<PAGE>


                                  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, 2002

                                       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: 0-15753

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

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

      7 Bulfinch Place - Suite 500
               Boston, MA                                   02114
----------------------------------------    ------------------------------------
(Address of principal executive offices)                 (Zip Code)


                                 (617) 570-4600
                        ---------------------------------
              (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]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes [ ] No [X]


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the 2003 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Annual Report
on Form 10-K.

As of March 24, 2003, of the 894,792 shares of common stock outstanding, 523,770
shares of common stock with an aggregate market value of $17,860,557 were issued
and outstanding and held by non-affiliates.

This report consists of 69 sequentially numbered pages. The Exhibit Index is
located at sequentially numbered page 46.




                                        2

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                                TABLE OF CONTENTS
                               -----------------

<TABLE>
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<S>                                                                                                              <C>
PART I............................................................................................................3

     Item 1.      Business........................................................................................3

Where Can You Find More Information About Us?....................................................................18

     Item 2.      Properties.....................................................................................19
     Item 3.      Legal Proceedings..............................................................................23
     Item 4.      Submission of Matters to a
                  Vote of Security Holders.......................................................................24

PART II..........................................................................................................25

     Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters..........................25
     Item 6.      Selected Financial Data........................................................................27
     Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations..........28
     Item 7A.     Quantitative and Qualitative Disclosures About Market Risk.....................................38
     Item 8.      Financial Statements and Supplementary Data....................................................39
     Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........39

PART III.........................................................................................................40

     Item 10.     Directors and Executive Officers of the Registrant.............................................40
     Item 11.     Executive Compensation.........................................................................40
     Item 12.     Security Ownership of Certain Beneficial Owners and Management.................................40
     Item 13.     Certain Relationships and Related Transactions.................................................40
     Item 14.     Controls and Procedures........................................................................40

PART IV..........................................................................................................41

     Item 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K................................41

Exhibit 99.1.....................................................................................................48
</TABLE>

                           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.


                                        3

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

         In this Form 10-K, the terms "we," "us," "our" and "our company" refer
either to the combined operations of all of Shelbourne Properties II, Inc.,
Shelbourne Properties II GP LLC and Shelbourne Properties II L.P. or to
Shelbourne Properties II, Inc. independently, as the context requires.

                                    OVERVIEW

         Our company, Shelbourne Properties II, 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. As of March 24, 2003, we operate and hold three
office buildings, one shopping centers, and two industrial warehouses. In
addition, the Corporation owns an interest in 20 motel properties that are
triple-net leased to an affiliate of Accor S.A. See "Corporate History-The
Accotel Transaction" and "Item 2. Properties" for a description of our
properties.

         We own our property portfolio through our directly and indirectly
wholly owned subsidiary, Shelbourne Properties II L.P. (the "Operating
Partnership"), a Delaware limited partnership. The Operating Partnership owns
our property portfolio directly, through joint ventures with affiliated entities
(Shelbourne Properties I L.P. and Shelbourne Properties III L.P.), or through
wholly-owned subsidiaries. The general partner of the Operating Partnership is
Shelbourne Properties II 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. Prior to October 29, 2002, we sought 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. On October
29, 2002, the stockholders of the Corporation adopted a plan of liquidation.
Accordingly, on such date the Corporation was dissolved and has been seeking to
liquidate its assets. Since October 29, 2002, the Corporation has sold its
properties located in Raleigh, North Carolina; Hilliard, Ohio; New York, New
York; and Melrose Park, Illinois. It is expected that the remaining properties
will be sold at such time as market conditions enable the Corporation to
maximize the sale price. See "Corporate History-The HX Transaction; The Plan of
Liquidation" below.

         Our Board of Directors currently consists of six directors. Two
director's terms expire in each of 2003, 2004 and 2005. See "Employees" below
for information relating to the provision by affiliates of property management
services, asset management services, investor relation services and accounting
services to us.

         The Corporation is operating with the intention of qualifying as a real
estate investment trust for U.S. Federal Income Tax purposes ("REIT") under
Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those
sections, a REIT which pays at least 90% of its ordinary taxable income as a
dividend to its stockholders each year and which meets certain other conditions
will not be taxed on that portion of its taxable income which is distributed to
its stockholders.

         We have adopted a plan of liquidation that requires us to liquidate all
of our assets and liabilities by October 29, 2004. Dividends paid during our
liquidation generally will not be taxable to you until the distributions exceed
your adjusted tax basis in your shares, and then will be taxable to you as
long-term capital gain assuming you hold your shares as capital assets and have
held them for more than 12 months when you receive the distribution as a result
of the adoption of the plan of liquidation. If our assets are not completely
liquidated by October 29, 2004, our assets will be transferred to a liquidating
trust on such date and in lieu of owning shares, you will own a beneficial
interest in the liquidating trust of an equivalent percentage. The
transferability of interests in the trust will be significantly restricted as
compared to the shares in the Corporation, and you will be required to include
in your own income your pro rata share of the trust's taxable income whether or
not that amount is actually distributed by the trust to you in that year.

         The Predecessor Partnership (as defined below) invested all of the net
proceeds of its offering of Units (as defined below) in real estate. Revenues
from the following properties owned wholly or through joint venture



                                       4
<PAGE>


represented 10% or more of our gross revenues during the fiscal year ended
December 31, 2002 and, the Predecessor Partnership's and, subsequently, our
gross revenues during each of the fiscal years ended December 31, 2001 and 2000:
during 2002, 568 Broadway, Sutton Square, Seattle Tower, Century Park, and
Commerce Plaza represented 33%, 14%, 12%, 12%, and 11% of gross revenues
respectively during 2001, 568 Broadway and Sutton Square represented 28% and 15%
of gross revenues, respectively; during 2000, 568 Broadway represented 26% of
gross revenues. See "Item 2. Properties" for a description of the Predecessor
Partnership's and our properties.

CORPORATE HISTORY

         Predecessor Partnership. Prior to the merger described below, the owner
of the Corporation's properties was High Equity Partners L.P. - Series 86, a
Delaware limited partnership (the "Predecessor Partnership"). The Predecessor
Partnership was formed as of November 14, 1985. Prior to November 3, 1994, the
Predecessor Partnership's General Partners ("Predecessor General Partners") were
owned and controlled by Integrated Resources, Inc. On November 3, 1994, Presidio
Capital Corporation ("Presidio") acquired the Predecessor General Partners.
Effective July 31, 1998, NorthStar Capital Investment Corp., a Maryland
corporation, acquired control of Presidio.

         In 1986 and 1987, the Predecessor Partnership offered 800,000 units of
limited partnership interest (the "Units"). Upon final admission of limited
partners, the Predecessor Partnership had accepted subscriptions for 588,010
units for an aggregate of $147,002,500 in gross proceeds, resulting in net
proceeds from the offering of $142,592,500 (gross proceeds of $147,002,500 less
organization and offering costs of $4,410,000). Subsequent to the conversion
discussed below, the Units were converted into shares of the Corporation on a
two for one basis. Throughout the rest of this document, rather than referring
to Units, we will refer to shares on a converted basis. The Predecessor
Partnership invested all of its net proceeds in real estate.

         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 payable to the Predecessor General Partners or
their affiliates commencing the year ended December 31, 2000 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 $973,293
($312,139 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 III, LLC, made a tender offer to limited partners
to acquire up to 39,596 Units (representing approximately 6.7% of the
outstanding Units) at a price of $103.05 per Unit. The offer closed in January
2000 and all 39,569 Units were acquired in the offer. On a post-conversion
basis, the tender offer was for the equivalent of 79,138 shares at a price of
$51.53 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



                                       5
<PAGE>


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 two shares of stock
of the Corporation for each Unit they owned and the Predecessor General Partners
received an aggregate of 61,896 shares of stock in the Corporation in exchange
for their general partner interests in the Predecessor Partnership. In
connection with the merger, the Company entered into an advisory agreement (the
"Advisory Agreement") with Shelbourne Management, LLC ("Shelbourne Management")
to provide accounting, asset management, treasury, cash management and investor
related services management to the Company. Shelbourne Management is a
wholly-owned subsidiary of Presidio Capital Investment Company, LLC ("PCIC"),
which was also the sole shareholder of Presidio. The Advisory Agreement has a
term of 10 years and provides for fees payable to Shelbourne Management of (1)
the Asset Management Fee previously payable to the Predecessor General Partners
or their affiliates, (2) $200,000 for non-accountable expenses and (3)
reimbursement of expenses incurred in connection with performance of its
services. In addition, Shelbourne Management was entitled to receive a property
management fee equal to up to 6% of property revenues.

         The Presidio Transaction. On February 14, 2002, the Corporation,
Shelbourne Properties I, Inc. and Shelbourne Properties III, Inc. (together the
"Companies") announced the consummation of a transaction (the "Transaction")
whereby the Companies (i) purchased their respective Advisory Agreement and (ii)
repurchased all of the shares of capital stock in the Companies held by
subsidiaries of PCIC (the "PCIC Shares").

         Pursuant to the Transaction, for the Advisory Agreements and the PCIC
Shares, the Companies paid PCIC an aggregate of $44,000,000 in cash, issued
preferred partnership interests in their respective operating partnerships with
a liquidation preference of $2,500,000, and issued notes with a stated amount
between approximately $54,300,000 and $58,300,000, depending upon the timing of
the repayment of the notes. These notes were subsequently satisfied for
$54,300,000 from the proceeds of the Hypo Loan described below.

         Pursuant to the Transaction, the Corporation paid PCIC approximately
$17,900,000 in cash and the Operating Partnership issued preferred partnership
interests (the "Class A Units") with an aggregate liquidation preference of
$1,015,148 and a note with an aggregate stated amount between approximately
$22,000,000 and $23,600,000, depending upon the timing of the repayment of the
note. This note was subsequently satisfied for approximately $22,000,000 from
the proceeds of the Hypo Loan described below.

         The Transaction was unanimously approved by the Boards of Directors of
each of the Companies at such time 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 II L.P., copies of which
are attached as exhibits to our current report on form 8-K filed on February 14,
2002, and are incorporated by reference herein.

         The HX Transaction; Plan of Liquidation. On July 1, 2002, the
Corporation entered into a settlement agreement with respect to certain
outstanding litigation brought by HX Investors, L.P. ("HX Investors") in the
Chancery Court of Delaware against the Companies. At the same time, the
Companies entered into a letter agreement settling other outstanding litigation
brought by stockholders against the Companies, subject to approval by the court
of a stipulation of settlement. In connection with the settlements, the
Corporation entered into a stock



                                       6
<PAGE>


purchase agreement (the "Stock Purchase Agreement") with HX Investors and Exeter
Capital Corporation ("Exeter"), the general partner of HX Investors, pursuant to
which HX Investors, the then owner of approximately 12% of the outstanding
common stock of the Corporation, was granted a waiver by the Corporation from
the stock ownership limitation (8% of the outstanding shares) set forth in the
Corporation's Certificate of Incorporation to permit HX Investors to acquire up
to 42% of the outstanding shares of the Corporation's common stock and HX
Investors agreed to conduct a tender offer for up to an additional 30% of the
Corporation's outstanding stock at a price per share of $62.00 (the "HX
Investors Offer"). The tender offer commenced on July 5, 2002 following the
filing of the required tender offer documents with the Securities and Exchange
Commission by HX Investors. In addition, pursuant to the terms of the
settlement, Shelbourne Management agreed to pay to HX Investors 42% of the
amounts paid to Shelbourne Management with respect to the Class A Units.

         Pursuant to the Stock Purchase Agreement, the board of directors of the
Corporation approved a plan of liquidation for the Corporation (the "Plan of
Liquidation") and agreed to submit the Plan of Liquidation to its stockholders
for approval. HX Investors agreed to vote all of its shares in favor of the Plan
of Liquidation. Under the Plan of Liquidation, HX Investors was to receive an
incentive payment (the "Incentive Fee") of 25% of gross proceeds after the
payment of a priority return of approximately $66.25 per share was made to the
stockholders of the Corporation.

