 31, 2010. The rent through
December 31, 2002 will remain at its current rate of $1,418,825 and then
increase to $1,533,290 per annum through December 31, 2005. Annual rent from
2006 through 2010 will be $1,614,910. We agreed to spend up to $2,000,000 for
capital improvements and to connect the property with an adjacent property. Any
expenditures made by us will be pro rated over the remaining term of the lease
and reimbursed by Volvo as additional rent.

                                       17

<PAGE>

         The TMR Warehouses are distribution and light manufacturing facilities
located in Orange, Grove City and Hilliard, all suburbs of Columbus, Ohio and
comprise 1,010,500 square feet of space in the aggregate, with individual square
footage of 583,000 square feet, 190,000 square feet and 237,500 square feet,
respectively.

         Further to the transaction described under "Item 1. Business - Recent
Developments", as of February 14, 2002 we granted a mortgage on the TMR
Warehouses to Shelbourne Management LLC as security for the note we issued as a
distribution to a preferred shareholder of the Operating Partnership. For more
information concerning this mortgage, please see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" below.

Occupancy

         The following table lists the occupancy rates of our properties at the
end of each of the last three years.

                                    OCCUPANCY
PROPERTY                             12/31/2001    12/31/2000     12/31/1999
--------                             ----------    ----------     ----------
568 Broadway Office Building            97%           100%           100%
Livonia Plaza                           92%           91%            89%
Melrose Crossing Phase II                0%            0%             0%
Sunrise Marketplace                     96%           92%            94%
SuperValu Stores (1)                    78%           76%            100%
Tri-Columbus-Grove City                 100%          100%           100%
Tri-Columbus-Hilliard                   100%          100%            0%
Tri-Columbus-Orange                     100%          100%           100%

         (1) Two of the four Super Valu properties, one in Edina, Minnesota, and
one in Toledo, Ohio, were sold in January 2002.

                                       18

<PAGE>

         The following table contains information for each tenant that occupies
ten percent or more of the rentable square footage of any of our properties.

<TABLE>
<CAPTION>
                                       Principal      Square Feet
                                      Business of      Leased by                           Lease          Renewal
    Property       Name of Tenant       Tenant           Tenant        Annual Rent    Expiration Date     Options
------------------ ---------------- ---------------- --------------- ---------------- ---------------- --------------
<S>                <C>              <C>                  <C>            <C>               <C>             <C>

568 Broadway       Scholastic       Publishing           87,010         $1,548,836        4/30/08         1-5 yr.
------------------ ---------------- ---------------- --------------- ---------------- ---------------- --------------
Livonia Plaza      Kroger           Grocery              56,733         $431,304          8/31/09         6-5 yr.
                                    Retailer

                   TJ Maxx          Department           23,800         $176,120          1/31/04         1-5 yr.
                                    store retailer
------------------ ---------------- ---------------- --------------- ---------------- ---------------- --------------
Sunrise            Smith's          Grocery              71,240         $402,240         10/31/08         1-5 yr.
Marketplace                         Retailer

                   America's Best   Furniture            18,974         $170,766         10/31/05         1-5 yr.
                   Furniture        Retailer
------------------ ---------------- ---------------- --------------- ---------------- ---------------- --------------
SuperValu Stores   Byerly's         Grocery              61,900         $229,769          6/30/03         3-5 yr.
                                    Retailer

                   SuperValu        Grocery              60,300         $315,000          8/30/03         5-5 yr.
                                    Retailer
------------------ ---------------- ---------------- --------------- ---------------- ---------------- --------------
Tri-Columbus       Volvo            Truck parts         583,000       $1,418,825         12/31/10         None.
                                    distributor

                   Simmons USA      Mattress            190,000         $541,500          3/31/04         1-5 yr.
                                    wholesaler

                   The Computer     Computer            237,500         $591,771          1/31/03         1-4 yr.
                   Group, Inc.      distributor

</TABLE>

Capital Improvements

         See "Item 7. Management's Discussion and Analysis and Results of
Operations."

Item 3.       Legal Proceedings

         On February 22, 2002, Carl Icahn and Longacre Corp. brought a
derivative shareholder suit in the New York State Supreme Court against
NorthStar Capital Investment Corp., PCIC, Shelbourne Management, Peter W. Ahl,
David Hamamoto, David G. King, Jr., Dallas E. Lucas, W. Edward Scheetz, Michael
T. Bebon, Donald W. Coons and Robert Martin, and nominal defendants the
Corporation, Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc.
for, inter alia, breach of fiduciary duties relating to the approval of the
stock repurchase transaction between the Corporation and NorthStar Capital
Investment Corp. described in "Item 1. Business" under the heading "Recent
Developments." On March 4, 2002, Icahn and Longacre brought a motion for
expedited discovery, reversal of priority of discovery and injunctive relief by
Order to Show Cause. Thereafter, the defendants moved to dismiss the case for,
among other reasons, the failure to make a demand on the Board of Directors
prior to commencing the action. At a hearing held on March 11, the court
authorized limited discovery in connection with

                                       19

<PAGE>

defendant's motion to dismiss. The court also scheduled a hearing for April 29,
2002 on defendant's motion to dismiss.

         In addition, two shareholder derivative actions have been filed in
Delaware against the same defendants. Those actions have now been consolidated,
and defendants have moved to dismiss the consolidated action.

         With respect to the allegations in the lawsuits, we believed at the
time the Special Committee approved the transaction, and we continue to believe,
that the stock repurchase was fair and reasonable and in the best interests of
the Corporation and its shareholders.

Item 4.       Submission of Matters to a Vote of Security Holders

         During 2001, matters were submitted to a vote of our security holders
on one occasion. The consent of limited partners was sought to approve the
conversion of the Predecessor Partnership into the Operating Partnership. 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 completed
as described in "Item 1. Business - Corporate History" on page 3 above.

                                       20
<PAGE>

                                    PART II

Item 5.       Market for Registrant's Common Equity and Related Stockholder
              Matters

Market for Our Common Stock

         In May 2001, our Common Stock began trading on the American Stock
Exchange under the symbol "HXF". Prior to that date, there was no established
trading market for interests in the Predecessor Partnership.

         The high and low sales prices per share of Common Stock are set forth
below for the periods indicated.


     QUARTER ENDED                       HIGH                   LOW
--------------------------------------------------------------------------------


     June 30, 2001                      $33.50                 $24.94

     September 30, 2001                 $32.11                 $25.23

     December 31, 2001                  $28.50                 $23.13


         On March 25, 2002, the closing sale price of the Common Stock as
reported by the ASE was $40.30. The Corporation had approximately 1,536 holders
of record of Common Stock as of March 25, 2002.

         The Corporation has authorized 2,500,000 shares of Common Stock, issued
1,173,998 and 788,772 shares are outstanding as of March 25, 2002. Prior to the
merger of the Operating Partnership and the Predecessor Partnership on April 17,
2001, the Predecessor Partnership had 371,766 Units issued and outstanding and
approximately 10,455 holders of record of Units.

Dividends

         Our management expects that any taxable income remaining after the
regular quarterly or other dividends on its Common Stock will be distributed
annually to the holders of the Common Stock on or prior to the date of the first
regular quarterly dividend payment date of the following taxable year. The
dividend policy with respect to the Common Stock is subject to revision by the
Board of Directors. All distributions in excess of those required for the
Corporation to maintain its REIT status will be made by the Corporation at the
sole discretion of the Board of Directors and will depend on the taxable
earnings of the Corporation, the financial condition of the Corporation, and
such other factors as the Board of Directors deems relevant. The Board of
Directors has not established any minimum distribution level. In order to
maintain its qualifications as a REIT, the Corporation intends to make regular
quarterly dividends to its shareholders that, on an annual basis, will represent
at least 90% of its taxable income (which may not necessarily equal net income
as calculated in accordance with generally accepted accounting principles),
determined without regard to the deduction for dividends paid and excluding any
net capital gains.

         Holders of Common Stock will be entitled to receive distributions if,
as and when the Board of Directors authorizes and declares distributions.
However, rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Corporation, each outstanding
share of Common Stock will entitle its holder to a proportionate share of the
assets that remain after the Corporation pays its liabilities and any
preferential distributions owed to preferred shareholders.

                                       21

<PAGE>

         The following table sets forth the dividends paid or declared by the
Corporation on its Common Stock (or distributions on the Predecessor
Partnership's Units prior to April 17, 2001) for the previous three years:


                                 STOCKHOLDER RECORD        DIVIDEND / SHARE (1)
     PERIOD ENDED                       DATE
-------------------------- ----------------------------- -----------------------
     March 30, 1999                October 1, 1998           $.85 / share (2)
     June 30, 1999                  March 31, 1999           $.85 / share (2)
     August 31, 1999                June 30, 1999            $.85 / share (2)
-------------------------- ----------------------------- -----------------------
     December 31, 2001            December 17, 2001         $1.87 / share (2)

         Explanatory Note:

         (1)  Commencing with the third quarter of 1999, distributions were
              suspended while the requirements of the class action and
              derivative litigation involving the Predecessor Partnership were
              completed. Distributions resumed in December of 2001.

         (2)  We converted from a partnership to a REIT in April 2001. Each
              partnership unit was converted to three shares of stock. All
              dividends in this chart are reflected on a per share basis.

         Distributions to shareholders will generally be taxable as ordinary
income, although a portion of such dividends may be designated by the
Corporation as capital gain or may constitute a tax-free return of capital. The
Corporation annually furnishes to each of its shareholders a statement setting
forth the distributions paid during the preceding year and their
characterization as ordinary income, capital gain or return of capital.

         The Corporation intends to continue to declare quarterly distributions
on its Common Stock. No assurance, however, can be given as to the amounts or
timing of future distributions, as such distributions are subject to our
earnings, financial condition, capital requirements and such other factors as
our Board of Directors deems relevant.

Recent Sales of Unregistered Securities

         There were no securities sold by the registrant in 2001 that were not
registered under the Securities Act.

                                       22

<PAGE>


Item 6.      Selected Financial Data

         The following financial data are derived from our audited consolidated
financial statements. The financial data set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and notes thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                          2001              2000            1999           1998            1997
                                          ----              ----            ----           ----            ----

<S>                                       <C>               <C>            <C>            <C>           <C>

Total Revenue                             $8,530,531        $8,110,124     $7,989,276     $8,210,920    $9,524,410(1)
Net Income                                 2.526.685         2,537,241      1,895,156      2,995,631     3,708,687(1)
Net Income per share                            2.15              2.16           1.61           2.55             3.16
Distributions per share (2) (3)                 1.87                --           1.70           3.40             3.23
Total Assets                             $56,541,462       $56,549,762    $54,187,702    $55,087,481      $56,296,853
</TABLE>

         (1)  Total revenues and net income for the year ended December 31, 1997
              include approximately $1,500,000, or $1.28 per share, received
              pursuant to the bankruptcy settlement of a tenant.
         (2)  All distributions are in excess of accumulated undistributed net
              income and therefore represent a return of capital to investors on
              a generally accepted accounting principles basis.
         (3)  Distributions made on December 21, 2001 are based on the total
              shares issued and outstanding.

Item 7.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations

         The following should be read in conjunction with "Forward-Looking
Statements" and our combined consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K.