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

         Contemporaneous with filing its July 29, 2002 lawsuit, Longacre
publicly announced that its related companies, together with outside investors,
were prepared to initiate a competing tender offer for the same number of shares
of common stock of the Corporation as were tendered for under the HX Investors
Offer, at a price per share of $68.20. Over the course of the next several days,
Longacre and HX Investors submitted competing proposals to the board of
directors of the Corporation and made those proposals public. On August 4, 2002,
Longacre notified the Corporation that it was no longer interested in proceeding
with its proposed offer.

         On August 5, 2002, the Corporation entered into an amendment to the
Stock Purchase Agreement. Pursuant to the terms of the amendment, the purchase
price per share offered under the HX Investors Offer was increased from $62.00
to $73.85. The amendment also reduced the Incentive Fee payable to HX Investors
under the Plan of Liquidation from 25% to 15% of gross proceeds after payment of
the approximately $66.25 per share priority return to stockholders of the
Corporation plus interest thereon compounded quarterly at 6% per annum, and
included certain corporate governance provisions. After giving effect to
dividends paid from August 19, 2002 to March 24, 2003, the remaining unpaid per
share priority return to stockholders is $9.66.

         On August 16, 2002, the HX Investors Offer expired and HX Investors
acquired 268,444 shares representing 30% of the outstanding shares.

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

         Also on August 19, 2002, the Board of Directors of the Corporation
authorized the issuance by the Operating Partnership of Class B Units to HX
Investors which Class B Units were to be issued in full satisfactory of the
Incentive Fee. The Class B Units provide distribution rights to HX Investors
consistent with the intent and financial terms of the incentive payment provided
for in Stock Purchase Agreement described above. On August 19, 2002, the
Operating Partnership issued the Class B Units to HX Investors in full
satisfaction of the Incentive Fee otherwise required under the Plan of
Liquidation.

         On October 29, 2002, the stockholders of the Corporation approved the
Plan of Liquidation. As a result, the Operating Partnership has been seeking,
and will seek to, sell its remaining properties at such time as it is



                                       7
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believed that the sale price for such property can be maximized. Since the
adoption of the Plan of Liquidation, the Corporation has sold its properties
located in Raleigh, North Carolina; Hilliard, Ohio; New York, New York; and
Melrose Park, Illinois, and has paid dividends of $14.00 per share on November
21, 2002, $14.50 on January 31, 2003 and $30.00 on March 18, 2003. Pursuant to
the Plan of Liquidation, if all of the assets of the Corporation are not
disposed of prior to October 29, 2004, the remaining assets will be placed in a
liquidating trust and the stockholders of the Corporation will receive a
beneficial interest in such trust in total redemption of their shares in the
Corporation.

         The foregoing description of Stock Purchase Agreement is qualified in
its entirety by reference to such agreement, a copy of which is attached as an
exhibit to the Corporation's Current Reports on Form 8-K filed on July 2, 2002
and August 5, 2002, which is incorporated herein by reference. The foregoing
description of Plan of Liquidation is qualified in its entirety by reference to
the Plan of Liquidation, a copy of which is attached as an exhibit to the
Corporation's Definitive Proxy Statement filed on September 29, 2002, which is
incorporated herein by reference.

FINANCINGS

         The Hypo Loan. On May 1, 2002, the operating partnerships of the
Companies and certain of the operating partnerships' subsidiaries entered into a
$75,000,000 revolving credit facility with Bayerische Hypo-Und Vereinsbank AG,
New York Branch, as agent for itself and other lenders (the "Credit Facility" or
"Hypo Loan"). The Credit Facility was subsequently satisfied on February 20,
2003 from proceeds of the Fleet Loan. See "Fleet Loan" below.

         The Credit Facility had a term of three years and was prepayable in
whole or in part at any time without penalty or premium. The Companies initially
borrowed $73,330,073 under the Credit Facility. The Corporation's share of the
proceeds amounted to $29,779,343, of which $22,034,250 was used to repay the
note issued in the Transaction, $215,768 to pay associated accrued interest and
$840,624 to pay costs associated with the Credit Facility. The excess proceeds
of $6,688,701 were deposited into the Corporation's operating cash account. The
Companies had the right, from time to time, to elect an annual interest rate
equal to (i) LIBOR plus 1.5% for the portion of the Note Payable secured by
mortgages on certain real properties (Conversion rate) (ii) LIBOR plus 2.5% for
the portion of the Note Payable secured by a pledge of partnership interests
(LIBOR rate) or (iii) the greater of (a) agent's prime rate or (b) the federal
funds rate plus 1.5% (Base rate). The Companies were required to pay the
lenders, from time to time, a commitment fee equal to .25% of the unborrowed
portion of the Credit Facility. Such fee paid during the term of the Credit
Facility amounted to $1,392. Interest was payable monthly in arrears. The
interest rate at December 31, 2002 was approximately 3.8%.

         The Credit Facility was secured by (i) a pledge by the operating
partnerships of their membership interest in their wholly-owned subsidiaries
that hold their interests in joint ventures with the other Companies and (ii)
mortgages on certain real properties owned directly or indirectly by the
operating partnerships. All of the properties of the Corporation were security
for the Credit Facility.

         Under the terms of the Credit Facility, the Companies were permitted to
sell the pledged property only if certain conditions were met. If properties
were sold, the Companies were required to pay a fixed release amount to the
lenders except in the case of core properties, which were defined as 568
Broadway, Century Park, Seattle Tower and Southport, in which case the Companies
were required to pay the lenders the greater of the net proceeds or the release
amount. In addition, the Companies were required to maintain certain debt yield
maintenance ratios and comply with restrictions relating to engaging in certain
equity financings, business combinations and other transactions that might
result in a change of control (as defined under the Credit Facility).

         The Companies were joint and severally liable under the Credit Facility
but had entered into a Contribution and Cross-Indemnification Agreement. Such
agreement provided for the allocation of the Credit Facility and payments
thereunder among the operating partnerships in proportion to their interest in
the Credit Facility.

         The foregoing description of the Credit Facility is qualified in its
entirety by reference to such agreement, a copy of which is attached as exhibits
to the Corporation's Current Report on Form 8-K filed on May 14, 2002, which is
incorporated herein by reference.


                                       8
<PAGE>


         The Fleet Loan. Under the terms of the Credit Facility, upon the sale
of the New York, New York property which was sold on February 28, 2003, the
proceeds from such sale would first have been required to satisfy the Credit
Facility. As a result, upon the sale of the New York property, the Corporation
risked not being able to satisfy the requirements to maintain its REIT status as
it was likely that dividends in 2003, absent unforeseeable occurrences, would
not have been equal to at least 90% of the Corporation's ordinary taxable
income. Accordingly, on February 20, 2003, in a transaction designed to
alleviate this problem as well as provide flexibility to the Companies in
implementing their respective plans of liquidation, direct and indirect
subsidiaries (the "Borrowers") of each of the Companies entered into a Loan
Agreement with Fleet National Bank, as agent for itself and other lenders
("Fleet") pursuant to which the Borrowers obtained a $55,000,000 loan (the
"Loan"). The entering into of this Loan transaction enabled 100% of the net
proceeds from the sale of its 568 Broadway Joint Venture (the New York property)
to be paid as a dividend by the Corporation as the New York property was not
security for the Loan.

         The Loan bears interest at the election of the Borrowers at a rate of
either (i) LIBOR plus 2.75% or (ii) 1% plus the greater of Fleet's prime rate or
5%. At present the Borrowers have elected that the Loan bear interest at LIBOR
plus 2.75% which, at March 24, 2003 was 4.09%. The Loan matures on February 19,
2006, subject to two one-year extensions. The Loan is pre-payable in whole or in
part at anytime without penalty or premium.

         The Borrowers are jointly and severally liable for the repayment of the
amounts due under the Loan and the Operating Partnership and the Corporation (as
well as the other operating partnerships and Companies) have guaranteed the
repayment of the Loan. The proceeds of the Loan were used to satisfy the Credit
Facility that had a balance due of $37,417,249. The Credit Facility was
satisfied by delivery of $27,417,249 in cash and a $10,000,000 note from 568
Broadway Joint Venture (the "568 Note"), which note was then acquired by
Manufacturers Traders and Trust Company. In connection with the assignment of
the 568 Note, the purchase agreement with respect to the property held by 568
Joint Venture was amended to provide that the buyer would acquire the property
subject to the 568 Note and would receive a credit of $10,000,000 at closing.
After satisfying the Credit Facility, establishing a capital improvements
reserve of $5,000,000 in the aggregate ($2,637,500 of which is allocable to the
Corporation), a $10,000,000 reserve ($3,892,500 of which is allocable to the
Corporation) to be released upon the earlier of the sale of the 568 Property or
the satisfaction of the 568 Note and costs associated with consummating the
Loan, the net proceeds received by the Companies was approximately $11,000,000
in the aggregate, which proceeds, together with the $10,000,000 reserve that was
released from escrow on March 3, 2003, were distributed to stockholders as part
of the March dividend.

         The Loan is secured by mortgages on certain real properties owned
directly and indirectly by the operating partnerships. The Corporation's
properties located in Seattle, Washington; San Diego, California; Westerville,
Ohio; Grove City, Ohio; Matthews, North Carolina and Richmond, Virginia (the
"Collateral Properties") secure the Loan. Pursuant to the Loan, the Collateral
Properties may be sold if, among other things, the purchase price provides net
proceeds which are in an amount equal to a minimum release price for such
property, which amount would be applied as a prepayment of the Loan. The
Corporation's other properties may be sold at any time and, so long as there is
no event of default, none of the net proceeds of the sales of such other
properties is required to be applied towards the Loan.

         Under the Loan, the Companies are required to maintain a certain debt
yield maintenance ratio and have certain restrictions with respect to engaging
in certain equity financings, business combinations and other transactions that
may result in a "change of control" (as defined under the Loan documents),
incurring additional indebtedness, acquiring additional properties, and selling
properties without achieving certain minimum sale prices. In addition, the
occurrence of certain events over which the Companies may have no control and
which constitute a "change of control" will cause a default under the Loan.

         Since the Borrowers are jointly and severally liable for the repayment
of the entire principal, interest and other amounts due under the Loan, the
Borrowers, the Companies and the operating partnerships have entered into
Indemnity, Contribution and Subrogation Agreements, the purpose and intent of
which was to place the operating partnerships in the same position (as among
each other) as each would have been had the lender made three separate loans,
one to each of the operating partnerships; each of which loans would have been
in a smaller amount than the Loan, would have been the obligation/liability only
of the operating partnership to which it was made and would have been secured
only by certain of such operating partnership's assets.


                                       9
<PAGE>


         The foregoing description of the Fleet Loan is qualified in its
entirety by reference to Loan Agreement and other documents entered into in
connection therewith, copies of which are attached as exhibits to the
Corporation's Current Report on Form 8-K filed on February 24, 2003, which are
incorporated herein by reference.

PROPERTY SALES/ACQUISITIONS

         The Accotel Transaction. As discussed above, in connection with the
Transaction, the Operating Partnership issued the Class A Units to Shelbourne
Management. Pursuant to the terms of the Purchase and Contribution Agreement
pursuant to which the Class A Units were issued, the holder of the Class A Units
had the right to cause the Operating Partnership to purchase the Class A Units
at a substantial premium to their liquidation value ($6,605,000 at the January
15, 2003) unless the Operating Partnership, together with the operating
partnerships of Shelbourne Properties I, Inc. and Shelbourne Properties III,
Inc. (together with the Operating Partnership, the "Shelbourne OPs") maintained
at least approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the
case of the Operating Partnership) guaranteed by the holder of the Class A Units
and secured by assets having an aggregate market value of at least approximately
$74,800,000 ($30,400,000 in the case of the Operating Partnership) (the "Debt
and Asset Covenant"). These requirements significantly impaired the ability of
the Corporation to sell its properties and pay dividends in accordance with the
Plan of Liquidation.

         Accordingly, in a transaction (the "Accotel Transaction") designed to
facilitate the liquidation of the Corporation and provide dividends to
stockholders, on January 15, 2003, a joint venture owned by the Shelbourne OPs
acquired from Realty Holdings of America, LLC, an unaffiliated third party, a
100% interest in an entity that owns 20 motel properties triple net leased to an
affiliate of Accor S.A. The cash purchase price, which was provided from working
capital, was approximately $2,700,000, of which approximately $878,000,
$1,096,000 and $726,000 was paid by Shelbourne Properties I L.P., the Operating
Partnership and Shelbourne Properties III L.P., respectively. The properties
were also subject to existing mortgage indebtedness in the principal amount of
approximately $74,220,000.

         The Accor S.A. properties were acquired for the benefit of the holder
of the Class A Units as they provide sufficient debt to be guaranteed by the
holder of the Class A Units. Except as indicated below, the Class A Unitholder
will ultimately be the sole owner of the joint venture. In connection with the
Accotel Transaction, the terms of the Class A Units were amended to (i)
eliminate the liquidation preferences (as the cost of the interest in the Accor
S.A. properties which was borne by the Shelbourne OPs satisfied the liquidation
preference) and (ii) eliminate the Debt and Asset Covenant. The holder of the
Class A Units does, however, continue to have the right, under certain limited
circumstances which the Companies do not anticipate will occur, to cause the
Shelbourne OPs to purchase their respective Class A Units at the premium
described above. These circumstances include the occurrence of the following
while any of the Class A Units are outstanding; (i) the filing of bankruptcy by
a Shelbourne OP; (ii) the failure of a Shelbourne OP to be taxed as a
partnership; (iii) the termination of the Advisory Agreement; (iv) the issuing
of a guaranty by any of the Companies on the debt securing the Accor S.A.
properties; or (v) the taking of any action with respect to the Accor S.A.
properties without the consent of the Class A Unitholder.

         The holder of the Class A Units has the right, which right must be
exercised by no later than July 28, 2004, to require that the Shelbourne OPs
acquire other properties for the Class A Unitholder's benefit at an aggregate
cash cost to the Shelbourne OPs of not more than $2,500,000 (approximately
$1,015,000 of which would be paid by the Operating Partnership). In that event,
the Accor S.A. properties would not be held for the benefit of the holder of the
Class A Units and the Companies would seek to dispose of these properties as
part of the liquidation of the Companies. Accordingly, if the Class A Unitholder
were to exercise this option, there is a risk that the Companies interest in the
Accor S.A. properties could not be sold for their original purchase price.

         The foregoing description of the transaction does not purport to be
complete, and is qualified in its entirety by reference to the Purchase
Agreement (and all exhibits thereto) dated as of January 15, 2003, the
Modification Agreement, dated as of January 15, 2003 and the Amended and
Restated Partnership Unit Designation, copies of which are attached as exhibits
to the Corporation's Current Report on Form 8-K filed on January 16, 2003, which
are incorporated herein by reference.


                                       10
<PAGE>


         Property Sales. On December 20, 2002, Shelbourne Raleigh Company LLC, a
limited liability company wholly-owned by the Operating Partnership, sold its
property located in Raleigh, North Carolina commonly referred to as Sutton
Square for a gross purchase price of $16,750,000. The property was sold to
Sutton Square Limited Partnership an unaffiliated third party. After satisfying
the loan encumbering the property of $6,000,000, adjustments for taxes and rents
and a credit to the purchaser for improvements, as well as closing costs, net
proceeds to the Operating Partnership were approximately $10,000,000.

         On January 31, 2003, the Hilliard, Ohio property was sold to an
unaffiliated third party for a gross sale price of $4,600,000. After satisfying
the debt encumbering the property, closing adjustments and other closing costs,
net proceeds were approximately $2,063,500, $426,330 of which is attributable to
the Company's interest.

         On February 28, 2003, 568 Broadway Joint Venture, a partnership in
which the Operating Partnership indirectly holds a 38.925% interest, sold its
property located in New York, New York for a gross purchase price of
$87,500,000. The property was sold to 568 Broadway Holding LLC, an unaffiliated
third party. After assumption of the debt encumbering the property
($10,000,000), closing adjustments and other closing costs, net proceeds were
approximately $73,000,000, and approximately $28,415,250 was allocated to the
Operating Partnership.

         Also on February 28, 2003, the Operating Partnership sold its
properties located in Melrose Park, Illinois for a gross purchase price of
$3,427,200. The property was sold to Antonio Francesco Ingraffia, as trustee of
the Antonio Francesco Ingraffia Living Trust, under Trust Agreement dated April
29, 1993, as to an undivided 1/2 interest and Domenico Gambino, as trustee of
the Domenico Gambino Living Trust, under Trust Agreement dated April 28, 1993,
as to an undivided 1/2 interest. After closing adjustments and other closing
costs, net proceeds were approximately $2,900,000.

COMPETITION

         The leasing and sale 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. In addition, we compete
for purchasers with sellers of similar properties in the areas in which our
properties are located. 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."

INDUSTRY SEGMENTS AND SEASONALITY

         Our primary business is the ownership 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

         Since the Corporation's inception, property management services, asset
management services, investor relation services and accounting services have
been provided to us by affiliates. See "Item 8. Financial Statements and
Supplementary Data- Note 3" for additional information.

         Asset Management Services. Prior to the Transaction, all asset
management services, investor relation services and accounting services (the
"Asset Management Services") were provided by Shelbourne Management pursuant to
the terms of the Advisory Agreement. Under the terms of the Advisory Agreement,
which agreement was approved by the stockholders of the Corporation in
connection with the merger of the Predecessor Partnership with and into the
Operating Partnership, 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) $150,000 for
non-accountable expenses and (3) reimbursement of expenses incurred in
connection with performance of its services. See "The Predecessor Partnership"
above.

         Effective February 14, 2002, the Advisory Agreement was contributed by
Shelbourne Management to the Operating Partnership (see "The Presidio
Transaction" above), Shelbourne Management ceased providing the Asset



                                       11
<PAGE>


Management Services, and the Corporation retained PCIC to provide the Asset
Management Services to the Corporation on a transitional basis at a reduced cost
of $333,333 per annum.

         Effective September 30, 2002, as contemplated by the Plan of
Liquidation, the agreement with PCIC was terminated and Kestrel Management, L.P.
("Kestrel") began providing the Asset Management Services for an annual cost of
$200,000. Kestrel is an affiliate of our current Chief Executive Officer.

         Property Management Services. During the years ended December 31, 2001
and 2002, property management services have been provided by Kestrel. For
providing property management services, as approved by the stockholders of the
Corporation in connection with the merger of the Predecessor Partnership with
and into the Operating Partnership, Kestrel is entitled to receive a fee of up
to 6% of the applicable property's revenues. Personnel at the properties perform
services for the Corporation at the properties. Salaries for such on-site
personnel are reimbursed by the Corporation.




                                       12
<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.

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, operation and disposal of real estate properties,
including:

<TABLE>
<CAPTION>
<S>                                                             <C>
        o    changes in the general and local economic          o    the attractiveness of our properties
             climate;                                                to tenants and purchasers;

        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. 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 debt service. 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.


WE CANNOT ASSURE THE AMOUNTS OR TIMING OF LIQUIDATING DISTRIBUTIONS.


         If values of our assets decline, or if the costs and expenses related
to selling our assets, including the costs of improvements to be made to our
assets, exceed our current estimates, then the Plan of Liquidation may not yield
liquidating distributions equal to or greater than the recent market prices of
the shares of common stock of the Corporation. In addition, the ability to sell
real estate assets depends, in some cases, on the availability of financing to
buyers on favorable terms. If such financing is not available, it may take
longer than expected to sell our assets at desirable prices, and this may delay
our ability to make liquidating distributions. There can be no assurance that we
will be successful in disposing of our remaining assets for values approximating
those currently estimated by us or that related liquidating distributions will
occur within the currently estimated timetable.


                                       13
<PAGE>



THE AMOUNTS AND TIMING OF THE LIQUIDATING DISTRIBUTIONS MAY BE ADVERSELY
AFFECTED BY LIABILITIES AND INDEMNIFICATION OBLIGATIONS FOLLOWING ASSET SALES.


         In selling our assets, we may be unable to negotiate agreements that
provide for the buyers to assume all of the known and unknown liabilities
relating to the assets, including, without limitation, environmental and
structural liabilities. In addition, if we agree to indemnify the buyers for
such liabilities, we may be unable to limit the scope or duration of such
indemnification obligations to desirable levels or time periods. As a result, we
have from time to time determined, and we may in the future determine, that it
is necessary or appropriate to reserve cash amounts or obtain insurance in order
to attempt to cover the liabilities not assumed by the buyers and to cover
potential indemnifiable losses. There can be no assurance that such reserves and
insurance will be sufficient to satisfy all liabilities and indemnification
obligations arising after the sale of our assets, and any such insufficiencies
may have a material adverse affect on the amounts and timing of the liquidating
distributions made to our stockholders.


IF A SIGNIFICANT NUMBER OF OUR TENANTS DEFAULTED OR SOUGHT BANKRUPTCY
PROTECTION, OUR CASH FLOWS, OPERATING RESULTS AND SALE PRICES 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, and, accordingly, sale
prices.

         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 could adversely affect our cash flows and operating results and,
accordingly, sale prices.

         In October 2000, a tenant leasing approximately 29% of the property and
operating a movie theater at our Matthews Township Festival property defaulted
on its lease obligations as a result of its bankruptcy filing. The tenant
rejected the lease in its bankruptcy and the space is now vacant.

OUR BUSINESS IS SUBSTANTIALLY DEPENDENT ON THE ECONOMIC CLIMATES OF FIVE MARKETS

         As of March 24, 2003, our real estate portfolio consists of office
properties in three markets (Seattle, Washington; San Diego, California; and
Richmond, Virginia), a retail property (Matthews, North Carolina), and two
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 and, accordingly, sale prices.

OUR COMPETITORS MAY ADVERSELY AFFECT OUR ABILITY TO LEASE OUR PROPERTIES, WHICH
MAY CAUSE OUR CASH FLOWS, OPERATING RESULTS AND SALE PRICES TO SUFFER.

         We face significant competition from developers, managers and owners of
office, 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 affect 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, operating results and sale prices may suffer.

OUR DEGREE OF LEVERAGE MAY ADVERSELY AFFECT OUR BUSINESS AND THE MARKET PRICE OF
OUR COMMON STOCK.

         Our degree of leverage could adversely affect our ability to obtain
additional financing for working capital, capital expenditures, developments or
other general corporate purposes. Our level of debt could also make us more


                                       14
<PAGE>

vulnerable to a downturn in our business or the economy generally. The Loan
contains financial and operating covenants limiting our ability under certain
circumstances to incur additional secured and unsecured indebtedness.

ENVIRONMENTAL PROBLEMS AT OUR PROPERTIES ARE POSSIBLE, MAY BE COSTLY AND MAY
ADVERSELY AFFECT OUR OPERATING RESULTS, FINANCIAL CONDITION AND SALE PRICES.

         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 affect 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, OPERATING RESULTS AND SALE PRICES 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 affect 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, operating results and sale
prices 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, OPERATING RESULTS AND SALE PRICES.

         Our properties are 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, operating results and sale prices.

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 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



                                       15
<PAGE>


seriously damage our properties, two of which are located in the States of
California and Washington, historically earthquake-prone areas, 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 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.

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, 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 would 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 would not be able to deduct, and would not be required to pay,
              dividends to stockholders in any year in which we fail to qualify
              as a REIT;

         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; and

         o    dividends paid by us during our liquidation would be fully taxable
              to our stockholders as ordinary dividend income, even if such
              distributions did not exceed their adjusted tax basis in their
              shares.