Overview

         The Corporation was formerly a Delaware limited partnership, High
Equity Partners L.P. - Series 88 ("HEP-88"), which was converted to a REIT on
April 17, 2001 by merging with Shelbourne Properties III LP, a Delaware limited
partnership, which is currently the operating partnership of the Corporation
(the "Operating Partnership"). The Corporation holds its investment in the
properties through its Operating Partnership in which it had a 99% direct
interest at December 31, 2001. The other 1% is held indirectly through the
general partner of the Operating Partnership, Shelbourne Properties III GP, Inc.
(the "General Partner").

         On February 14, 2002, we repurchased the shares of a major stockholder,
PCIC and paid $11,830,337 in cash. As part of that repurchase, Shelbourne
Management, a wholly-owned subsidiary of PCIC, contributed the advisory
agreement between the Corporation and the Operating Partnership and Shelbourne
Management LLC, dated as of April 17, 2001, (the "Advisory Agreement") pursuant
to which it had provided financial and investment advisory services to the
Corporation and the General Partner. As consideration for the Advisory
Agreement, the Operating Partnership and issued 672,178 5% Class A Preferred
Partnership Units (with a liquidation preference of $1,000 per unit) to
Shelbourne Management LLC. As a result, until those Preferred Units are
redeemed, Shelbourne Management LLC is entitled to receive quarterly
distributions from the Operating Partnership at a rate of 5% per annum of the
aggregate liquidation preference of its preferred units. The agreement governing
the repurchase provides for pre-payment penalties in the event that the
Operating Partnership redeems these preferred units prior to February 14, 2007.
The preferred units may be automatically redeemed upon the occurrence of certain
events of default by the Corporation on its obligations under that agreement,
which may result in our having to pay a pre-payment penalty.

                                       23

<PAGE>

         As an initial distribution on the Preferred Units, the Corporation
issued a note to Shelbourne Management LLC (the "Note") in the principal amount
of $15,665,421, except that if the Note is repaid in full on or prior to April
30, 2002, the principal amount will be reduced to $14,589,936 and if the Note is
repaid in full after April 30, 2002 and on or prior to May 15, 2002, the
principal amount shall be reduced to $14,858,807. As security for the note,
mortgages were placed on the following properties owned by the Corporation:
Livonia Plaza, Sunrise Marketplace and the TMR warehouses. In addition, the
Operating Partnership granted Shelbourne Management Company LLC a security
interest in its joint venture interest in the 568 Broadway Office Building. We
agreed to repay the Note entirely from the proceeds of new third party
borrowings, which Presidio will have the option to guaranty.

         We intend to be taxed as a REIT for U.S. federal income tax purposes
for the year ended December 31, 2001. To qualify as a REIT, we generally must
distribute to our stockholders at least 90% of our net taxable income each year,
excluding capital gains. As a REIT, if we distribute 100% of our taxable income
and comply with a number of organization and operational requirements, we
generally will not be subject to U.S. federal income tax.

         Our primary business objective is to maximize the value of our common
stock. We seek to achieve this objective by managing our existing properties,
making capital improvements to and/or selling properties and by making
additional real estate-related investments. We may invest in a variety of real
estate-related investments, including undervalued assets and value-enhancing
situations, in a broad range of property types and geographical locations. We
may raise additional capital by mortgaging existing properties or by selling
equity or debt securities. We may acquire investments for cash or by issuing
equity securities, including limited partnership interests in the Operating
Partnership. The Board of Directors may retain an independent consulting firm to
assist it in ascertaining the most effective means of achieving these
objectives.

         Critical Accounting Policies

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying financial statements and related footnotes. In preparing
these financial statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. The Corporation 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 December 31, 2001 and December 31,
2000, the Corporation had approximately $40.5 million and $44.6 million of real
estate (net) as well as dollars of real estate held for sale, accounting for
approximately 77% and 79%, respectively, of the Corporation's total assets.
Property and equipment is carried at cost net of adjustments for impairment. The
fair value of Operating Partnership's property and equipment is dependent on the
performance of the properties.

         The Corporation 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 Corporation 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 Corporation recognizes an impairment
loss, and reduces the carrying amount of the asset to its estimated fair value.
Fair value is the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. Management estimates fair value using discounted cash flows or
market comparables, as most appropriate for each property. Independent certified
appraisers are utilized to assist management, when warranted.

                                       24

<PAGE>

         For the years ended December 31, 2001, 2000, and 1999, no impairment
losses have been recorded. Cumulative impairment losses from previous years
amount to $19,638,700. 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 Corporation 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 Corporation 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 Corporation defers recognition of contingent rental
income (i.e., percentage/excess rent) in interim periods until the specified
target (i.e., breakpoint) that triggers the contingent rental income is achieved
.. Recoveries from tenants or taxes, insurance and other operating expenses are
recognized as revenue in the period the applicable taxes are incurred.

         Investments in Joint Ventures. Certain properties were purchased in
joint venture ownership with affiliated REITS. The Corporation owns an undivided
interest and is severally liable for indebtedness it incurs with connection with
its ownership interest in those properties. Therefore, the Corporation's
financial statements present the assets, liabilities, revenues and expenses of
the joint ventures on a pro rata basis in accordance with the percentage of
ownership.

New Accounting Policies

         In July 2001, the 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. There was no effect from this statement on the Corporation'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 will not effect
the Corporation's financial statements.

                                       25

<PAGE>

         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 Corporation does not expect that this statement will have a
material effect on the Corporation's financial statements.

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

Liquidity And Capital Resources

         Our objective is to ensure that there are sufficient resources to fund
ongoing operating expenses and capital expenditures and to make the
distributions required to maintain REIT status. In the next year, we believe our
needs will be funded through existing cash balances and cash flows provided by
operating activities.

         Real Estate

         We own all of, or an interest in, one office building, three shopping
centers, four retail stores (supermarkets), two of which were sold in January
2002 and three industrial warehouses. Subsequent to December 31, 2001, some of
these properties became subject to mortgages or security interests as discussed
above. When the Note is refinanced, the new lender may take a security interest
in some or all of the properties we own. We generate rental revenues from our
commercial properties and are responsible for each property's operating expenses
as well as the Operating Partnership's and our own administrative expenses.

         These encumbrances on our properties may limit our ability to raise
capital to fund capital improvement projects or acquisitions. In addition, we
will have to use cash flow from operations to repay our obligation under the
Note or any subsequent loan it undertakes to refinance the Note.

         We use working capital reserves and any undistributed cash from
operations as the primary source of liquidity. For the year ended December 31,
2001, all capital expenditures were funded from cash flow from operations and
working capital reserves. As of December 31, 2001, total remaining working
capital reserves amounted to approximately $10,305,552. Working capital reserves
are temporarily invested in short-term instruments and are expected, together
with operating cash flow, to be sufficient to fund anticipated capital
improvements to the Corporation's properties.

         We had $11,122,456 of cash and cash equivalents at December 31, 2001,
as compared to $10,222,394 at December 31, 2000. During the year ended December
31, 2001 cash and cash equivalents increased $900,062 as a result of $3,377,382
in cash provided by operations, which was offset by $281,944 of capital and
tenant improvements to the properties and $2,195,376 in cash distributions to
shareholders. Our primary source of funds is cash flow from operation of our
properties, principally rents received from tenants.

                                       26

<PAGE>

         Capital Improvements and Capitalized Tenant Procurement Costs

         The following table sets forth, for each of the last three fiscal
years, the our expenditures at each of our properties for capital improvements
and capitalized tenant procurement costs:


                                Years Ended December 31,

PROPERTY                2001              2000                  1999
------------------------------------------------------------------------
568 Broadway         $133,654           $86,130          $87,985

Livonia Plaza          28,250            80,846           12,868

Melrose-Phase II            -                 -                -

Sunrise               179,058            38,421           74,738

Super Valu                  -                 -                -

TMR Warehouse         282,378            94,985          112,560
------------------------------------------------------------------------
             Totals: $623,340          $300,382         $288,151
                     ========          ========         ========

         Capital improvement projects for the year 2001 consisted solely of
ordinary course expenditures. Capital expenditures budgeted for 2002 consist
primarily of approximately $129,000 in facade improvements and exterior painting
and approximately $28,000 in corridor and restroom upgrades and window repairs
at 568 Broadway, approximately $186,000 for the replacement of the roof at
Livonia Plaza, and approximately $113,000 in landscaping upgrades, exterior
painting and roof replacement at Sunrise Marketplace. These are all considered
expenditures in the ordinary course and, where applicable, will be split among
the co-venturers in the joint venture according to the percentage of their
interest therein.

         Certain properties require periodic investments of capital for tenant
costs related to new and renewal leasing. The most significant tenant
procurement costs budgeted for 2002 include approximately $118,000 in costs
associated with making the sub-cellar at 568 Broadway into leaseable space (this
space is currently utilized only for storage and is not revenue-producing),
approximately $1,005,000 in tenant improvements obligations associated with the
Tri-Columbus property leased to Volvo and other existing leases at Sunrise
Marketplace, 568 Broadway and Livonia Plaza as well as approximately $76,000 in
projected tenant improvements costs anticipated in conjunction with the
procurement of new leases at Sunrise Marketplace and Livonia Plaza. Leasing
commissions associated with these leases are budgeted to be approximately
$129,000 for 2002. Where applicable, these costs will be split among the
co-venturers in the joint venture according to the percentage of their interest
therein.

         Overall, the Corporation has budgeted expenditures for capital
improvements and capitalized tenant procurement costs of $1,819,067 in 2002.
These costs are expected to be incurred in the normal course of business and are
expected to be funded from cash flow from operations and working capital
reserves. However, such expenditures will depend upon the level of leasing
activity and other factors that cannot be predicted with certainty.

         We expect to continue to utilize a portion of cash flow from operations
to pay for various future capital and tenant improvements to the properties and
leasing commissions, the amount of which cannot be predicted with certainty.
Capital and tenant improvements may in the future exceed the Corporation's cash
flow from operations that would otherwise be available for distributions. We
believe current working capital is sufficient for any near term needs of the
Corporation. In the event that it is not, we would utilize the remaining working
capital reserves, borrow funds or sell one or more properties to meet those
needs.

                                       27

<PAGE>

Real Estate Market

         In the markets in which our properties are located, the market values
of existing properties continue to recover from the effects of the substantial
decline in the real estate market in the early 1990's. However, in select
markets, values have been slow to recover, and high vacancy rates continue to
exist in some areas. The geographic diversity of our properties decreases the
risk of a significant devaluation resulting from an isolated market slump in a
particular region.

         The outlook continues to be particularly positive for 568 Broadway as
office and retail space in the Midtown South sub-market in which 568 Broadway is
located is becoming increasingly popular. Little new office space inventory have
been introduced to offset demand in the area, resulting in a favorable operating
environment for the property. Rents are thus anticipated to continue to increase
at the property for the foreseeable future.

         Our Super Valu property at Norcross, Georgia was previously occupied by
Cub Foods Stores. In January 2002, Cub Foods declared bankruptcy, rejected the
lease and ceased paying rent at the property. The property is currently being
marketed for sale or lease, and preliminary indications are that the property is
well-positioned to benefit from generally favorable market conditions upon a
sale or relet.