         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 pay dividends 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 dividend requirements.
As a result, we may need to incur debt to fund required dividends when
prevailing market conditions are not favorable. Difficulties in meeting dividend
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


                                       16
<PAGE>


         o    required debt or amortization payments.

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


THE TRANSFER OF OUR REMAINING ASSETS TO A LIQUIDATING TRUST WILL AFFECT THE
LIQUIDITY OF YOUR OWNERSHIP INTERESTS, AND THE ANTICIPATION OF THAT TRANSFER MAY
REDUCE THE PRICE OF OUR COMMON STOCK.


         The Corporation currently expects that not later than October 29, 2004
the Corporation will transfer and assign to a liquidating trust as designated by
the Board of Directors all of its then remaining assets (which may include
direct or indirect interests in real property) and liabilities, although there
can be no assurance in this regard. After such a transfer to a liquidating
trust, all stock certificates that represent outstanding shares of our common
stock will be automatically deemed to evidence ownership of beneficial interests
in the liquidating trust. Beneficial interests in the liquidating trust will be
non-certificated and non-transferable, except by will, intestate succession or
operation of law. As a result, the beneficial interests in the liquidating trust
will not be listed on any securities exchange or quoted on any automated
quotation system of a registered securities association. In anticipation of such
a transfer and the resulting illiquidity of the beneficial interests, some of
our stockholders may desire to sell their shares of common stock. In such case,
the number of shares of our common stock for which sell orders are placed is
high relative to the demand for such shares, there could be a material adverse
affect on the price of the Corporation's common stock.

OUR STOCKHOLDERS WILL FACE REDUCED LIQUIDITY AS OUR ASSETS ARE SOLD AND THE
PROCEEDS ARE DISTRIBUTED.

         As our assets are sold and the proceeds are distributed to our
stockholders, the market capitalization, "public float" and the market interest
in our common stock by the investment community will diminish, thereby reducing
the market price, the market demand and liquidity for shares of the common
stock. Depending on the length of the liquidation process and our market
capitalization, the American Stock Exchange may cause the common stock to be
delisted at a later stage of the liquidation process.

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, which may be waived by the
Corporation, 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.

           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.



                                       17
<PAGE>


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. HX Investors and the Operating Partnership have received
such a waiver and 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 current terms of which expire in 2003, 2004 and 2005 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 stockholder rights agreement that gives the current
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 stockholder rights agreement from operating
in the event the Board approves of the acquiring person.


             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 Corporation has 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, New York 10006 and can be contacted at (212) 306-1000.


                                       18
<PAGE>


ITEM 2.  PROPERTIES

PROPERTY PORTFOLIO

         The Corporation owned or held a Joint Venture interest in the following
properties as of December 31, 2002 and unless otherwise indicated March 24,
2003:

         (1) 568 BROADWAY

         On December 2, 1986, a joint venture (the "Broadway Joint Venture")
comprised of the Predecessor Partnership and Integrated Resources High Equity
Partners L.P. - Series 85 ("HEP-85"), the Predecessor in interest to Shelbourne
Properties I, L.P. acquired a fee simple interest in 568-578 Broadway ("568
Broadway"), a commercial building in New York, New York. Until February 1, 1990,
the Predecessor Partnership 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, High Equity Partners L.P. - Series 88 ("HEP-88"), the
Predecessor in interest to Shelbourne Properties III, L.P. The Operating
Partnership and Shelbourne Properties I, L.P. 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.

         On February 28, 2003, Broadway Joint Venture sold the property to an
unaffiliated third party for a gross purchase price of $87,500,000, which
consisted of the assumption of $10,000,000 loan encumbering the property and the
balance in cash. Net proceeds, after closing costs and adjustments, from the
sale were approximately $73,000,000 of which $28,415,250 is attributable to the
Operating Partnership's interest in the property).

         (2) CENTURY PARK I

         On November 7, 1986, a joint venture (the "Century Park Joint Venture")
comprised of the Predecessor Partnership and HEP-85, the predecessor to
Shelbourne Properties I, L.P., purchased the fee simple interest in Century Park
I ("Century Park I"), an office complex.

         Century Park I, situated on approximately 8.6 acres, is located in the
center of San Diego County in Kearny Mesa, California, directly adjacent to
Highway 163 at the northeast corner of Balboa Avenue and Kearny Villa Road.
Century Park I is part of an office park consisting of six office buildings and
two parking garages, in which Century Park Joint Venture owns three buildings,
comprising 200,002 net rentable square feet and one garage with approximately
810 parking spaces. One of the three buildings was completed in the latter half
of 1985, and the other two buildings were completed in February 1986.

         Century Park I competes with other office parks and office buildings in
the Kearny Mesa sub-market. New competition in the sub-market includes the
redevelopment of the adjacent property into the Cabrillo Technology Center with
141,800 square feet available plus an additional 284,000 square feet planned and
redevelopment of the 234 acre former General Dynamics site, now known as New
Century Center. Plans for New Century Center call for development of the site
with mixed use commercial, industrial, retail and entertainment areas.

         On February 25, 2003, Century Park Joint Venture entered into an
agreement to sell its property to an unaffiliated third party for a purchase
price of $29,750,000. The sale is subject to the buyer completing its due
diligence review. If the property is sold, pursuant to the terms of the Loan,
$20,000,000 of the proceeds from the sale will be required to be paid to Fleet
on account of the Loan. The sale is expected to be consummated, if at all,
during the second quarter of 2003.


                                       19
<PAGE>


         Further to the transaction described under "Item 1. Business-Recent
Developments-Fleet Loan", we granted a mortgage on Century Park I to Fleet as
security for the loan made by Fleet to 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) COMMERCE PLAZA I

         On April 23, 1987, the Predecessor Partnership purchased a fee simple
interest in Commerce Plaza I located in Richmond, Virginia. Commerce Plaza I is
located in the Commerce Center Business Park, an office park situated at the
intersection of I-64, Glenside Drive and Broad Street in Henrico County,
northwest of Richmond, Virginia. This area, referred to as the West End,
contains established residential neighborhoods as well as corporate headquarters
and many of Richmond's suburban office parks. Commerce Plaza I's building is
constructed of steel with red brick facade and insulated bronze tinted glass. It
is situated on a site of approximately 4.2 acres, has a net rentable area of
approximately 85,000 square feet and provides parking for approximately 300
cars.

         Further to the transaction described under "Item 1. Business-Recent
Developments-Fleet Loan", we granted a mortgage on Commerce Plaza to Fleet as
security for the loan made by Fleet to 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.

         (4) MATTHEWS TOWNSHIP FESTIVAL

         On February 23, 1988, the Predecessor Partnership purchased a fee
simple interest in Matthews Township Festival ("Matthews Festival"), a community
shopping center in suburban Charlotte, North Carolina in the town of Matthews.
Completed in November 1987, Matthews Festival contains 127,403 square feet of
rentable space. During 1990 the A&P anchor store closed and the center has
suffered a lower level of consumer traffic, sales and occupancy as a result. A&P
remains obligated pursuant to the terms of its lease until 2007 and continues to
pay rent. In October 2000, a tenant leasing approximately 29% of the property
and operating a movie theater defaulted on its lease obligations as a result of
its bankruptcy filing. The tenant has rejected the lease in its bankruptcy and,
accordingly, the space is now vacant.

         Matthews Festival is part of a larger overall retail complex containing
approximately 55 acres and zoned for 550,000 square feet of retail space. During
1996, construction of Phase II of the overall complex and a concept restaurant
on an out-parcel in front of the center were completed by the original
developer.

         Further to the transaction described under "Item 1. Business-Recent
Developments-Fleet Loan", we granted a mortgage on Matthews Festival to Fleet as
security for the loan made by Fleet to 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) MELROSE CROSSING SHOPPING CENTER

         On January 5, 1988, the Predecessor Partnership purchased a fee simple
interest in Melrose Crossing, a neighborhood shopping center located in Melrose
Park, Illinois. Completed in January 1987, Melrose Crossing contains 138,355
square feet of rentable space in addition to 88,000 square feet that is leased
to Wolf Flea Market. This store anchors both Melrose Crossing and Phase II of
Melrose Crossing Shopping Center which is to the north of Melrose Crossing and
is owned by Shelbourne Properties III, LP. It is situated on approximately 11.6
acres and has parking space for 1,150 cars.

         Melrose Crossing is located 10 miles west of Chicago's Loop, adjacent
to another parcel of land purchased by the Predecessor Partnership known as the
"Melrose Out Parcel" (described more fully below), in an area comprised
primarily of heavy industrial and dense residential properties. The area is
virtually 100% developed.

                  On February 28, 2003, this property was sold to an
unaffiliated third party for a gross purchase price of $3,247,200. Net proceeds,
after closing costs and adjustments, from the sale were approximately
$2,900,000.


                                       20
<PAGE>


         (6) THE MELROSE OUT PARCEL

         On November 3, 1988, the Predecessor Partnership purchased the fee
simple interest in a parcel of vacant land (the "Melrose Out Parcel") adjacent
to the Melrose Crossing Shopping Center, located in Melrose Park, Illinois. (See
"Melrose Crossing" above). The parcel consists of approximately 18,000 square
feet of vacant land. In 1993, the Predecessor Partnership entered into a ten
year ground lease with Rally's Hamburgers, Inc. ("Rally's") which constructed a
drive-through hamburger restaurant on the site at its own cost. In January 1995,
Rally's ceased operating due to low sales volume. The Predecessor Partnership
and Rally's negotiated a settlement whereby Rally's paid the Predecessor
Partnership $100,000, and the Predecessor Partnership agreed to release Rally's
from its obligations under the lease.

         The Melrose Out Parcel was sold as part of the Melrose Crossing
Shopping Center sale discussed above.

         (7) SEATTLE TOWER

         On December 16, 1986, a joint venture (the "Seattle Landmark Joint
Venture") comprised of the Predecessor Partnership and Shelbourne I acquired a
fee simple interest in Seattle Tower, a commercial office building located in
downtown Seattle ("Seattle Tower"). The Operating Partnership and Shelbourne
Properties I, L.P. each have a 50% interest in the Seattle Landmark Joint
Venture.

         Seattle Tower is located at Third Avenue and University Street on the
eastern shore of Puget Sound in the financial and retail core of the Seattle
central business district. Seattle Tower, built in 1928, is a 27-story
commercial building containing approximately 167,000 rentable square feet,
including almost 10,000 square feet of retail space and approximately 2,211
square feet of storage space. The building also contains a 55-car garage.
Seattle Tower, formerly Northern Life Tower, represented the first appearance in
Seattle of a major building in the Art Deco style. It was accepted into the
National Register of Historic Places in 1975. There are approximately seventy
tenants occupying the building. Leasing efforts are focused on consolidating
space to create single floor tenants.

         In February 2001, the Seattle area was hit with an earthquake. Seattle
Tower suffered some damage in the earthquake. Repairs have been undertaken and
completed on all tenant spaces, with approximately 75% of the repairs completed
overall. The costs of the repairs are fully covered by insurance, subject to a
$25,000 deductible which has been satisfied.

         We believe that Seattle Tower's primary direct competition comes from
three office buildings of similar size or age in the immediate vicinity of
Seattle Tower, which buildings have current occupancy rates which are comparable
to Seattle Tower's.

         Further to the transaction described under "Item 1. Business-Recent
Developments-Fleet Loan", we granted a mortgage on Seattle Tower to Fleet as
security for the loan made by Fleet to 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.


                                       21
<PAGE>


(8) 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."), a wholly owned subsidiary of Integrated,
purchased the fee simple interest in three warehouses (the "TMR Warehouses"),
located in Columbus, Ohio. We have a 20.66% undivided interest in Tri-Columbus.
Columbus Corp. subsequently sold its interest in Tri-Columbus to Shelbourne
Properties III, L.P. Our ownership was not affected by the transfer of Columbus
Corp.'s interest in the venture to Shelbourne Properties III, L.P. 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 remained at its then current rate of $1,418,825 and increased 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. From January 1, 2001 through March 24, 2003, $212,759 has been
spent for such capital improvements.