         Our Super Valu property in Indianapolis, Indiana was occupied by Cub
Foods Stores until July 2001 at which time Cub ceased operating a store at the
property. While Cub continues to pay rent and is obligated under a lease that
does not expire until August, 2003, the Corporation currently expects that Cub
will not renew its lease and that the Corporation will need either to sell or
relet the property at that time. The competition for tenants and buyers in the
sub-market in which the property is located is considered to be extremely high,
with a number of comparable vacant properties that compete with the
Corporation's property.

         The expectations are also positive for improving market conditions in
Columbus, Ohio, a market in which the we have an interest in three warehouse
properties (the TMR Warehouse properties). Columbus has become a hub for North
American distribution facilities and substantial construction activity is
producing increased competition for our properties. Nevertheless, values are
expected to continue to improve for properties comparable to those in which we
have an interest. The realization of any market appreciation will however be
subject to the terms of the existing leases, which are not due to expire for
several years at our properties in these locations.

         We also own a property in Livonia, Michigan, a suburb of Detroit. After
suffering significant losses in the early 1980's, the regional economy has
diversified and is in the midst of a continuing steady recovery. The property is
located on an established commercial and retail corridor near both downtown
Detroit and the Detroit Metropolitan Airport. Accordingly, indications are that
the property is well positioned to benefit from the anticipated growth in the
area.

         The Las Vegas sub market in which Sunrise Marketplace is located is
likewise improving with strong population growth and household development. A
recent review of the property's position suggests however that Sunrise
Marketplace is not located within one of the region's primary growth paths, and
its competition continues to be traditional neighborhood shopping centers with
grocery or discount store anchors. It is therefore not anticipated that Sunrise
Marketplace will fully benefit from the expected general appreciation in the
real estate market in the area.

         Our property in Melrose Park, Illinois continues to experience
extremely poor operating conditions. While the broader Chicago market is
experiencing economic and population growth which is creating a positive
environment for real estate appreciation, the trade area in which the property
is located is experiencing a decline in population. This decline coupled with
the related flight from the area by big box retailers has left many retail
properties, including our property, suffering from high vacancy and low rental
rates. Vehicular access to the property is also difficult, further contributing
to the negative outlook for the property in the foreseeable future.

         Technological changes are also occurring which may reduce the space
needs of many tenants and potential tenants and may alter the demand for
amenities and power supplies at our properties. As a result of these changes

                                       28

<PAGE>

and the continued risk for overall market volatility, our potential for
realizing the full value of its investment in the properties is at continued
risk.

Impairment Of Assets

         The Corporation evaluates the recoverability of the net carrying value
of our real estate and related assets at least annually, and more often if
circumstances dictate as required by SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." If there is an indication that the carrying
amount of a property may not be recoverable, the Corporation 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 is located.

         If the sum of the expected future undiscounted cash flow is less than
the carrying amount of the property, the Corporation recognizes an impairment
loss, and reduces the carrying amount of the asset to its estimated fair value
as required by SFAS No. 144. Fair value is the amount at which the asset could
be bought or sold in a current transaction between willing parties, that is,
other than in a forced or liquidation sale. Management estimates fair value
using discounted cash flows or market comparables, as most appropriate for each
property. Independent certified appraisers are utilized to assist management,
when warranted.

         Impairment adjustments to reduce the carrying value of the real estate
assets 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.

         Management is not aware of any other current trends, events, or
commitments that will have a significant impact on the long-term value of the
properties. However, 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. Actual results may vary from the
estimates, and the variances may be material.

         All of our properties have experienced varying degrees of operating
difficulties and the Corporation recorded significant impairment adjustments in
prior years. Improvements in the real estate market and in property operations
resulted in no adjustments for impairment being needed from 1996 through
December 31, 2001.

                                       29

<PAGE>

         The following table represents the historical cost less accumulated
depreciation, the December 31, 2001 carrying value and the impairment
adjustments recorded to date against our properties held as of December 31,
2001:


                                    HISTORICAL COST     ADJUSTMENT     12/31/01
                                   LESS ACCUMULATED        FOR         CARRYING
       DESCRIPTION                   DEPRECIATION       IMPAIRMENT      VALUE
--------------------------------------------------------------------------------
568 Broadway Office Building          $9,391,127      $6,157,700     $3,233,427
(22.15% owned)

Livonia Plaza, Shopping Center,        9,914,039       2,100,000      7,814,039
Livonia, Michigan

Melrose Crossing, Phase II,            4,876,406       2,881,000      1,995,406
Melrose, Illinois

Sunrise Marketplace Shopping Center,  15,839,671       8,500,000      7,339,671
Clark County, Nevada

SuperValu Stores (Retail)              6,985,497              --      6,985,497
(50% interest)

TMR Warehouses,
Grove City and Delaware, Ohio         16,086,438              --     16,086,438
(79.34% owned)
                                     -------------------------------------------
                      Total:         $63,093,178     $19,638,700    $43,454,478
                                     ===========     ===========    ===========

Funds from Operations

         Management believes that funds from operations, as defined by the Board
of Governors of the National Association of Real Estate Investment Trusts, or
NAREIT, to be an appropriate measure of performance for an equity REIT. While
funds from operations is a relevant and widely used measure of operating
performance of equity REITs, it does not represent cash flows from operations or
net income as defined by GAAP, and it should not be considered as an alternative
to these indicators in evaluating our liquidity or operating performance.

         Funds from Operations for the years ended December 31, 2001, 2000 and
1999 are summarized in the following table:

                                            2001           2000          1999
--------------------------------------------------------------------------------
Net Income                               $2,526,685     $2,537,241    $1,895,156

Plus: Depreciation and amortization       1,663,483     1,593,250      1,609,183
related to real estate

                Funds from Operations:   $4,190,168     $4,130,491    $3,504,339
                                         ==========     ==========    ==========

Results of Operations

         The following discussion is based on our financial statements for the
years ended December 31, 2001, 2000 and 1999.

                                       30

<PAGE>

         Comparison of the Year Ended December 31, 2001 to the Year Ended
December 31, 2000

         Net Income

         The net income of the Corporation remained relatively constant for the
year ended December 31, 2001 as compared to 2000. Net income decreased to
$2,526,685 for the year ended December 31, 2001 as compared to $2,537,241 for
the year ended December 31, 2000 primarily due to an increase in costs and
expenses and a decrease in interest income, which was partially offset by an
increase in other income and the cash distribution of $2,195,376 to
shareholders.

         Rental Revenue

         Rental revenue increased by $424,217, or 5.6%,during the year ended
December 31, 2001 to $8,065,011 from $7,640,794 in 2000. The increase in rental
revenue was attributable to an increase in base rental income on all properties
of a combined $425,735 together with a slight increase in escalations of $4,518.

         Interest and Other Income

         Interest income decreased by $16,553, or 3.81%, to $417,638 in 2001 due
to lower interest rates paid on our short-term investment instruments. Other
income increased by $12,743, or 36%, during the year ended December 31, 2001 to
$47,882 compared to $35,139 in 2000 due to a prior year real estate tax
abatement from 4251 Leap Road (which is part of the Tri-Columbus properties)
offset by the decrease in transfer fee income from transfers of partnership
interests due to the conversion.

         Costs and Expenses

         Costs and expenses increased by $430,963, or 7.73%, for the year ended
December 31, 2001 to $6,003,846 compared to $5,572,883 in 2000 due to higher
administrative expenses, asset management fees, operating expenses and property
management fees. Administrative expenses for the year ended December 31, 2001
increased by $187,500, or 18.88%, compared to 2000 due to the added legal
expenses incurred with the conversion of the Predecessor Partnership into a REIT
and expenses incurred for the first time that were solely associated with the
operation of the REIT. Operating expenses increased by $99,893 or 5.11% during
the year ended December 31, 2001 compared to 2000 due primarily to increases in
insurance costs, which were partially offset by decreases in utilities, repairs
and maintenance. Asset management fees increased 8.50% in 2001 to $871,863 due
to an increase in the gross asset value of the Corporation. Depreciation and
amortization expenses and property management fees rose slightly.

         Comparison of the Year Ended December 31, 2000 to the Year Ended
December 31, 1999

         Net Income

         The Predecessor Partnership experienced an increase in net income of
$642,085, or 33.9%, for the year ended December 31, 2000 compared to 1999. Net
income increased to $2,537,241 for the year ended December 31, 2000 from net
income of $1,895,156 for the year ended December 31, 1999 primarily due to an
increase in interest income and a decrease in costs and expenses, which more
than offset a decrease in other income.

         Rental Revenues

         Rental revenue increased slightly during the year ended December 31,
2000 to $7,640,794 from $7,625,731 in 1999. The increase in rental revenue was
attributable to an increase in base rent of $190,918, which was partially offset
by decreases in step lease rental adjustments recorded for accounting purposes
(adjustments to account for the recognition of rent on a straight-line basis) of
$148,950 and escalation rent. Escalation rent consists of reimbursements of
property level operating expenses received by the Predecessor Partnership from
the tenants at the property. Escalation rent decreased in 2000 as compared to
1999 due to reduced operating expenses at the properties.

                                       31

<PAGE>

         Interest and Other Income

         Interest income increased by $163,752, or 60.6%, to $434,191 in 2000
from $270,439 in 1999 due to higher cash balances and interest rates during the
current year compared to 1999. Other income decreased $57,967, or 62.3% during
the year ended December 31, 2000 to $35,139 compared to $93,106 in 1999 due to a
decrease in fees from investor servicing primarily related to a decrease in
investor transfers.

         Costs and Expenses

         Costs and expenses decreased by $521,237, or 8.55%, for the year ended
December 31, 2000 to $5,572,883 compared to $6,094,120 in 1999 due to the lower
administrative expenses and operating expenses, which more than offset an
increase in partnership asset management fees. Operating expenses decreased
$353,494 or 15.3% during the year ended December 31, 2000 from $2,306,635 in
2000 to $1,953,141 in 1999 due primarily to savings in real estate tax expenses
as well as repairs and maintenance which were partially offset by an increase in
utilities. Administrative expenses for the year ended December 31, 2000
decreased by 19.1% or $234,921 compared to 1999 due to lower professional fees
related to the settlement of the litigation and reorganization of the
Predecessor Partnership. Partnership asset management fees increased 11.7% in
2000 to $803,487 due to an amendment to the partnership agreement, which
significantly reduced the amount payable in 1999 and changed the method of
calculating such fee in subsequent years. Depreciation and amortization expenses
and property management fees remained relatively constant.

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk

         Market risk is the risk of loss from adverse changes in market prices
and interest rates. As of December 31, 2001, we did not have any debt
outstanding or any investments in long-term financial instruments that exposed
us to market risks. However, as described under "Item 1. Business - Recent
Developments", as of February 14, 2002, we issued a note to Shelbourne
Management LLC (the "Note") in the principal amount of $15,665,421 with a
maturity date of August 14, 2002. If the Note is repaid from third party
indebtedness, it will bear an effective rate of interest equal to the initial
rate of interest applicable to that third party indebtedness. If the Note is not
repaid from third party indebtedness, the interest rate payable at maturity or
earlier repayment is 8% per annum. As such, our exposure to market risk for
changes in interest rates is contingent upon refinancing this indebtedness. If
we do refinance this indebtedness, our exposure will depend on the level of
interest rates at the time of that potential refinancing. If we do not refinance
this indebtedness, we will not be exposed to market risks from changing interest
rates.