         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.

         On January 31, 2003, the Hilliard, Ohio property was sold to an
unaffiliated third party for a gross sales price of $4,600,000. After satisfying
the debt encumbering the property, closing adjustments and other closing costs,
net proceeds were approximately $2,063,500, $426,330 of which is attributable to
the Company's interest.

         Further to the transaction described under "Item 1. Business-Recent
Developments-Fleet Loan", we granted a mortgage on the TMR Warehouses located in
Orange and Grove City to Fleet as security for the loan made by Fleet to 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                                 12/31/2002     12/31/2001    12/31/2000
--------                                 ----------     ----------    ----------
568 Broadway Office Building (2)            99%            97%           100%
Century Park I Office Complex               100%           100%          100%
Commerce Plaza I                            74%            73%            82%
Matthews Township Festival                  68%            64%            63%
Melrose Crossing Shopping Center (2)        51%            27%            12%
Melrose Out Parcel (2)                       0%             0%            0%
Seattle Tower Office Building               80%            90%            95%
Tri-Columbus-Grove City                     100%           100%          100%
Tri-Columbus-Hilliard(1)                    100%           100%          100%
Tri-Columbus-Orange                         100%           100%          100%

(1)      Property was sold in January 2003.

(2)      Property was sold in February 2003.



                                       22
<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>
                                                              SQUARE FEET                         LEASE
                                         PRINCIPAL BUSINESS    LEASED BY                        EXPIRATION
     PROPERTY           NAME OF TENANT         OF TENANT         TENANT        ANNUAL RENT          DATE     RENEWAL OPTIONS
-------------------- ------------------ -------------------- -------------- ----------------- --------------- ----------------
<S>                  <C>                <C>                    <C>              <C>               <C>            <C>
CENTURY PARK         San Diego Gas &    Utilities              118,104          $1,894,640        11/30/07       1-5 yr.
                     Electric
                     Per-Se             Physician's             64,817            $855,584         7/31/05       2-5 yr.
                     Technologies       billing service
-------------------- ------------------ -------------------- -------------- ----------------- --------------- ----------------

COMMERCE PLAZA       Branch Banking &   Banking                  9,416            $160,072         6/30/06       2-5 yr.
                     Trust
                     Robertshaw         Appliance control       18,120            $310,939         1/31/04         None.
                     Controls           manufacturer
                     Sinclair           Communications          14,021            $250,176         4/30/03       1-5 yr.
                     Telecable/ Radio
                     One
-------------------- ------------------ -------------------- -------------- ----------------- --------------- ----------------

MATTHEWS FESTIVAL    A&P (1)            Grocery retailer        40,526            $364,734        11/30/07       4-5 yr.
-------------------- ------------------ -------------------- -------------- ----------------- --------------- ----------------

SEATTLE TOWER        Electric           Telephone               23,475            $510,545         8/31/09          None
                     Lightwave          switching company
-------------------- ------------------ -------------------- -------------- ----------------- --------------- ----------------

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
</TABLE>

(1)  Tenant has vacated property but continues to pay rent pursuant to terms of
     the lease.


         CAPITAL IMPROVEMENTS

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

ITEM 3.  LEGAL PROCEEDINGS

         Delaware Plaintiffs Litigation, Court of Chancery of the State of
Delaware (C.A. No. 19442- NC, and C.A. No. 19611).

          On February 26 and March 6, 2002, respectively, plaintiffs Thomas
Hudson and Ruth Grening filed individual and derivative action lawsuits, which
were subsequently consolidated, on behalf of the Companies against NorthStar
Capital Investment Corp. ("NorthStar"), several of its affiliates, and the
members of the boards of directors of the Companies as of February 13, 2002 in
the Court of Chancery of the State of Delaware. The two actions challenged the
propriety of transactions consummated on February 14, 2002, by which the
Companies and their respective operating partnerships agreed to purchase from
NorthStar approximately 30% of the then outstanding shares of each of the
Companies as well as the right to terminate certain management services
agreements.


                                       23
<PAGE>


          On May 7, 2002, plaintiffs Grening and Hudson jointly filed a separate
individual and class action in Delaware Chancery Court alleging that the
Companies and the members of the Boards at that time had violated 8 Del. C. ss.
211 by failing to call and hold annual meetings of the stockholders within 13
months of the incorporation of the Companies, and had breached their fiduciary
duties and the provisions of the Companies' Amended and Restated Certificates of
Incorporation, by, inter alia, reducing and reorganizing the Companies' boards
and issuing allegedly false and/or misleading statements and omissions of
material facts in press releases and the 2001 Annual Reports filed with the SEC
by each of the Companies. On May 29, 2002, the Court consolidated the claims
pursuant to 8 Del. C. ss. 211 for purposes of discovery and trial with similar
claims in a lawsuit brought in the same forum by HX Investors L.P., and other
stockholders against the Companies.

         The Companies vigorously defended all of the litigation, and, on July
1, 2002, HX Investors, L.P., the additional stockholders, the Companies, the
additional defendants, and Ms. Grening entered into several related agreements
pursuant to which the aforementioned actions by plaintiffs Grening, Hudson, and
HX Investors, L.P. were settled, subject, with respect to the class and
derivative actions, to the approval of the Court. In connection with the
settlement, among other things, NorthStar agreed to contribute up to $1 million
for the payment of the class and derivative plaintiffs' attorneys' fees,
expenses, and incentive fees as approved by the Court.


         The settlement with Ms. Grening was memorialized by letter agreement
dated July 1, 2002, setting forth the agreement in principle. By letter
agreement dated October 28, 2002, Plaintiff Thomas Hudson joined in the
agreement in principle. Confirmatory discovery and drafting of the full
settlement agreement is proceeding, after which Court approval for the
settlement must be obtained and notice and the opportunity to opt-out of the
class provided to relevant current and former stockholders. A class member who
elects to opt-out would not be bound by the terms of the settlement agreement
and would have the right to bring a similar action on his own behalf. The
Company does not anticipate that a substantial number of class members will
opt-out or that any action brought by any class members who opt-out would have a
material adverse affect on the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On October 29, 2002, the Corporation held a special meeting of the
Stockholders, at which time the Plan of Liquidation was approved by a majority
of the stockholders. See "Item 1. Business-Corporate History-The HX Transaction;
Plan of Liquidation."



                                       24
<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 "HXE". 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                     $46.50             $31.55

September 30, 2001                $43.02             $32.95

December 31, 2001                 $40.52             $33.00

March 31, 2002                    $52.80             $35.00

June 30, 2002                     $54.25             $50.10

September 30, 2002                $72.00             $53.75

December 31, 2002                 $64.50             $53.25


         On March 24, 2003, the closing sale price of the Common Stock as
reported by the American Stock Exchange was $34.10. The Corporation had
approximately 2,532 holders of record of Common Stock as of March 24, 2003.

         The Corporation has authorized 2,500,000 shares of Common Stock, issued
1,237,916 shares, with 894,792 shares outstanding at March 24, 2003.

DIVIDENDS

         As a result of the adoption of the plan of liquidation, our management
expects that dividends of cash from operations and property sales will be made
on a timely basis, subject only to maintaining adequate reserves. It is expected
that such dividends will be sufficient to maintain our status as a REIT under
the Internal Revenue Code. The dividend policy with respect to our Common Stock
is subject to revision by the Board of Directors. All dividends in excess of
those required for us to maintain our REIT status will be made by us at the sole
discretion of the Board of Directors and will depend on our taxable earnings,
financial condition, 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 our qualifications as a REIT, we intend to
periodically evaluate the dividends made to ensure that dividends made, on an
annual basis, will represent at least 90% of our 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 dividends if, as
and when the Board of Directors authorizes and declares dividends. In connection
with the settlement of the lawsuit brought by HX Investors, L.P., the Operating
Partnership issued to HX Investors Class B units which entitle HX Investors to
receive 15% of all



                                       25
<PAGE>


gross proceeds after payment of the approximately $66.25 (plus interest) per
share priority dividend. After giving effect to dividends paid from August 19,
2002 through March 24, 2003, the remaining unpaid per share priority return is
$9.66.

         The following table sets forth the dividends paid or declared by the
Corporation on its Common Stock for the previous three years:


<TABLE>
<CAPTION>
     PERIOD ENDED                    STOCKHOLDER RECORD DATE             DIVIDEND / SHARE (1)
------------------------------ ------------------------------------- ------------------------------
<S>                                     <C>                             <C>
     December 31, 2001                  December 17, 2001                       $ 2.11
------------------------------ ------------------------------------- ------------------------------

     March 31, 2002                             -                                  -

     June 30, 2002                              -                                  -

     September 30, 2002                         -                                  -

     December 31, 2002                  November 15, 2002                        14.00
</TABLE>

         Explanatory Note:

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

         In addition to the foregoing dividends, a dividend of $14.50 was made
on January 31, 2003 to stockholders of record on January 23, 2003 and a dividend
of $30.00 was paid on March 18, 2003, to the stockholders of records on March
10, 2003.

RECENT SALES OF UNREGISTERED SECURITIES

         There were no securities sold by us in 2002 that were not registered
under the Securities Act.



                                       26
<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 "Item 8. Financial Statements and
Supplementary Data" and the notes thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                               Period 10/30/02     Period 1/1/02 to                    Year Ended December 31,
                                 to 12/31/02           10/29/02                             Going Concern
                              Liquidation Basis     Going Concern         2001            2000            1999           1998
---------------------------- ------------------- ------------------- --------------- ---------------- -------------- -------------
<S>           <C>                 <C>                <C>             <C>               <C>             <C>            <C>
Total Revenue (6)                 $837,495(4)        $3,700,417(4)   $15,916,861(2)    $12,675,585     $12,800,623    $11,883,246

Net Income (Loss)                 7,177,799          (23,815,147)     6,850,151(2)      4,103,276       3,852,480      3,100,160
Available for Common
Shareholders

Net Income (Loss) per                8.02              (25.19)            5.53            3.31            3.11           2.50
Common Share
Dividends per Common Share(1)       14.00                 -             2.11 (3)            -             1.16           2.30

Total Assets                    $90,672,934(5)      $60,317,641(6)     $70,681,975     $67,141,583     $63,413,501    $61,837,211
</TABLE>


     (1)  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.

     (2)  Total revenues and net income for the year ended December 31, 2001
          includes a $3,207,975 gain or $2.59 per share, from the sale of a
          property, Commonwealth Industrial Park.

     (3)  Dividends from and after December 21, 2001 are based on the total
          shares issued and outstanding.

     (4)  Reflects the January 1, 2002 conversion to the equity method of
          accounting, as required under generally acceptable accounting
          principles due to the incurrence of debt. Prior to the conversion, the
          Corporation reported its investments in joint ventures using the pro
          rata consolidation method of accounting, under which revenues and
          expenses attributable to the joint ventures are presented on a pro
          rata basis in accordance with the Corporation's percentage of
          ownership together with the revenues and expenses of the Corporation's
          wholly-owned properties. Under the equity method of accounting, the
          net income attributable to the Corporation's investment in the joint
          ventures is presented as a single item on the statement of operations.
          If the change to the equity method of accounting had been made on
          January 1, 2001, revenues reported for 2001 would be reduced by
          $6,803,300. Total net income remains unchanged.

     (5)  Reflects the conversion to the liquidation basis of accounting under
          which real estate is reported to its estimated net realizable value.
          Prior to the conversion to the liquidation basis of accounting, real
          estate was reported at its historical cost, less accumulated
          depreciation and adjustments for impairment.

     (6)  Total revenue includes revenues from discontinued operations.