Item 8.       Financial Statements and Supplementary Data

         Our consolidated balance sheets as of December 31, 2001 and 2000, and
the related consolidated statements of operations, equity and cash flows for the
years ended December 31, 2001, 2000 and 1999, and the notes thereto, and the
independent auditor's report thereon and the financial statement schedule are
set forth on page F-1 through F-16 and S-1 and S-2 of this report.

Item 9.       Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure

         None.

                                       32
<PAGE>

                                    Part III

Item 10.       Directors and Executive Officers

         The table below sets forth certain information relating to the current
directors and executive officers of the Corporation. The Corporation currently
has three directors, Donald W. Coons, Robert Martin and W. Edward Scheetz and
one executive officer, Dallas Lucas, who serves as treasurer.

<TABLE>
<CAPTION>

         Name              Age       Position Held             Term of Service
         --------------------------------------------------------------------------
         <S>                <C>         <C>                <C>
         Donald W. Coons    38          Director           February 8, 2001-present

         Dallas Lucas       39    Director, Secretary,     February 8, 2001-February 14,
                                  Treasurer and Chief      2002, as Director
                                  Financial Officer

                                                           November 20, 2001-February 14,
                                                           2002 as Secretary and Chief
                                                           Financial Officer

                                                           November 20, 2001-present, as
                                                           Treasurer

         Robert Martin      40          Director           February 8, 2001-present

         W. Edward Scheetz  37    Director, Co-Chief       February 8, 2001-present, as
                                  Executive Officer        Director


                                                           August 15, 2001-February 14,
                                                           2002, as Co-Chief Executive
                                                           Officer

</TABLE>

                                       33

<PAGE>

         The table below sets forth information relating to all directors and
officers who served the Corporation for any period from February 8, 2001, the
date of incorporation through December 31, 2001 but who no longer have those
positions.

<TABLE>
<CAPTION>

  Name               Age           Position Held               Term of Service
  ------------------------------------------------------------------------------------
<S>                 <C>      <C>                         <C>
Peter Ahl           37       Director, Vice President    February 8, 2001-February 14,
                                                          2002, as Director

                                                          August 15, 2001-February 14,
                                                          2002, as Vice President

Michael Ashner       49         Director, President       February 8, 2001-August 15, 2001
                                                          as President and Director

Michael Bebon        40             Director              February 8, 2001-March 27, 2002

Peter Braverman      48          Vice President           February 8, 2001-August 15, 2001
                                                          as Vice President

David T. Hamamoto    43        Director, Co-Chief         February 8, 2001-February 14,
                                Executive Officer         2002, as Director

                                                          August 15, 2001-February 14,
                                                          2002, as Co-Chief Executive
                                                          Officer

Steven B. Kauff      40          Vice President           February 8, 2001-February 14, 2002

David G. King, Jr.   39     Director, Vice President      February 8, 2001-February 14, 2002

Lara Sweeney         29    Vice President, Secretary      February 8, 2001-August 15, 2001

Carolyn Tiffany      35    Vice President, Treasurer      February 8, 2001-April 10, 2001,
                                                          as treasurer

                                                          February 8, 2001-August 15, 2001,
                                                          as Vice President
</TABLE>


         Pursuant to our certificate of incorporation, the directors are
classified into three classes, as equal in number as possible, with respect to
the term for which they hold office. The terms of the current directors will
expire at the annual meeting of stockholders as follows: Robert Martin in 2003,
Edward Scheetz in 2003 and Donald W. Coons in 2004.

         Until March 27, 2002, our audit committee consists solely of
independent directors, Michael Bebon, Donald Coons, Robert Martin. As our audit
committee charter requires that three directors serve on our audit committee,
subsequent to Michael Bebon's resignation on March 27, the Board of Directors
elected Edward Scheetz to serve on the audit committee. Our audit committee is
charged with recommending to the Board of Directors the independent public
accountants to be selected to audit the Corporation's annual financial
statements, approving (i) any special assignments given to such accountants,
(ii) such

                                       34

<PAGE>

accountant's letter of comments and management's responses thereto and (iii) any
major accounting changes made or contemplated, and reviewing the effectiveness
and adequacy of the Corporation's internal accounting controls.

         Robert Martin and Donald Coons are the members of the corporate
governance committee and the compensation committee.

         The following is a summary of the background of each director and
officer who served the Corporation for some period during 2001.

         Peter Ahl. Mr. Ahl has been a Vice President of NorthStar Capital
Investment Corp. since 1997. Prior to joining NorthStar, he was a director in
the Alternate Investment Group of AEW Capital Management, L.P. Mr. Ahl is a
Level 3 Chartered Financial Analyst.

         Michael Ashner. Mr. Ashner has been the Chief Executive Officer of
Winthrop Financial Associates, a limited partnership since 1996 as well as the
Chief Executive Officer of the New Kirk Group from 1997. From 1994 to 1996, Mr.
Ashner was a Director, President and Co-chairman of National Property Investors,
Inc., a real estate investment company. In addition, since 1981, Mr. Ashner has
been President of Exeter Capital Corporation, a firm that has organized and
administered real estate limited partnerships. Mr. Ashner currently serves as a
director of Interstate Hotel Corporation, Nexthealth Corp., Great Bay Hotel and
Casino Inc., Burnham Pacific Properties, Inc. and NBTY, Inc.

         Michael Bebon. Mr. Bebon is a Vice President of Sales at each of
Commonwealth Land Title Insurance Company and Lawyers Title Insurance
Corporation, both subsidiaries of LandAmerica Financial Group, Inc., a New York
Stock Exchange listed title insurance company. Mr. Bebon has been a Vice
President of Lawyers Title Insurance Corporation for more than five years.

         Peter Braverman. Mr. Braverman has been a Vice President of Presidio
AGP Corp. since November 1999. Mr. Braverman has served as the Executive Vice
President of Winthrop Financial Associates and its affiliates since January
1996. Mr. Braverman also serves as the Executive Vice President of The Newkirk
Group. From June 1995 until January 1996, Mr. Braverman was a Vice President of
National Property Investors, Inc. and NPI Property Management Corporation.

         Donald W. Coons. Mr. Coons is a director and the President and Chief
Executive Officer of The Loyalist Insurance Group, a public company that trades
on the Canadian Venture Exchange. Mr. Coons is also the President of Loyalist
Insurance Brokers Limited and Loyalist Insurance Managers and a director and the
President of Canadian Shortline Insurance Services and The Loyalist Insurance
Company. Mr. Coons serves as a director of American Special Risks Limited.

         David T. Hamamoto. Mr. Hamamoto is a co-founder and Co-Chief Executive
Officer of NorthStar Capital Investment Corp. Prior to founding NorthStar in
1997, he was a co-head of the Whitehall Funds, a real estate principal
investment business at Goldman Sachs & Co., and a partner at Goldman Sachs as
well. Mr. Hamamoto is a director of Emeritus Corporation, one of the largest
publicly traded owners and operators of assisted living facilities, and of U.S.
Franchise Systems, a publicly traded franchising concern.

         Steven B. Kauff. Mr. Kauff has been a Vice President of NorthStar
Capital Investment Corp. since July 1999. He is also a Vice President of
Presidio Capital Corp. Prior to joining NorthStar Capital Investment Corp., Mr.
Kauff was with Arthur Andersen LLP in the Real Estate and Hospitality Services
Group from 1996 to 1999, where he specialized in transaction consulting, due
diligence and tax products for real estate ventures, including real estate
investment trust and partnerships. From 1994 to 1996, Mr. Kauff was with Price
Waterhouse LLP in the Real Estate Industry Services Group.

         David G. King, Jr. Mr. King has been a Vice President and Assistant
Treasurer of NorthStar Capital Investment Corp. since November 1997, as well as
a Vice President of Presidio Capital Corp. Prior to joining NorthStar Capital
Investment Corp., Mr. King was a Senior Vice President of Finance at Olympia &
York Companies (USA).

                                       35

<PAGE>

         Dallas Lucas. Mr. Lucas has been a director, Vice President, Treasurer
and Chief Financial Officer of NorthStar Capital Investment Corp. since August
1998. He is also a Vice President of Presidio Capital Corp. From 1994 until
August 1998, he was the Chief Financial Officer and Senior Vice President of
Crescent Real Estate Equities Company. Mr. Lucas is a Certified Public
Accountant.

         Robert Martin. Mr. Martin is an Executive Managing Director at
Insignia/ESG., Inc., a global commercial real estate brokerage firm, where he
has been employed since 1995. Prior to joining Insignia/ESG, Mr. Martin was a
managing director at Grubb & Ellis, a commercial real estate brokerage firm.

         W. Edward Scheetz. Mr. Scheetz is Co-Chief Executive Officer of
NorthStar Capital Investment Corp., a company he co-founded in July 1997. From
1993 to 1997, Mr. Scheetz was a partner at Apollo Real Estate Advisors, where he
was responsible for the investment activities of Apollo Real Estate Investment
Funds I and II. From 1989 to 1993, Mr. Scheetz was a principal with Trammell
Crow Ventures where he was responsible for that firm's opportunistic real estate
investment activities.

         Lara Sweeney. Ms. Sweeney has been a Vice President and Secretary of
Presidio AGP Corp. since November 1999. Ms. Sweeney has been a Senior Vice
President of Winthrop Financial Associates since 1996. Ms. Sweeney was Director
of Investor Relations for National Property Investors, Inc. from 1994 until
1996.

         Carolyn Tiffany. Ms. Tiffany has been a Vice President and Treasurer of
Presidio AGP Corp. since November 1999 and has been with Winthrop Financial
Associates since January 1993. From 1995 to 1997, she was a Vice President in
the asset management and investor relations departments of Winthrop Financial
Associates and became Chief Operating Officer of Winthrop Financial Associates
in December 1997. Ms. Tiffany is also the Chief Operating Officer of The Newkirk
Group.

         There are no family relationships among the current or former directors
and officers of the Corporation.

Item 11.       Compensation

(a) Executive Compensation.

         None of our executive officers received compensation from us in 2001.
Our executive officers were compensated by Shelbourne Management LLC in their
capacities as officers and employees of that company. Please see "Item 1 -
Business" and "Item 13 - Certain Relationships and Related Transactions" for a
description of those arrangements between us and Shelbourne Management LLC.

(b) Director Compensation.

         Our independent directors, currently Donald W. Coons and Robert Martin,
receive $6,667 annually for their services as directors. In addition, solely for
their services as members of the Special Committee, which was organized to
review and evaluate the fairness of the repurchase by the Corporation of the
shares of common stock held by PCIC, Michael Bebon, Donald W. Coons and Robert
Martin received a one-time payment of $20,000. All directors are reimbursed for
travel expenses and other out-of-pocket expenses incurred in connection with
their serving as directors of the Corporation.

                                       36

<PAGE>

Item 12.       Security Ownership Of Certain Beneficial Owners And Management

(a) Security Ownership of Certain Beneficial Owners.