                                       27
<PAGE>


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

         Shelbourne Properties II, Inc. was formerly a Delaware limited
partnership, High Equity Partners L.P. - Series 86 ("HEP-86"), which was merged
on April 17, 2001 with and into Shelbourne Properties II L.P., a Delaware
limited partnership (the "Operating Partnership"). The Corporation holds its
investment in its properties through the Operating Partnership in which it held
a 99% direct interest and a 1% indirect interest at December 31, 2002. The 1% is
held indirectly through the general partner of the Operating Partnership,
Shelbourne Properties II GP LLC (the "General Partner"), of which the
Corporation is the sole member.

         On February 14, 2002, the Corporation repurchased the shares of a major
stockholder, Presidio Capital Investment Company LLC ("PCIC"). As part of that
repurchase, Shelbourne Management LLC, a wholly-owned subsidiary of PCIC,
contributed to the Operating Partnership, the advisory agreement between the
Corporation, the Operating Partnership, and Shelbourne Management LLC, dated as
of April 17, 2001 (the "Advisory Agreement"), pursuant to which Shelbourne
Management LLC had provided financial and investment advisory services to the
Corporation and the Operating Partnership. As consideration for the purchase of
the shares and the contribution of the Advisory Agreement, the Corporation paid
$17,866,603 in cash and the Operating Partnership issued a note in the amount of
$22,034,250 and issued 1,015.148 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. As a result of a transaction that was consummated in
January 2003, the 5% Class A Preferred Partnership Units were reclassified as
Class A Partnership Units and modified to eliminate the liquidation preference
and to significantly limit the events that could create a pre-payment penalty.
The Class A Preferred Partnership Units are still entitled to receive quarterly
distributions at a rate of 5% per annum.

         During July and August 2002, the Corporation entered into a settlement
agreement with HX Investors, L.P. ("HX Investors"), a stockholder in the
Corporation, with respect to a lawsuit brought by HX Investors and others
against the Companies. In connection with this settlement:

         o    HX Investors made a tender offer for up to 30% of the outstanding
              shares of Common Stock. Upon consummation of the offer, HX
              Investors acquired 268,444 Common Shares. As a result of the
              tender offer and subsequent market acquisitions, HX Investors
              holds 41.46% of the outstanding Common Stock.

         o    On August 19, 2002, the existing Board of Directors and executive
              officer of the Corporation resigned, and the Board was
              reconstituted to consist of six members, four of whom are
              independent directors. In addition, new executive officers were
              appointed.

         o    HX Investors was issued by the Operating Partnership Class B Units
              that entitle the holder thereof to receive 15% of the Operating
              Partnership's gross proceeds after the payment of a priority
              return of approximately $66.25 (plus interest at 6% per annum,
              subject to certain increases) per share to the stockholders of the
              Corporation.

         o    A Plan of Liquidation of the Corporation was adopted by the prior
              Board of Directors.

         On October 29, 2002, the stockholders of the Corporation approved the
Plan of Liquidation. As a result, the Corporation adopted liquidation accounting
and the Operating Partnership has been seeking, and will seek, to sell its
remaining properties at such time as it is believed that the sale price for such
property can be maximized. Since the adoption of the Plan of Liquidation, the
Corporation has sold its properties located in Raleigh, North Carolina; Hillard,
Ohio; New York, New York; and Melrose Park, Illinois and has paid dividends of
$58.50 per share (including a dividend of $14.50 per share paid in January 2003
and of $30.00 per share paid in March 2003). In addition, its property located
in San Diego, California is under contract for sale. Pursuant to the Plan of


                                       28
<PAGE>

Liquidation, if all of the assets of the Corporation are not sold prior to
October 29, 2004, the remaining assets will be placed in a liquidating trust and
the stockholders of the Corporation will receive a beneficial interest in such
trust in total redemption for their shares in the Corporation.

         The Corporation is operating with the intention of qualifying as a real
estate investment trust for U.S. Federal Income Tax purposes ("REIT") under
Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those
sections, a REIT which pays at least 90% of its ordinary taxable income as a
dividend to its stockholders each year and which meets certain other conditions
will not be taxed on that portion of its taxable income which is distributed to
its stockholders.

         We have adopted a plan of liquidation that requires us to liquidate all
of our assets and liabilities by October 29, 2004. Dividends made by us to you
and our other stockholders during our liquidation generally will not be taxable
to you until the dividends exceed your adjusted tax basis in your shares, and
then will be taxable to you as long-term capital gain assuming you hold your
shares as capital assets and have held them for more than 12 months when you
receive the dividend as a result of the adoption of the plan of liquidation. If
our assets are not completely liquidated by October 29, 2004, our assets will be
transferred to a liquidating trust on such date and in lieu of owning shares,
you will own a beneficial interest in the liquidating trust of an equivalent
percentage. The transferability of interests in the trust will be significantly
restricted as compared to the shares in the Corporation, and you will be
required to include in your own income your pro rata share of the trust's
taxable income whether or not that amount is actually distributed by the trust
to you in that year.

         As a result of the adoption of the Plan of Liquidation, our primary
business objective is to maximize the value of our common stock. Prior to
October 29, 2002, we sought 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.

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. 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.

REAL ESTATE HELD FOR SALE AND ADJUSTMENT TO LIQUIDATION  BASIS OF ACCOUNTING

         On October 30, 2002, in accordance with the liquidation basis of
accounting, assets were adjusted to estimated net realizable value and
liabilities were adjusted to estimated settlement amounts, including estimated
costs associated with carrying out the liquidation. The valuation of investments
in joint ventures and real estate held for sale is based on current contracts,
estimates as determined by independent appraisals or other indications of sales
value, net of estimated selling costs (including brokerage commissions, transfer
taxes, legal costs) and capital expenditures of approximately $4,144,092
anticipated during the liquidation period. The valuations of other assets and
liabilities are based on management's estimates as of December 31, 2002. The
actual values realized for assets and settlement of liabilities may differ
materially from amounts estimated. The net adjustment at October 30, 2002,
required to convert from the going concern (historical cost) basis to the
liquidation basis of accounting, totaled $2,743,237, which is included in the
consolidated statement of changes in net assets (liquidation basis) for the
period October 30, 2002 to December 31, 2002. Significant increases (decreases)
in the carrying value of net assets are summarized as follows:


                                       29
<PAGE>



<TABLE>
<CAPTION>
<S>                                                                                                       <C>
Increase  to  reflect   estimated  net  realizable   values  of certain real estate properties            $  8,628,174
Deferral of  appreciated  gain and incentive fee on real estate properties                                  (8,628,174)
Write-off of other assets                                                                                     (250,638)
Increase  to reflect net  realizable  value of  investments  in joint ventures                              41,979,786
 Deferral   of   appreciated   gain   and   incentive   fee  on investments in joint ventures              (41,979,786)
Reserve for additional costs associated with liquidation (1)                                                (1,600,000)
Write-off of deferred debt costs                                                                              (892,599)
                                                                                                          ---------------

Adjustment  to  reflect  the  change  to  liquidation  basis of accounting                                 ($2,743,237)
                                                                                                          ===============
</TABLE>

(1) Such costs do not include costs incurred in connection with ordinary
operations.

         Adjusting assets to estimated net realizable value resulted in the
adjustment in value of certain real estate properties. The anticipated gains
associated with the write-up of these real estate properties have been deferred
until such time as a sale occurs. The write down of other assets included
amounts for unamortized lease commissions and straight line rent.

RESERVE FOR ESTIMATED COSTS DURING THE PERIOD OF LIQUIDATION

         Under liquidation accounting, the Corporation is required to estimate
and accrue the non-operating costs associated with executing the Plan of
Liquidation. These amounts can vary significantly due to, among other things,
the timing and realized proceeds from property sales, the costs of retaining
agents and trustees to oversee the liquidation, including the costs of
insurance, the timing and amounts associated with discharging known and
contingent liabilities and the non-operating costs associated with cessation of
the Corporation's operations. These non-operating costs are estimates and are
expected to be paid out over the liquidation period. Such costs do not include
costs incurred in connection with ordinary operations.

INVESTMENTS IN JOINT VENTURES

         Certain properties are owned in joint ventures with Shelbourne
Properties I L.P. and/or Shelbourne Properties III L.P. Prior to April 30, 2002,
the Corporation owned an undivided interest in the assets owned by these joint
ventures and was severally liable for indebtedness it incurred in connection
with its ownership interest in those properties. Therefore, for periods prior to
April 30, 2002, the Corporation's consolidated financial statements had
presented the assets, liabilities, revenues and expenses of the joint ventures
on a pro-rata basis in accordance with the Corporation's percentage of
ownership.

         After April 30, 2002, as a result of the Operating Partnership
incurring debt in connection with entering into the note payable discussed in
Note 6 to the Consolidated Financial Statements annexed hereto, the Corporation
was no longer allowed to account for its investments in joint ventures on a
pro-rata consolidation basis in accordance with its percentage of ownership but
must instead utilize the equity method of accounting. Accordingly, the
Corporation's consolidated balance sheet at December 31, 2002 and the
Corporation's consolidated statements of operations commencing on January 1,
2002 reflect the equity method of accounting.

RECENTLY ISSUED ACCOUNTING STANDARDS

         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 did not have a material effect on the financial statements.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which updates, clarifies and simplifies existing accounting
pronouncements, which will be effective for fiscal years beginning after May 15,
2002. This statement will not have a material effect on the Corporation's
financial statements.


                                       30
<PAGE>


         In November 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this Interpretation are
effective for the Corporation's December 31, 2002 financial statements. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. This Interpretation had no effect on the Corporation's
financial statements.

         In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interest in
variable interest entities created after January 31, 2003, and the Corporation
will need to apply its provisions to any existing variable interest in variable
interest entities by no later than December 21, 2004. The Corporation does not
expect that this will have an impact on the Corporation's consolidated financial
statements.

PRO-FORMA INFORMATION

         The pro-forma information is provided for the purpose of facilitating
the comparison of the 2002 and 2001 results of operations in the review of
management's discussion and analysis. Investments in joint ventures were
reported in 2001 under the pro-rata consolidated method of accounting which
presented the assets and liabilities and revenues and expenses of the joint
ventures on a pro-rata basis in accordance with the Corporation's percentage of
ownership together with the assets and liabilities and revenues and expenses of
the Corporation's wholly-owned properties. In 2002, under the equity method of
accounting, the Corporation's share of assets and liabilities and revenues and
expenses in joint ventures is presented as a single item on the balance sheet
and statement of operations. The Corporation's total equity and net income did
not change as a result of the conversion. The following tables show (i) the
pro-forma condensed consolidated balance sheet as of December 31, 2001 and (ii)
the pro-forma condensed consolidated statement of operations for the year ended
December 31, 2001 both reflecting the pro-forma impact had the change to equity
accounting for the investments in joint ventures occurred in 2001.