         Except as set forth below, no person or group that is known by us to be
the beneficial owner of more than 5% of the outstanding shares of common stock
at March 26, 2002:


Name of Beneficial Owner      Number of Shares owned           % of Class
--------------------------------------------------------------------------------
HX Investors, L.P (1)                63,072                      7.996%


     (1)  The principal business address of HX Investors, L.P. is 100 Jericho
          Quadrangle, Suite 214, Jericho, New York 11753. The sole general
          partner of HX Investors LP is Exeter Capital Corporation. Mr. Michael
          L. Ashner is the sole shareholder and director of Exeter Capital.
          Mr. Ashner is principally employed as the Chief Executive Officer of
          Winthrop Financial Associates, a limited partnership affiliated with
          the management company that provides all management services for the
          Corporation.

(b) Security Ownership of Management.

         Except as set forth below, no member of the management of the
Corporation is known to be a beneficial holder of its stock.

Name of Beneficial Owner      Number of Shares owned           % of Class
--------------------------------------------------------------------------------
Michael Bebon, Director               1,500                      0.19%

Robert Martin, Director               1,300                      0.16%


     (1)   On March 27, 2001, Michael Bebon resigned from his position as
           director of the Corporation.

(c) Changes in Control.

         There exists no arrangement known to the Corporation the operation of
which may at a subsequent date result in a change in control of the Corporation.

                                       37

<PAGE>

Item 13.       Certain Relationships and Related Transactions

Compensation for Services

         The Predecessor General Partners and certain affiliated entities have,
during the year ended December 31, 2001, earned or received compensation or
payments for services or reimbursements from us, the Predecessor Partnership, or
Presidio subsidiaries as follows:
<TABLE>
<CAPTION>
                                                                                Compensation from us, the
                                                                                Predecessor Partnership or
Name of Recipient                  Capacity in Which Served                        Presidio subsidiaries
--------------------------------------------------------------------------------------------------------------
<S>                             <C>                                                    <C>
Resources High Equity Inc.      Predecessor Managing General Partner                   $454,252 (1)

Presidio AGP Corp.              Predecessor Associate General Partner                  $702 (2)

Kestrel Management, L.P.        Property Manager                                       $235,036 (3)

Shelbourne Management LLC       Business Manager                                       $617,611 (4)

</TABLE>

(1)  $59,444 represents payment for non-accountable expenses of the
     Predecessor Managing General Partner and $394,808 represents a
     Partnership Management Fee for managing the affairs of the Predecessor
     Partnership and the Corporation. Furthermore, under the Predecessor
     Partnership's Limited Partnership Agreement which was in effect until
     April 17, 2001, 5% of the Predecessor Partnership's net income and net
     loss is allocated to the General Partners (0.1% to the Predecessor
     Associate General Partner and 4.9% to the Predecessor Managing General
     Partner). Pursuant thereto, for the year ended December 31, 2001,
     $34,401 of the Predecessor Partnership's net income was allocated to
     the Predecessor Managing General Partner.

(2)  For the year ended December 31, 2001, $702 of the Predecessor
     Partnership's net income was allocated to the Predecessor Associate
     General Partner.

(3)  This amount was earned pursuant to a management agreement with Kestrel
     Management, L.P. for performance of certain functions relating to the
     management of our properties.

(4)  This amount was earned pursuant to an advisory agreement with
     Shelbourne Management LLC for performance of certain functions relating
     to the management of our business. $140,556 represents reimbursement
     for expenses and $477,055 represents payment of an asset management fee
     pursuant to the advisory agreement.

         Recent Developments

         On February 14, 2002, the Corporation, Shelbourne Properties I, Inc.
and Shelbourne Properties II, Inc. (together the "Companies") announced the
consummation of a transaction whereby the Companies (i) purchased each of the
advisory agreements between the Companies and an affiliate of PCIC and (ii)
repurchased all of the shares of capital stock in the Companies held by PCIC.
Pursuant to the Transaction, for the Advisory Agreements and the Shares, the
Companies paid PCIC an aggregate of $44 million in cash, preferred partnership
interests in their respective operating partnerships with a liquidation
preference of $2.5 million, and notes with a stated amount of between $54.3
million and $58.3 million, depending upon the timing of the repayment of the
notes. For further details concerning this transaction, please see "Item 1.
Business - Recent Developments" on page 3 above.

         On March 27, 2001, Michael Bebon resigned from his position as director
of the Corporation.

                                       38

<PAGE>

                                     Part IV

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a)   Financial Statements and Financial Statement Schedules

         (1)   Financial Statements

               Independent Auditor's Report

               Consolidated Balance Sheets as of December 31, 2001 and 2000

               Consolidated Statements of Operations for the years ended
               December 31, 2001, 2000 and 1999

               Consolidated Statements of Equity for the years ended December
               31, 2001, 2000 and 1999

               Consolidated Statements of Cash Flows for the years ended
               December 31, 2001, 2000 and 1999

         (2)   Financial Statement Schedules

               III - Real Estate and Accumulated Depreciation

               All other schedules are omitted because they are not applicable
               or not required.

         (b)   Reports on Form 8-K

               None.

         (c)   Exhibits

         Exhibit
         Number   Description
         ------   -----------
         2.1      Form of Merger Agreement*

         3.1      Amended and Restated Certificate of Incorporation of the
                  Corporation*

         3.2      Amended and Restated Bylaws of the Corporation*

         4.1      Amended and Restated Agreement of Limited Partnership of the
                  Operating Partnership*

         4.2      Shareholder Rights Agreement*

         4.3      Amendment of Shareholder Rights Agreement between Shelbourne
                  Properties III, Inc. and American Stock Transfer & Trust
                  Company, as rights agent, dated as of February 14, 2002.**

         4.3      Certificate of Designations, Preferences and Rights of Series
                  A Preferred Stock*

         10.1     Indemnification Agreement between the Corporation and each of
                  its directors and executive officers*

         21.1     Listing of Subsidiaries

         99.1     Purchase and Contribution Agreement, dated as of February 14,
                  2002, by and among PCIC, certain subsidiaries of PCIC,
                  Northstar Capital Investment Corp., Shelbourne Management, the
                  Companies, the Operating Partnership, Shelbourne Properties I,
                  L.P. and Shelbourne Properties II, L.P.**

         99.2     Secured Promissory Note between the Operating Partnership and
                  Shelbourne Management dated as of February 14, 2002**

         99.3     Partnership Unit Designation of the Class A Preferred
                  Partnership Units of the Operating Partnership**

                                       39

<PAGE>

         99.4     Deed of Trust, Security Agreement, Financing Statement,
                  Fixture Filing and Assignment of Leases, Rents and Security
                  Deposits (Las Vegas, Nevada) dated as of February 14, 2002
                  among the Operating Partnership, Shelbourne Management and
                  United Title of Nevada as Trustee

         99.5     Mortgage, Security Agreement, Financing Statement, Fixture
                  Filing and Assignment of Leases, Rents and Security Deposits
                  (Livonia, Michigan) dated as of February 14, 2002

         99.6     Security Agreement dated as of February 14, 2002 between the
                  Operating Partnership and Shelbourne Management

         99.7     First Amendment to Security Agreement dated as of March 15,
                  2002 between the Operating Partnership and Shelbourne
                  Management

         99.8     Negative Covenant and Declaration by Tri-Columbus Associates,
                  as Declarant, to Shelbourne Management, as Beneficiary, dated
                  as of March 15, 2002.


         *   incorporated by reference to the Registration Statement of the
             Corporation on form S-4 filed on February 11, 2000 as amended

         **  incorporated by reference to the Current Report of the Corporation
             on form 8-K filed on February 14, 2002

         (d) Financial Statements.

             None
                                       40
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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:  March 29, 2002            By:   /s/  Dallas Lucas
                                      ---------------------------------------
                                      Name:  Dallas Lucas
                                      Title: Treasurer




         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



Dated:  March 29, 2002             By:   /s/  Donald W. Coons
                                       ---------------------------------------
                                       Name:  Donald W. Coons
                                       Title: Director


                                   By:   /s/  Robert Martin
                                       ---------------------------------------
                                       Name:  Robert Martin
                                       Title: Director

                                   By:   /s/  W. Edward Scheetz
                                       ---------------------------------------
                                       Name:  W. Edward Scheetz
                                       Title: Director

<PAGE>

                              Annual Report on 10-K
                               Item 8 and 14(a)(2)


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                             A DELAWARE CORPORATION
                             ----------------------
                        CONSOLIDATED FINANCIAL STATEMENTS
                        ---------------------------------
                  YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                  --------------------------------------------
                                    I N D E X
                                    ---------

<TABLE>
<CAPTION>
<S>                                                                                    <C>
Independent Auditors' Report...........................................................F-1

Consolidated Financial Statements, years ended December 31, 2001, 2000 and 1999

Consolidated Balance Sheets............................................................F-2

Consolidated Statements of Operations..................................................F-3

Consolidated Statements of Equity......................................................F-4

Consolidated Statements of Cash Flows..................................................F-5

Notes to Consolidated Financial Statements.............................................F-6

</TABLE>

<PAGE>


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of Shelbourne Properties III, Inc.

We have audited the accompanying balance sheets of Shelbourne Properties III,
Inc. (formerly High Equity Partners L.P. - Series 88), (the "Company") as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, equity, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14(a) 2. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company's and its subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.


DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 25, 2002


                                      F-1
<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                            ------------------------------------------
                                                                                  2001             2000
  <S>                                                                         <C>              <C>
  ASSETS
  ------
  Real estate, net                                                            $40,493,332      $44,633,773
  Real estate held for sale                                                     2,961,146                     -
  Cash and cash equivalents                                                    11,122,456       10,222,394
  Other assets                                                                  1,921,600        1,610,180
  Receivables, net of allowances of $35,245 and $139,900, respectively             42,928           83,415
                                                                              -----------      -----------

  TOTAL ASSETS                                                                $56,541,462      $56,549,762
                                                                              ===========      ===========


  LIABILITIES AND EQUITY
  ----------------------
  Accounts payable and accrued expenses                                       $   816,904       $  821,472
  Due to affiliates                                                                     -          335,041
                                                                              -----------      -----------
  Total liabilities                                                               816,904        1,156,513
                                                                              -----------      -----------

  COMMITMENTS AND CONTINGENCIES (Note 6 & 7)

  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                                                              (370,750)               -

  Limited partners' equity (371,766 units
      issued and outstanding)                                                           -       52,623,568
  General partners' equity                                                              -        2,769,681
                                                                              -----------      -----------
  Total equity                                                                 55,724,558       55,393,249
                                                                              -----------      -----------
  TOTAL LIABILITIES AND EQUITY                                                $56,541,462      $56,549,762
                                                                              ===========      ===========
</TABLE>


                See notes to consolidated financial statements.

                                      F-2
<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------
<TABLE>
<CAPTION>

                                                                       For the Years Ended December 31,
                                                        -------------------------------------------------------------
                                                            2001                 2000                   1999
                                                            ----                 ----                   ----
<S>                                                      <C>                  <C>                    <C>
Rental Revenue                                           $8,065,011           $7,640,794             $7,625,731
                                                         ----------           ----------             ----------

Costs and Expenses:
         Operating expenses                               2,053,034            1,953,141              2,306,635
         Depreciation and amortization                    1,663,483            1,593,250              1,609,183
         Asset management fee                               871,863              803,487                719,411
         Administrative expenses                          1,180,430              992,930              1,227,851
         Property management fee                            235,036              230,075                231,040
                                                          ---------           ----------              ---------
                                                          6,003,846            5,572,883              6,094,120
                                                          ---------           ----------              ---------

Income before interest and other income                   2,061,165            2,067,911              1,531,611

         Interest income                                    417,638              434,191                270,439
         Other income                                        47,882               35,139                 93,106
                                                          ---------           ----------              ---------

Net income                                               $2,526,685           $2,537,241             $1,895,156
                                                         ==========           ==========             ==========

Earnings per share - Basic and Diluted

Net income per common share                                $   2.15             $   2.16               $   1.61
                                                         ==========           ==========             ==========

Weighted average common shares                            1,173,998            1,173,998              1,173,998
                                                         ==========           ==========             ==========


</TABLE>

                 See notes to consolidated financial statements.

                                      F-3
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                        CONSOLIDATED STATEMENTS OF EQUITY
                        ---------------------------------

<TABLE>
<CAPTION>
                                          Partners' Equity                   Shareholders' Equity
                                      ---------------------------------------------------------------------------------------
                                         General      Limited Partners    Common      Additional     Retained
                                         Partners                         Stock        Capital       Earnings      Total
<S>                                     <C>           <C>              <C>         <C>           <C>            <C>
Balance, January 1, 1999                $ 2,647,851   $   50,308,799   $      -    $         -   $        -      $52,956,650

Net income                                   94,758        1,800,398          -              -            -        1,895,156

Distributions ($1.70 per share)             (99,790)      (1,896,008)                                             (1,995,798)
                                      -------------     ------------   --------     ----------   -----------     ------------
Balance, December 31, 1999                2,642,819       50,213,189          -              -            -       52,856,008

Net income                                  126,862        2,410,379          -              -            -        2,537,241
                                      -------------     ------------   --------     ----------   -----------     ------------
Balance, December 31, 2000                2,769,681       52,623,568          -              -            -       55,393,249

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

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

Net income after conversion                       -                -          -              -    1,824,626        1,824,626

Distributions ($1.87 per share)                   -                -          -              -   (2,195,376)      (2,195,376)
                                      -------------     ------------   --------     ----------   -----------     ------------
Balance, December 31, 2001            $           -     $          -   $ 11,739    $56,083,569   $ (370,750)     $55,724,558
                                      =============     ============   ========    ===========   ===========     ============
</TABLE>


                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

<TABLE>
<CAPTION>
                                                                        For the Years Ended December 31,
                                                              ---------------------------------------------
                                                                  2001            2000           1999
                                                                  ----            ----           ----
  CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                            <C>             <C>            <C>
  Net Income                                                   $2,526,685      $2,537,241     $1,895,156
  Adjustments to reconcile net income
    to net cash provided by operating activities:
           Depreciation and amortization                        1,663,483       1,593,250      1,609,183
           Straight line adjustment for stepped
              lease rentals                                      (77,601)       (105,049)      (254,000)
  Changes in assets and liabilities:
           Accounts payable and accrued expenses                  (4,568)        (61,992)         93,553
           Receivables                                             40,487         254,683      (196,042)
           Due to affiliates                                    (335,041)       (113,189)        105,208
           Other assets                                         (436,063)       (215,169)      (293,245)
                                                              -----------   -------------    -----------
  Net cash provided by operating activities                     3,377,382       3,889,775      2,959,813
                                                              -----------   -------------    -----------
  CASH FLOWS FROM INVESTING ACTIVITIES

                 Improvements to real estate                    (281,944)       (100,911)       (53,284)
                                                              -----------   -------------    -----------
  CASH FLOWS FROM FINANCING ACTIVITIES

                 Distributions                                (2,195,376)              --    (2,993,697)
                                                              -----------   -------------    -----------
  Increase (Decrease) in Cash and Cash Equivalents                900,062       3,788,864       (87,168)

  Cash and Cash Equivalents, Beginning of Year                 10,222,394       6,433,530      6,520,698
                                                              -----------   -------------    -----------

  Cash and Cash Equivalents, End of Year                      $11,122,456     $10,222,394    $ 6,433,530
                                                              ===========   =============    ===========
</TABLE>



                 See notes to consolidated financial statements.

                                      F-5
<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION
     ------------
     High Equity Partners L.P. - Series 88 (the "Predecessor Partnership"),
     a limited partnership, was formed on February 24, 1987 under the
     Uniform Limited Partnership Laws of the State of Delaware, for the
     purpose of investing in, holding and operating income-producing real
     estate was converted to a Real Estate Investment Trust ("REIT") on
     April 17, 2001 named Shelbourne Properties III, Inc. ("Shelbourne" or
     the "Corporation") by merging with Shelbourne Properties III LP, a
     Delaware limited partnership, that would be the operating partnership
     of the REIT. Shelbourne began the year invested in one office building,
     three shopping centers, four retail stores (supermarkets) and three
     industrial warehouses. Subsequently in 2002 two of the supermarkets
     were sold. Edina, Minnesota was sold on January 6, 2002 and Toledo,
     Ohio was sold on January 30, 2002. Neither of the sold properties or
     any of the remaining properties were encumbered by debt as of December
     31, 2001.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     Basis of Presentation
     ---------------------
     The consolidated financial statements include the accounts of
     Shelbourne Properties III, Inc. and its wholly owned subsidiaries,
     Shelbourne Properties III, L.P. and Shelbourne Properties III GP, LLC.
     Intercompany accounts and transactions have been eliminated in
     consolidation.

     Financial Statements
     --------------------
     The financial statements are prepared on the accrual basis of
     accounting. The preparation of financial statements in conformity with
     accounting principles generally accepted in the United States of
     America requires management to make estimates and assumptions that
     affect the reported amounts of assets and liabilities and disclosure of
     contingent assets and liabilities at the date of the financial
     statements and the reported amounts of revenues and expenses during the
     reporting period. Actual results could differ from those estimates.

     Cash and Cash Equivalents
     -------------------------
     Shelbourne considers all short-term investments, which have maturities
     of three months or less from the date of issuance, to be cash
     equivalents.

     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 Task Force's consensus on Issues 98-9, "Accounting for
     Contingent Rent in Interim Financial Periods," Shelbourne 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 costs are incurred.

     Investments in Joint Ventures
     -----------------------------
     Certain properties were purchased in joint venture ownership with an
     affiliated REIT. Shelbourne owns an undivided interest and is severally
     liable for indebtedness it incurs in connection with its ownership
     interest in those properties. Therefore, Shelbourne's financial
     statements present the assets, liabilities, revenues and expenses of
     the joint ventures on a pro rata basis in accordance with the REIT's
     percentage of ownership.

                                      F-6
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
     ------------------------------------------------------
     Real Estate
     -----------
     Real estate is carried at cost, net of adjustments for impairment.
     Repairs and maintenance are charged to expense as incurred.
     Replacements and betterments are capitalized. Shelbourne evaluates the
     recoverability of the net carrying value of its real estate and related
     assets at least annually, and more often if circumstances dictate. If
     there is an indication that the carrying amount of a property may not
     be recoverable, Shelbourne 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 is located.

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

     Impairment write-downs recorded by Predecessor Partnership 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 the variances may be material. Shelbourne may provide
     additional write-downs, which could be material in subsequent years if
     real estate markets or local economic conditions change.

     Depreciation and Amortization
     -----------------------------
     Depreciation is computed using the straight-line method over the useful
     life of the property, which is estimated to be 40 years. The cost of
     properties represents the initial cost of the properties to Shelbourne
     plus acquisition and closing costs less impairment adjustments. Tenant
     improvements and leasing costs are amortized over the applicable lease
     term.

     Income Taxes
     ------------
     Shelbourne is operating with the intention of qualifying as a REIT
     under Sections 856-860 of the Internal Revenue Code of 1986 as amended.
     Under those sections, a REIT which distributes 90% of its taxable
     income as a dividend to its shareholders each year and which meets
     certain other conditions will not be taxed on that portion of its
     taxable income which is distributed to its shareholders. Shelbourne
     distributed to its shareholders an amount greater than its taxable
     income therefore no provision for Federal income taxes is required.


                                      F-7

<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
     ------------------------------------------------------
     For federal income tax purpose, the cash dividends distributed to
     shareholders are characterized as follows:

                                                           2001
                                                           ----
            --------------------------------------------------------------------
            Ordinary Income                                                  80%
            Return of Capital                                                20%
                                            ------------------------------------
                        Total:                                              100%
                                            ====================================


     Prior to conversion, no provision has been made for federal, state and
     local income taxes since they are the personal responsibility of the
     partners. A final tax return and K-1s were issued for the short tax
     year ending April 17, 2001.

     Taxable income differs from net income for financial reporting purposes
     principally because of differences in the timing of recognition of
     rental income and depreciation. As a result of these differences, and
     the impairment of long-lived assets and the initial write off of
     organization costs for book purposes, the tax basis of Shelbourne's net
     assets exceeds its book value by $24,447,813 and $25,579,963 at
     December 31, 2001 and 2000, respectively.

     Amounts Per Share
     -----------------
     Basic earnings per share is computed based on average shares
     outstanding. The number of limited partnership interest units
     outstanding prior to the conversion have been restated to reflect
     effects of the conversion.

     Distributions Per Share
     -----------------------
     On December 7, 2001 the Board of Directors declared a dividend of $1.87
     per share. The distribution was subsequently paid on December 21, 2001
     to all shareholders of record as of December 17, 2001.

     Net Income and Distributions per Unit of Limited Partnership Interest
     ---------------------------------------------------------------------
     Prior to Conversion
     -------------------
     Prior to the conversion, net income and distributions per unit of
     limited partnership interest were calculated based upon the number of
     limited partnership units outstanding (371,766) for each of the years
     ended December 31, 2000, and 1999. No distributions were paid in 2000.

     Recently Issued Accounting Standards
     ------------------------------------
     Effective January 1, 2001 Shelbourne adopted Statement of Financial
     Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
     Instruments and Hedging Activities". Because Shelbourne does not
     currently utilize derivatives or engage in hedging activities, this
     standard did not have a material effect on Shelbourne'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. There was no effect from this statement on
     Shelbourne's financial statements.

                                      F-8
<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED 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

                                      F-9

<PAGE>


                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
         ------------------------------------------------------
         intangible assets subsequent to their acquisition. SFAS No. 142 is
         effective for fiscal years beginning after December 15, 2001. This
         statement will not effect Shelbourne'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.
         Shelbourne does not expect that this statement will have a material
         effect on Shelbourne's financial statements.


3.       CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
         -----------------------------------------------------------
         Due to the conversion of the Predecessor Partnership into a REIT (as
         described in Note 1 above) on April 17, 2001, the nature of the
         relevant conflicts of interest and related party transactions changed
         during the fiscal year ended December 31, 2001. In addition, the stock
         repurchase described at Note 7 again affected the relevant conflicts of
         interest and changed the nature of some related party transactions.
         This Note 3 is divided into two sections: (A) Prior to April 17, 2001
         and (B) April 17, 2001 to December 31, 2001.

                  A.   Prior to April 17, 2001

         Until April 17, 2001, the General Partners of the Predecessor
         Partnership were entitled to receive certain fees and reimbursement
         for expenses as permitted under the terms of the Predecessor
         Partnership's partnership agreement. The Managing General Partner of
         the Predecessor Partnership, Resources High Equity Inc., is a wholly
         owned subsidiary of Presidio Capital Corp. ("Presidio"). Presidio AGP
         Corp., which is also a wholly owned subsidiary of Presidio, is the
         Associate General Partner (together with the Managing General Partner,
         the "Predecessor General Partners").