                                       31
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.
                 CONDENSED CONSOLIDATED PRO-FORMA BALANCE SHEET

<TABLE>
<CAPTION>
                                               AS REPORTED                 PRO-FORMA                EQUITY METHOD
                                            DECEMBER 31, 2001             ADJUSTMENTS             DECEMBER 31, 2001
                                         ------------------------  -------------------------- --------------------------
<S>                                                <C>                        <C>                         <C>
ASSETS
Real estate, net                                   $  41,327,041              $ (16,342,903)              $  24,984,138
Cash and cash equivalents                             26,011,761                 (8,938,300)                 17,073,461
Other assets                                           3,191,467                  6,097,689                   9,289,156
Receivables, net                                         151,706                    (92,360)                     59,346
Investment in joint ventures                                   -                 18,790,789                  18,790,789
                                         ------------------------  -------------------------- --------------------------

TOTAL ASSETS                                       $  70,681,975               $   (485,085)              $  70,196,890
                                         ========================  ========================== ==========================


LIABILITIES

Accounts payable and accrued expenses              $   1,168,273               $   (485,085)               $    683,188
                                         ------------------------  -------------------------- --------------------------
                                                   $   1,168,273               $   (485,085)               $  1,168,273
                                         ========================  ========================== ==========================
</TABLE>


   CONDENSED CONSOLIDATED PRO-FORMA STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001

                                                      AS REPORTED         DISCONTINUED         PRO-FORMA           EQUITY METHOD
                                                         2001              OPERATIONS         ADJUSTMENTS              2001
                                                   ------------------    ---------------    -----------------    ------------------
<S>                                                <C>                     <C>                <C>                    <C>
Rental revenue                                          $ 11,918,573        $ (349,295)         $(6,803,200)          $  4,766,078
                                                   ------------------    ---------------    -----------------    ------------------
Costs and expenses                                         9,066,710          (738,150)          (3,290,290)             5,038,270
                                                   ------------------    ---------------    -----------------    ------------------

Income (loss) before equity income from joint              2,851,863           388,855           (3,512,910)              (272,192)
     ventures, interest, other income, gain on
     sale, and discontinued operations

     Equity income from joint ventures                             -                 -            3,932,845              3,932,845
     Interest income                                         709,913                 -             (411,424)               298,489
     Other income                                             80,400           (50,824)              (8,511)                21,065
     Gain on sale                                          3,207,975                 -                    -              3,207,975
     Discontinued operations                                       -          (338,031)                   -               (338,031)
                                                   ------------------    ---------------    -----------------    ------------------
Net income                                              $  6,850,151            $    -              $     -           $  6,850,151
                                                   ==================    ===============    =================    ==================
</TABLE>



                                       32
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The Corporation uses its working capital reserves and any cash from
operations as its primary source of liquidity. On October 29, 2002, the
Corporation's stockholders approved the Plan of Liquidation. Accordingly, the
Corporation began to sell its properties. In this regard, on October 31, 2002,
568 Broadway Joint Venture, a joint venture in which the Corporation indirectly
held a 38.925% interest, entered into a contract to sell its property located at
568 Broadway, New York, New York for a gross sales price of $87,500,000. The
sale of this property occurred on February 28, 2003. In addition, on December
20, 2002, the Corporation closed the sale of Sutton Square Shopping Center in
Raleigh, North Carolina for a gross sales price of $16,750,000. After all
adjustments and paying the release amount plus fees to the lender, the
Corporation received net cash proceeds of approximately, $10,393,025. On January
31, 2003, Tri-Columbus Associates, a joint venture in which the Corporation owns
a 20.66% interest, completed a sale of 4251 Leap Road in Hilliard, Ohio. After
all adjustments and paying the release amount plus fees to the lender the joint
venture received approximately $2,063,553 in net proceeds of which the
Corporation is entitled to receive approximately $426,330. On February 25, 2003,
the Operating Partnership entered into an agreement to sell its property located
in San Diego, California for a purchase price of $29,750,000. The sale is
subject to the buyer completing its due diligence review. If the property is
sold pursuant to the terms of the current Loan encumbering the property,
$20,000,000 of the proceeds from the sale will be required to be paid to the
Lender. The sale is expected to be consummated, if at all, during the second
quarter of 2003.

         The Corporation had $10,898,495 in cash and cash equivalents at
December 31, 2002. Cash and cash equivalents are temporarily invested in
short-term instruments. The Corporation's level of liquidity based upon cash and
cash equivalents decreased by $6,174,966 for the year ended December 31, 2002
from $17,073,461 for the year ended December 31, 2001. As discussed further
below, the decrease resulted from $28,712,914 of cash used in financing
activities which was offset by $7,068,856 of net cash provided by operating
activities of which included $6,978,371 in distributions made in excess of
income from joint ventures and by $15,469,092 provided by investment activities.
The sources of cash provided by investment activities consists of $16,456,646 in
proceeds from the sale of Sutton Square Shopping Center prior to the pay down of
the Credit Facility which were offset slightly by $528,970 in improvements to
real estate and $458,584 used in discontinued operations.

         In addition to cash and cash equivalents reported at December 31,2002,
the Corporation's joint ventures held cash at December 31, 2002 of which the
Corporation's allocable share was approximately $4,097,339.

         Cash used in financing activities consisted of $17,866,603 paid to PCIC
in connection with the Transaction, $22,034,250 paid to retire the note that was
issued to Shelbourne Management in connection with the Transaction, cash
dividends of $12,591,404 and $6,000,000 of principal payments on the Credit
Facility as a result of the sale of Sutton Square Shopping Center. These
decreases were partially offset by proceeds from the initial borrowing under the
Credit Facility of $29,779,343.

         Currently, the Corporation's primary source of funds is cash flow from
the operation of its wholly owned properties, principally rents collected from
tenants as well as distributions from joint venture investments and proceeds
from property sales. Rents collected from tenants for the year ended December
31, 2002 amounted to $4,474,295 as compared to $5,270,927 for the year ended
December 31, 2001. The decrease in rents collected from tenants is due to the
sale of Commonwealth Industrial Park on December 6, 2001.

         For the year ended December 31, 2002, the Corporation made $528,970 in
capital expenditures and $82,012 in capitalized tenant procurement costs that
were funded from cash flow and the Corporation's working capital reserves. The
Corporation's capital expenditures were $241,433 of tenant improvements at
wholly owned properties along with a heating ventilation air conditioning unit
replacement of $159,795 and repaving of the parking lot of $99,104 at Commerce
Plaza. Tenant procurement costs consisted of leasing commissions and legal
costs. Additionally, Melrose Crossing's capital expenditures of $92,400 and
tenant procurement costs of $107,191 are included in cash used in discontinued
operations.



                                       33
<PAGE>


CAPITAL IMPROVEMENTS AND CAPITALIZED TENANT PROCUREMENT COSTS

The following table sets forth, for each of the last three fiscal years, the
Corporation's and the Predecessor Partnership's expenditures at each of its
wholly owned properties for capital improvements and capitalized tenant
procurement costs:


<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,

         PROPERTY                                     2002           2001         2000
-------------------------------------------------- ---------     ----------   ---------------
<S>                                                <C>           <C>          <C>
         Commonwealth Industrial Park (1)          $      0       $      0      $293,946

         Melrose Crossing   (3)                     199,591         53,347             0

         Matthews Festival                          189,942         71,292        14,708

         Sutton Square (2)                           16,346         18,985       102,952

         Melrose Out Parcel (3)                           0              0             0

         Commerce Plaza I                           404,694        433,360        86,386
                                                   --------       --------      --------
         TOTALS:                                   $810,573       $576,984      $497,992
                                                   ========       ========      ========
</TABLE>

(1)      Commonwealth  Industrial  Park was sold on December 6, 2001.

(2)      Sutton  Square  Shopping  Center was sold on  December 20, 2002.

(3)      Melrose  Crossing  and the  Melrose  Out  Parcel  were sold on
         February 28, 2003.

         The capital expenditures for 2002 were mostly in the ordinary course of
business. Major capital expenditures budgeted for 2003 consist primarily of
approximately $1,200,000 at Matthews Festival in order to renovate the movie
theater that has been vacant since August 2000 in order to lease to in-line
tenants. The project involves leveling the floor from stadium seating to create
more leasing opportunities.

         Certain properties require periodic investments of capital for tenant
costs related to new and renewal leasing. The most significant tenant
procurement costs budgeted for 2003 is $592,679 at Commerce Plaza. These costs
are primarily related to the expansion of Radio One into suite 300 which
consists of 12,633 square feet and 4 currently vacant spaces that are projected
to be released in 2003. Radio One expansion is projected to have an approximate
cost of $241,684, or 41%, of the tenant procurement costs. All other projects
are scheduled to run between $50,000 and $100,000 depending on the square
footage of the space involved.



                                       34
<PAGE>


RESULTS OF OPERATIONS

         After April 30, 2002, as a result of the Operating Partnership's
incurring debt in connection with entering into the Credit Facility, the
Corporation is no longer allowed to account for its investments in joint
ventures on a pro-rata consolidation basis in accordance with its percentage of
ownership but must instead utilize the equity method of accounting. Further, as
a result of the adoption of the Plan of Liquidation, the Corporation adopted
liquidation accounting effective October 30, 2002. In order to provide a more
meaningful comparison of the results of operations for the years ended December
31, 2002 and 2001, the following comparison compares the results of operations
for such periods assuming that the Corporation used the equity method of
accounting for the entirety of both periods.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001(ON A PRO-FORMA BASIS)

Net Income

         The Corporation's net income decreased by $23,487,499 to a net loss of
$16,637,348 for the year ended December 31, 2002 from a net income of $6,850,151
for the year ended December 31, 2001. This decrease is primarily attributable to
expenses incurred in connection with the Transaction, including the purchase of
the Advisory Agreement, legal fees and consulting fees to Lazard Freres & Co.
LLC for its advisory and valuation services for the Corporation. In addition,
further contributing to the decrease in net income were the legal fees incurred
by the Corporation associated with defending lawsuits brought in connection with
the Transaction and a decrease in rental revenue of $393,817. Partially
offsetting the increase in costs and expenses was an increase in equity income
from the investment in joint ventures of $177,758. Further mitigating the effect
of increased expenses was the gain on sale of Sutton Square in 2002 which was
$3,552,310 greater than the gain on sale recognized by the sale of Commonwealth
Industrial Park in 2001.

Rental Revenues

         Rental revenues decreased $393,817, or approximately 8%, to $4,372,261
for the year ended December 31, 2002 from $4,766,078 for the year ended December
31, 2001. The decrease in rental revenue was due to the loss of $934,001 of
rental income attributable to Commonwealth Industrial Park which was sold in
December 2001. The decrease was offset in part by the aggregate increase in
rental revenues of the remaining wholly owned properties of $540,184.

Costs and Expenses

         Costs and expenses for the year ended December 31, 2002 amounted to
$30,632,657, representing an increase of $25,594,387 from the year ended
December 31, 2001. This increase consists of a one-time expense of $23,049,398
for the purchase of the Advisory Agreements. The remaining costs and expenses
amounted to $7,583,259 representing an increase of $2,544,989 from $5,038,270
incurred during the year ended December 31, 2001. The increase is primarily due
to an increase in administrative expenses incurred in connection with the
Transaction, legal, professional and consulting fees.

         Operating expenses decreased slightly despite increased insurance
costs. The Corporation experienced an increase in depreciation and amortization
expense due to real estate improvements and tenant procurement costs of $76,270.
Excluding the 2001 depreciation and amortization expense associated with
Commonwealth Industrial Park of $170,940, the increase of depreciation and
amortization amounted to $247,211. Pursuant to the vote of the stockholders to
liquidate the portfolio and resultant conversion to the liquidation basis of
accounting on October 29, 2002, the Corporation will not incur any further
depreciation and amortization costs. Property management fees decreased $24,169.
However if the 2001 fees attributable to Commonwealth Industrial Park of $30,584
are deducted, property management fees increased by $6,416 due to increased
rental collections from the wholly owned properties in 2002.

         Asset management fee decreased by $926,170 for the year ended December
31, 2002 from $1,342,002 for the year ended December 31, 2001. This decrease was
due to the reduction of the fee in connection with the Transaction from a fee
based on 1.25% of gross asset value of the Corporation to set a fee of $27,778
per month

                                       35
<PAGE>


through September 30, 2002, which was then further reduced to $16,667 per month
for the balance of 2002. Shelbourne Management was paid $157,582 in partnership
asset management fees prior to February 14, 2002, $208,250 was paid to PCIC for
transition fees from February 15, 2002 through September 30, 2002 and Kestrel
Management was paid $50,000 for its services from October 1, 2002 through
December 31, 2002.

Non-Operating Income and Expenses

         Income from the investment in joint ventures increased by $177,758 to
$4,110,603 for the year ended December 31, 2002 from $3,932,845 for the same
time period in 2001. The increase is due to the increased equity income from 568
Broadway of $354,946 that was offset by an aggregate decrease of equity income
from Century Park, Seattle Landmark and Tri-Columbus Associates of $177,188.