         Affiliates of the Predecessor General Partners were engaged in
         businesses related to the acquisition and operation of real estate.

         Presidio is the parent of other corporations that are or may in the
         future be engaged in business that may be in competition with
         Shelbourne. Accordingly, conflicts of interest may have arisen between
         the Predecessor Partnership and such other businesses. Subject to the
         rights of the Limited Partners under the Limited Partnership Agreement
         (the "Agreement"), Presidio controlled the Predecessor Partnership
         through its indirect ownership of all the shares of the Predecessor
         General Partners. Effective July 31, 1998, Presidio was indirectly
         controlled by NorthStar Capital Investment Corp., a Maryland
         Corporation.

         Effective as of August 28, 1997, Presidio had a management agreement
         with NorthStar Presidio Management Company LLC ("NorthStar Presidio"),
         an affiliate of NorthStar Capital Investment Corp., pursuant to which
         NorthStar Presidio provided the day-to-day management of Presidio and
         its direct and indirect subsidiaries and affiliates. For the years
         ended December 31, 2001, 2000 and 1999, reimbursable expenses incurred
         by NorthStar Presidio, which is related to the Predecessor Partnership
         amounted to approximately $0, $0 and $56,018 respectively. Effective
         October 21, 1999, Presidio entered into a Services Agreement with
         AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was retained
         to provide asset management and investor relation services to the
         Predecessor Partnership and other entities affiliated with the
         Predecessor Partnership.

                                      F-10

<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

         In order to facilitate the Agent's provision of the asset management
         services and the investor relation services, effective October 25,
         1999, the officers and directors of the Predecessor General Partner
         resigned and nominees of the Agent were elected as the officers and
         directors of the Predecessor Partnership (and subsequently of
         Shelbourne). The Agent is an affiliate of Winthrop Financial
         Associates, a Boston based company that provides asset management
         services, investor relation services and property management services
         to over 150 limited partnerships which own commercial property and
         other assets.

         The fees payable to the Predecessor General Partners prior 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 was based on gross assets, the
         amount payable to Shelbourne Management increased to the extent
         Shelbourne acquired new investments, whether for cash, or by causing
         Shelbourne to incur indebtedness or otherwise.

         Prior to the merger in April 2001, the Predecessor Partnership had a
         property management services agreement with Resources Supervisory
         Management Corp. ("Resources Supervisory"), an affiliate of the
         Managing General Partner, to perform certain functions relating to the
         management of the properties of the Partnership. Portions of the
         property management fees were paid to unaffiliated management
         companies, which were engaged for the purpose of performing the
         management functions for certain properties. Effective October 2000,
         Kestrel Management L.P. ("Kestrel"), and affiliate of the Agent began
         performing all property management services directly for the
         Predecessor Partnership. For the years ended December 31, 2000, and
         1999, Resources Supervisory was entitled to receive an aggregate of
         $165,338, and $231,048 respectively, of which $99,189 was received by
         Kestrel in 2000 and $66,149, and $115,352 was paid to unaffiliated
         management companies, respectively. From October 1, 2000 through
         December 31, 2000 Kestrel received $64,737. For the year ended December
         31, 2001 Kestrel received $235,036.

         For the administration of the Predecessor Partnership the Managing
         General Partner was entitled to receive non-accountable reimbursement
         of expenses of a maximum of $200,000 per year.

         Pursuant to the amendment to the Agreement, which became effective on
         August 20, 1999, the annual partnership management fee for 1999 was
         reduced to $719,411. Further, the Agreement was amended (for the year
         2000 and beyond) so that the partnership management fee will be
         calculated equal to 1.25% of the Gross Asset Value of the Partnership.
         For the years ended December 31, 2000, and 1999 the Managing General
         Partner earned $803,487, and $719,411 respectively.

         Prior to the conversion, the General Partners were allocated 5% of the
         net income of the Predecessor Partnership that amounted to $126,862 and
         $94,758 in 2000 and 1999, respectively. The General Partners were also
         entitled to receive 5% of distributions that amounted to $39,581 in
         1999. There were no distributions were paid in 2000.

                                      F-11

<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.       CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (Continued)
         -----------------------------------------------------------------------
         In connection with a tender offer for units of the Predecessor
         Partnership made March 12, 1998 (the "Offer") by Olympia Investors,
         L.P., a Delaware limited partnership controlled by Carl Ichan
         ("Olympia"), Olympia and Presidio entered into an agreement dated March
         6, 1998 (the "Olympia Agreement"). Subsequent to the expiration of the
         offer, Olympia announced that it had accepted for payment 14,955 units
         properly tendered pursuant to the Offer. Pursuant to the Olympia
         Agreement, Presidio purchased 50% of the units owned by Olympia as a
         result of the Offer, or 7,478 units, for $132.26 per unit. Presidio may
         be deemed to beneficially own the remaining units owned by Olympia as a
         consequence of the Olympia Agreement

         Subsequent to the expiration of the tender offer described above,
         Millennium Funding IV Corp. purchased 12,396 limited partnership units
         from August 1998 through February 1999. The total of these purchases
         and the units purchased from Olympia (as described above) represents
         approximately 18.1% of the outstanding limited partnership units of the
         Predecessor Partnership.

         As required by the settlement (see Note 6), an affiliate of the
         Predecessor 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.

                  B.   April 17, 2001 to December 31, 2001

         On April 17, 2001, further to the settlement of litigation described in
         Note 6, the Predecessor Partnership was converted to a REIT as
         described in Note 1.

         Effective April 17, 2001, Shelbourne entered into a contract with
         Shelbourne Management, LLC ("Shelbourne Management"), which contract
         has a term of 10 years, pursuant to which Shelbourne Management agreed
         to provide Shelbourne 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 former senior management of the Corporation. For
         providing these services, Shelbourne Management was to 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. This agreement was
         terminated on February 14, 2002 as part of the transaction described in
         Note 7 below.

         Subsequent to the conversion, all Partnership units owned were
         converted to common stock at three shares for 1 partnership unit.
         Affiliates of the Predecessor General Partner of the Partnership owned
         385,220 shares and received a distribution in the amount of $720,373 in
         2001.

         In August 2001, the nominees of the Agent resigned as officers and
         directors of Shelbourne, and certain officers of Presidio were elected
         as officers of Shelbourne, though the Agent continued to provide
         services to Shelbourne.

         The following table summarizes the amounts paid to the Predecessor
         General Partners and Shelbourne Management on account of such fees for
         the twelve-month periods ended December 31, 2001, December 31, 2000 and
         1999.

                                      F-12

<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.       CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (Continued)
         -----------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                    Twelve Months Ended
                                                                    -------------------
                                              December 31, 2001           December 31, 2000     December 31, 1999
                                              -----------------           -----------------     -----------------
<S>                                      <C>              <C>              <C>                   <C>
                                         Predecessor
                                         General          Shelbourne
                                         -------          ----------       Predecessor           Predecessor
                                         Partners         Management       General Partners      General Partners
                                         --------         ----------       ----------------      ----------------
         Expense                         $ 59,444          $140,556            $200,000              $200,000
         Reimbursement
         Asset Management Fee            $394,808          $477,055            $803,487              $719,411
</TABLE>

4.       REAL ESTATE
         -----------
         The following table is a summary of Shelbourne's real estate as of:

                                                         December 31,
                                             -----------------------------------
                                                  2001                 2000
                                             ----------------     --------------
         Land                                   $ 8,040,238          $ 8,040,238
         Buildings and Improvements              50,134,222           53,985,169
                                             ----------------     --------------
                                                 58,174,460           62,025,407

         Less: Accumulated depreciation        (17,681,128)         (17,391,634)

                                             $   40,493,332         $ 44,633,773
                                             ==============      ===============

         As of December 31, 2001, two properties were being held for sale. The
         supermarkets in Edina, Minnesota and the Toledo, Ohio have been
         subsequently sold in January 2002 for $3,500,000 and $3,600,000
         respectively. The Edina sale resulted in a generally accepted
         accounting principles (GAAP) gain on sale of $635,150. Toledo's sale
         however resulted in a loss on sale of $185,790.

         During 2001, revenues at the Tri-Columbus, Sunrise, Livonia, and 568
         Broadway properties represented 27%, 25%, 18% and 24% of gross
         revenues, respectively. During 2000, revenues at the Tri-Columbus,
         Sunrise, Livonia, and 568 Broadway properties represented 25%, 26, 19%
         and 23% of gross revenues, respectively. During 1999, revenues at the
         Tri-Columbus, Sunrise, Livonia, and 568 Broadway properties represented
         22%, 25%, 19% and 23% of gross revenues, respectively. No single tenant
         accounted for more than 10% of Shelbourne's rental revenues.

         The following is summary of Shelbourne's share of anticipated future
         receipts under noncancellable leases:

<TABLE>
<CAPTION>

                       2002          2003           2004          2005          2006        Thereafter           Total
                   ----------------------------------------------------------------------------------------------------
<S>                <C>           <C>           <C>            <C>           <C>            <C>              <C>
         Total:    $ 7,018,409   $ 6,320,343   $ 5,414,065    $ 4,910,597   $ 4,114,353    $12,123,929      $39,901,694
                   ===========   ===========   ===========    ===========   ===========    ===========      ===========

</TABLE>

                                      F-13

<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.       REAL ESTATE (Continued)
         -----------------------
         Shelbourne recorded substantial write-downs for impairment prior to
         1996. No write-downs were required for 2001, 2000 or 1999. The table
         below summarizes write-downs recorded on the properties:

                   Property
                   --------
                   568 Broadway                                 $ 6,157,700
                   Sunrise                                        8,500,000
                   Livonia Plaza                                  2,100,000
                   Melrose-Phase II                               2,881,000
                                                                -----------
                                                                $19,638,700

5.       DUE TO AFFILIATES
         -----------------
                                                               December 31,
                                                          ----------------------
                                                            2001         2000
                                                            ----         ----

         Predecessor Partnership asset management fee     $    -       $ 285,041
         Predecessor Partnership administration fee            -          50,000
                                                          -------      ---------
                                                          $    -       $ 335,041
                                                          =======      =========

6.       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
         Predecessor Partnership. Under the terms of the settlement, the former
         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 Predecessor 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 Predecessor Partnership and a
         fixed 1999 Partnership Asset Management Fee of $719,411 or $160,993
         less than the amount that would have been paid for 1999 under the prior
         formula and (b) fixed the amount that the Predecessor General Partners
         would liable to pay to limited partners upon liquidation of the
         Predecessor Partnership as repayment of fees previously received (the
         "Fee Give-Back Amount"). As amended, the Partnership Agreement provided
         that, upon a reorganization of the Predecessor Partnership into a real
         estate investment trust or other public entity, the Predecessor General
         Partners will have no further liability to pay the Fee Give-Back
         Amount.

         As required by the settlement, as discussed above, 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 Unit. The offer closed in January 2000, and all
         25,034 Units were acquired in the offer. On a post-conversion basis,
         the tender offer was for the equivalent of 75,012 Shares at a price of
         $37.71 per share.

         The final requirement of the settlement obligated the Predecessor
         General Partners to use their best efforts to reorganize the
         partnership into a real estate investment trust 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 Predecessor Partnership into a publicly-traded
         real estate investment trust. 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.

                                      F-14
<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.       SETTLEMENT OF LAWSUIT (Continued)
         ---------------------------------
         The consent of limited partners was sought to approve the conversion of
         the Predecessor Partnership into a publicly-traded real estate
         investment trust called Shelbourne Properties III, Inc. ("Shelbourne").

         The consent solicitation period expired on April 16, 2001, and holders
         of a majority of the Units approved the conversion.

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

7.       SUBSEQUENT EVENTS
         -----------------
         On February 14, 2002, Shelbourne, Shelbourne Properties I, Inc. and
         Shelbourne Properties II, Inc. (together the "Companies") announced the
         consummation of a transaction (the "Transaction") whereby the Companies
         (i) purchased each of the advisory agreements (the "Advisory
         Agreements") between the Companies and an affiliate of PCIC and (ii)
         repurchased all of the shares of capital stock in the Companies held by
         PCIC (the "Shares").

         Pursuant to the Transaction, Shelbourne paid PCIC $11,830,337 in cash
         and its operating partnership, Shelbourne Properties I LP issued
         preferred partnership interests with an aggregate liquidation
         preference of $672,178 and issued a note with an aggregate stated
         amount of $15,665,421.

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

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

         On February 22, 2002, Carl Icahn and Longacre Corp. brought a
         derivative shareholder suit in the New York State Supreme Court
         against NorthStar Capital Investment Corp., PCIC, Shelbourne
         Management, Peter W. Ahl, David Hamamoto, David G. King, Jr., Dallas
         E. Lucas, W. Edward Scheetz, Michael T. Bebon, Donald W. Coons and
         Robert Martin, and nominal defendants the Corporation, Shelbourne
         Properties II, Inc. and Shelbourne Properties III, Inc. for, inter
         alia, breach of fiduciary duties relating to the approval of the stock
         repurchase transaction between the Corporation and NorthStar Capital
         Investment Corp. described in "Item 1. Business" under the heading
         "Recent Developments." On March 4, 2002, Icahn and Longacre brought a
         motion for expedited discovery, reversal of priority of discovery and
         injunctive relief by Order to Show Cause. Thereafter, the defendants
         moved to dismiss the case for, among other reasons, the failure to
         make a demand on the Board of Directors prior to commencing the
         action. At a hearing held on March 11, the court authorized limited
         discovery in connection with defendant's motion to dismiss. The court
         also scheduled a hearing for April 29, 2002 on defendant's motion to
         dismiss.

         In addition, two shareholder derivative actions have been filed in
         Delaware against the same defendants. Those actions have now been
         consolidated, and defendants have moved to dismiss the consolidated
         action.

         With respect to the allegations in the lawsuits, we believed at the
         time the Special Committee approved the transaction, and we continue to
         believe, that the stock repurchase was fair and reasonable and in the
         best interests of the Corporation and its shareholders.

         On March 27, 2002, Michael Bebon resigned from the Board of Directors.

                                      F-15
<PAGE>
                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.       QUARTERLY DATA
         --------------
         The following table presents the unaudited financial data by quarter
         for the years ended December 31, 2001 and December 30, 2000:
<TABLE>
<CAPTION>

                    ---------------------------------------------------------------------------------------------------
                        2001        2001        2001         2001        2000        2000        2000         2000
                      4th Qtr      3rd Qtr     2nd Qtr     1st Qtr      4th Qtr     3rd Qtr     2nd Qtr     1st Qtr
                    ---------------------------------------------------------------------------------------------------
 <S>                  <C>         <C>         <C>          <C>         <C>         <C>         <C>          <C>

 Rental Revenues      $2,128,523  $2,049,343  $1,837,133   $2,050,012  $2,042,371  $1,816,723  $1,726,534   $2,055,166
                    ---------------------------------------------------------------------------------------------------
  Operating
  Expenses                                                    446,814                                          461,616
                         597,237     551,141     457,842                  704,724     346,730     440,071
  Depreciation &
  Amortization                                                408,231                                          387,513
                         417,155     422,793     415,304                  413,550     409,030     383,157
  Asset
  Management Fee                                              215,360                                          167,420
                         221,760     217,938     216,805                  285,232     183,415     167,420
  Administrative
  Expenses
                         339,787      97,839     258,863      483,941     216,039     210,132     311,653      255,106
  Property
  management fee
                          63,609      61,063      56,164       54,200      64,737      65,440      37,909       61,989
                    ---------------------------------------------------------------------------------------------------
                       1,639,548   1,350,774   1,404,978    1,608,546   1,684,282   1,214,747   1,340,210    1,333,644
                    ---------------------------------------------------------------------------------------------------
Income Before
Interest and Other
Income                   488,975     698,569     432,155       441,466     358,089     601,976     386,324     721,522

  Interest Income         78,243      86,569     110,715       142,111     143,831     117,206      96,002      77,152

  Other Income               (52)      5,200      33,034         9,700      10,189      16,750       8,200           -
                    ---------------------------------------------------------------------------------------------------

Net Income               $567,166    $790,338    $575,904     $593,277    $512,109    $735,932    $490,526    $798,674
                    ===================================================================================================

Net Income Per
Common Share                $0.48       $0.67       $0.49        $0.51       $0.44       $0.63       $0.42       $0.68
                    ===================================================================================================
Weighted Average
Common Shares           1,173,998   1,173,998   1,173,998    1,173,998   1,173,998   1,173,998   1,173,998   1,173,998
                    ===================================================================================================

</TABLE>

                                      F-16
<PAGE>

                         SHELBOURNE PROPERTIES III, INC.
                         -------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                             ADDITIONAL INFORMATION

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                                      INDEX

                                                                            Page
                                                                          Number
                                                                          ------

Additional financial information furnished pursuant to the
requirements of Form 10-K:

Schedules - December 31, 2001, 2000 and 1999

         Schedule III - Real estate and accumulated depreciation             S-1

         Note to Schedule III - Real estate and accumulated depreciation     S-2


<PAGE>

SHELBOURNE PROPERTIES III, INC

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                                                                Reductions
                                                                                                 Recorded
                                                                                                Subsequent
                                                                          Costs Capitalized         to
                                                   Initial Cost       Subsequent to Acquisition Acquisition
                                             ------------------------ ------------------------- -------------
                                                           Buildings
                                                              And                   Carrying
         Description            Encumbrances    Land      Improvement  Improvements   Costs      Write-downs
------------------------------- ------------ ----------- ------------- ------------ ---------   -------------
RETAIL:

<S>                <C>            <C>        <C>          <C>             <C>       <C>         <C>
 Melrose II        Melrose   IL   $  --      $ 1,375,000  $ 4,000,640     $ 97,509  $     ---   $ (2,881,000)
 Shopping Center   Park

 Sunrise           Las Vegas NV      --        3,024,968   13,469,031    1,883,137  1,342,536     (8,500,000)
 Marketplace

 SuperValu         Various   --      --        1,787,620    6,881,999          ---    708,358             ---
 Stores (1)

 Livonia Plaza     Livonia   MI      --        1,518,638    9,328,777    1,274,341    880,080     (2,100,000)
                                ------------ ----------- ------------- ------------ ---------   -------------
                                     --        7,706,226   33,680,447    3,254,987  2,930,974    (13,481,000)
OFFICE:

 568 Broadway      New York  NY      --        1,429,284    6,091,266    3,048,432    813,953     (6,157,700)
 Office Building

INDUSTRIAL:

 TMR Warehouses    Various   OH      --        1,355,621   19,694,413      223,169  1,717,279             ---
                                ------------ ----------- ------------- ------------ ---------   -------------

                                $    --     $ 10,491,131  $59,466,126   $6,256,588 $5,462,206   $(19,638,700)
</TABLE>


                       Gross Amount at which Carried
                           at Close of Period
                   ------------------------------------
                                 Buildings
                                    And                   Accumulated     Date
                      Land     Improvements     Total    Depreciation   Acquired
                   ----------  ------------- ----------- ------------   --------
RETAIL:

 Melrose II         $ 638,742   $ 1,953,407  $ 2,592,149 $    596,743      1989
 Shopping Center

 Sunrise            1,811,849     9,407,773   11,219,622    3,879,951      1989
 Marketplace

 SuperValu          1,935,936     7,442,041    9,377,977    2,392,480      1989
 Stores (1)
                    1,536,441     9,365,445   10,901,886    3,087,847      1989
 Livonia Plaza     ----------  ------------  ----------- ------------ ----------
                    5,922,968    28,168,666   34,091,634    9,957,021


OFFICE:

 568 Broadway         651,057     4,574,178    5,225,235   1,991,808       1986
 Office Building

INDUSTRIAL:

 TMR Warehouses     1,466,213    21,524,269   22,990,482    6,904,044      1988
                   ---------- -------------  ----------- ------------ ----------

                   $8,040,238 $  54,267,113  $62,307,351 $ 18,852,873




   (1)  SuperValu stores are reported as real estate held for sale.

   Note:   The aggregate cost for Federal income tax purposes is $78,401,334 at
           December 31, 2001.

                                      S-1
<PAGE>

SHELBOURNE PROPERTIES III, INC.

NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
--------------------------------------------------------------------------------

(A) RECONCILIATION OF REAL ESTATE OWNED:
<TABLE>
<CAPTION>
                                                                            For the Years Ended December 31,
                                                              ------------------- -- ----------------- -- -----------------
                                                                     2001                  2000                 1999
                                                              -------------------    -----------------    -----------------
    <S>                                                              <C>                  <C>                  <C>
    BALANCE AT BEGINNING OF YEAR                                     $62,025,407          $61,924,496          $61,871,212

    ADDITIONS DURING THE YEAR
        Improvements to Real Estate                                      281,944              100,911               53,284
                                                              -------------------    -----------------    -----------------
    BALANCE AT END OF YEAR (1)                                       $62,307,351          $62,025,407          $61,924,496
                                                              ===================    =================    =================
</TABLE>

    (1) INCLUDES THE INITIAL COST OF THE PROPERTIES PLUS ACQUISITION AND CLOSING
        COSTS.



(B) RECONCILIATION OF ACCUMULATED DEPRECIATION:

<TABLE>
<CAPTION>
                                                                            For the Years Ended December 31,
                                                              ------------------- -- ----------------- -- -----------------
                                                                     2001                  2000                 1999
                                                              -------------------    -----------------    -----------------
    <S>                                                              <C>                  <C>                  <C>
     BALANCE AT BEGINNING OF YEAR                                    $17,391,634          $15,963,186          $14,549,818

     ADDITIONS DURING THE YEAR
        Depreciation expense(1)                                        1,461,239            1,428,448            1,413,368
                                                              -------------------    -----------------    -----------------

     BALANCE AT END OF YEAR                                          $18,852,873          $17,391,634          $15,963,186
                                                              ===================    =================    =================

</TABLE>

    (1) DEPRECIATION IS PROVIDED ON BUILDINGS USING THE STRAIGHT-LINE
        METHOD OVER THE USEFUL LIFE OF THE PROPERTY, WHICH IS ESTIMATED TO BE
        40 YEARS AND ON TENANT IMPROVEMENTS OVER THE ESTIMATED TERM OF THE
        RELATED LEASE.


                                      S-2