         Interest expense of $215,768 was paid on the note issued to Shelbourne
Management in the Transaction. An additional $829,073 was incurred on the Credit
Facility dated May 1, 2002. No interest expense was incurred during 2001 as the
Company had no outstanding debt obligations.

         Interest income decreased by $133,387, or 45% to $165,102 for the year
ended December 31, 2002 as compared to $298,489 for the year ended December 31,
2001 due to significantly lower cash balances invested as well as lower yields
on investments.

         Other income decreased for the year ended December 31, 2002 as compared
to the year ended December 31, 2001 by $20,516 or 97% to $549 from $21,065 due
to the absence, as a result of the conversion of the Predecessor Partnership
into a REIT, of transfer fees that were previously generated by the transfer of
partnership interests.

         Loss from discontinued operations (Melrose Crossing I) ceased in 2002
on October 29, 2002 due to the stockholders vote to liquidate the portfolio.
Under liquidation accounting, all property is considered real estate held for
sale and discontinued income is no longer applicable.

Inflation

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

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 (AS REPORTED) TO THE YEAR ENDED
DECEMBER 31, 2000 (AS REPORTED)

Net Income

         The Corporation experienced an increase in net income of $2,746,875, or
approximately 67%, for the year ended December 31, 2001 to $6,850,151 compared
to 2000 net income of $4,103,276 due to a gain on the sale of Commonwealth
Industrial Park. The property was sold for $8,200,000, and the Corporation
received $7,879,568 in net proceeds after all expenses, prorations, adjustments
and settlement charges. The Corporation realized a gain of $3,207,975 on the
sale. This gain was partially offset by a decrease in interest income and
increased costs and expenses.

Interest and Other Income

         Interest income decreased by $105,505, or approximately 13%, from
$815,468 in 2000 to $709,913 in 2001 due to lower interest rates provided by
short-term investment instruments. Other income increased from $54,881 in 2000
to $80,400 in 2001 due to real estate tax abatements from previous years on
Melrose Crossing, Matthews Festival and 4251 Leap Road (part of Tri-Columbus),
which was partially offset by the decrease in transfer fee income from transfers
of partnership units.


                                       36
<PAGE>


Rental Revenues

         Rental revenues increased by approximately 1% during the year ended
December 31, 2001 to $11,918,573 from $11,805,236 for the same period in 2000
due to normal course increases in rents in new and renewal leases, which offset
the vacancies at Matthews Festival and Commerce Plaza.

Costs and Expenses

         Costs and expenses increased by $494,401, or approximately 6%, during
the year ended December 31, 2001 to $9,066,710 compared to $8,572,309 in 2000,
due to increases in asset management fees, operating expenses, property
management fees and depreciation and amortization expense. Asset management fees
increased by $170,750, or approximately 15%, in 2001 due to an increase in the
gross asset value of the Corporation. Operating expenses increased by $251,451,
or approximately 7% to $4,055,975 in 2001 as compared to $3,804,524 in 2000 due
to an increase in utilities, taxes and cleaning costs, which was offset
primarily by a decrease in repair and maintenance costs and a minor decrease in
personnel expenses. For the year ended December 31, 2001, the property
management fee increased slightly and administrative expenses remained
relatively constant.

RECENT DEVELOPMENTS

         On January 13, 2003, the Board of Directors declared a dividend of
$12,974,484 ($14.50 per share). The dividend was paid on January 31, 2003 to
stockholders of record at the close of business on January 23, 2003.

         On January 15, 2003, a joint venture owned by the operating partnership
and the operating partnerships of Shelbourne Properties I, Inc. and Shelbourne
Properties III, Inc. acquired from Realty Holdings of America, LLC, an
unaffiliated third party, a 100% interest in an entity that owns 20 motel
properties triple net leased to an affiliate of Accor S.A. The cash purchase
price, which was provided by working capital, was approximately $2,700,000, of
which approximately $878,000, $1,096,000 and $726,000 was paid by Shelbourne
Properties I, Inc., the Corporation and Shelbourne Properties III, Inc.,
respectively. The properties are also subject to existing mortgage indebtedness
in the current principal amount of approximately $74,220,000.

         The Companies formed the joint venture and acquired the interest in the
new properties in order to facilitate the disposition of the other properties of
the Companies and the distribution to stockholders of the sales proceeds in
accordance with the Plan of Liquidation. Prior to the acquisition of the Accor
S.A. properties, the holder of the Class A Preferred Units of the Operating
Partnership had the right to cause the operating partnerships to purchase the
Class A Preferred Units at a substantial premium to their liquidation value (at
the time of the acquisition, a premium of approximately $6,605,000 in the case
of the Operating Partnership and approximately $16,265,000 for all three
operating partnerships) unless the operating partnerships maintained at least
approximately $54,200,000 of aggregate indebtedness ($22,026,000 in the case of
the Operating Partnership) guaranteed by the holder of the Class A Preferred
Units and secured by assets having an aggregate market value of at least
approximately $74,800,000 ($30,400,000 in the case of the Operating
Partnership). These requirements significantly impaired the ability of the
Corporation to sell its properties and make distributions in accordance with the
Plan of Liquidation. In lieu of these requirements, the operating partnerships
agreed to acquire the Accor S.A. properties for the benefit of the holder of the
Class A Preferred Units. The holder of the Class A Preferred Units does,
however, continue to have the right, under certain limited circumstances which
the Companies do not anticipate will occur, to cause the operating partnerships
to purchase the Class A Preferred Units at the premium described above. The
terms of the Class A Preferred Units were also modified to eliminate the
$2,500,000 aggregate liquidation preference to which the holder of the Class A
Preferred Units was previously entitled ($1,015,148 in the case of the Operating
Partnership).

         The holder of the Class A Preferred Units has the right to require the
operating partnerships to acquire other properties for its benefit at an
aggregate cash cost to the operating partnerships of $2,500,000 (approximately
$1,000,000 of which would be paid by the Operating Partnership). In that event
the Accor S.A. properties would not be held for the benefit of the holder of the
Class A Preferred Units and would be disposed of as part of the liquidation of
the Companies.



                                       37
<PAGE>

         On January 31, 2003, the Hilliard, Ohio property was sold to an
unaffiliated third party for a gross sale price of $4,600,000. After satisfying
the debt encumbering the property, closing adjustments and other closing costs,
net proceeds were approximately $2,063,500, $426,330 of which is attributable to
the Company's interest.

         On February 20, 2003, direct and indirect subsidiaries of each of the
Companies entered into a Loan Agreement with Fleet National Bank, as agent for
itself and other lenders pursuant to which the Borrowers obtained a $55,000,000
loan. The proceeds from this loan allocable to the Company were used to satisfy
the Company's existing loan payable and the balance was paid as a dividend by
the Corporation in March 2003.

         On February 25, 2003, the Operating Partnership entered into an
agreement to sell its property located in San Diego, California for a purchase
price of $29,750,000. The sale is subject to the buyer completing its due
diligence review. If the property is sold pursuant to the terms of the current
Loan encumbering the property, $20,000,000 of the proceeds from the sale will be
required to be paid to the Lender. The sale is expected to be consummated, if at
all, during the second quarter of 2003.

         On February 28, 2003, the joint venture property located in New York,
New York was sold for a gross purchase price of $87,500,000, which consisted of
the assumption of a $10,000,000 loan encumbering the property and the balance in
cash. Net proceeds after closing costs and adjustments from the sale were
approximately $73,000,000 of which $28,415,250 is attributable to the
Corporation's interest in the property.

         On February 28, 2003, the Corporation declared a dividend of $30.00 per
share from the net proceeds of the Fleet Loan and the sale of the New York, New
York property. The dividend was paid on March 18, 2003 to stockholders of record
at the close of business on March 10, 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The primary market risk the Corporation faces is interest rate
sensitivity. The Corporation's long-term debt bears interest at a floating rate
and therefore is exposed to the risk of interest rate changes. At March 24,
2003, borrowings totaled $22,081,542 and bore interest at a rate of LIBOR plus
2.75%. Based on the balance outstanding on the Loan at March 24, 2003 and the
interest rate at that date, a 10% increase in LIBOR would increase the interest
expense in 2003 by approximately $29,589. Conversely, a 10% decrease in LIBOR
would decrease interest expense in 2003 by the same amount. The gain or loss the
Corporation ultimately realizes with respect to interest rate fluctuations will
depend on the actual interest rates during that period. The Corporation does not
believe that it has any risk related to derivative financial instruments.



                                       38
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Our consolidated balance sheets as of December 31, 2002 and 2001, and
the related consolidated statements of operations, equity and cash flows for the
years ended December 31, 2002, 2001 and 2000, and the notes thereto, and the
independent auditors' report thereon and the financial statement schedule are
set forth on pages F-1 through F-20.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.



                                       39
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information called for by Item 10 of Form 10-K is set forth under the
heading "Election of Directors" in the Company's Proxy Statement for its annual
meeting of Stockholders relating to year ended December 31, 2002 (the "Proxy
Statement"), which is incorporated herein by reference, and under the heading
"Executive Officers of the Company" in the Business section included herein.

ITEM 11. EXECUTIVE COMPENSATION.

         Information called for by Item 11 of Form 10-K is set forth under the
heading "Executive Compensation" in the Proxy Statement, which is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information called for by Item 12 of Form 10-K is set forth under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement, which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information called for by Item 13 of Form 10-K is set forth under the
heading "Certain Relationships and Related Transactions" in the Proxy Statement,
which is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

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



                                       40
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

         (1)  Financial Statements

              Independent Auditors' Report

              Consolidated Statement of Net Assets of December 31, 2002 and
              Consolidated Balance Sheet as of December 31, 2001

              Consolidated Statements of Operations and Changes in Net Assets
              for the Period October 30, 2002 to December 31, 2002, and
              Consolidated Statement of Operations for the Period January 1,
              2002 to October 29, 2002 and for the years ended December 31, 2001
              and 2000

              Consolidated Statements of Equity for the Period January 1, 2002
              to October 29, 2002 and the Years Ended December 31, 2001 and 2000

              Consolidated Statements of Cash Flows for the Periods October 30,
              2002 to December 31, 2002 and January 1, 2002 to October 29, 2002
              and for the Years Ended December 31, 2001 and 2000

         (2)  Notes to Consolidated Financial Statements

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

         (b)  REPORTS ON FORM 8-K

                   Date Filed:      December 23, 2002
                   Item Reported:   2 (Acquisition or Disposition of Assets)

         (c)  EXHIBITS

         EXHIBIT
         NUMBER            DESCRIPTION

         2.1      Stock Purchase Agreement among HX Investors, Exeter Capital
                  Corporation and the Company(4)
         2.2      Amendment No. 1 to Stock Purchase Agreement(6)
         2.3      Plan of Liquidation (7)
         3.1      Amended and Restated Certificate of Incorporation of the
                  Company (1)
         3.2      Amended and Restated Bylaws of the Company(1)
         4.1      Limited Partnership of the operating partnership (1)
         4.2      Stockholder Rights Agreement (1)
         4.3      Amendment to Stockholder Rights Agreement (2)
         4.4      Restated Partnership Unit Designation for 5% Class A Preferred
                  Partnership Units (incorporated by reference to Exhibit E-1 of
                  Exhibit 10.4) (9)
         4.5      Stockholder Agreement, among the Companies and HX Investors,
                  LP and Exeter Capital Corporation, dated as of April 30, 2002
                  (3)
         4.6      Amendment No. 2 to Stockholder Rights Agreement (5)
         4.7      Partnership Unit Designation of the Class B Partnership Units
                  of the Operating Partnership(8)
         10.1     Settlement Agreement and Mutual Release between HX Investors,
                  the Companies and Shelbourne Management (4)
         10.2     Amendment No. 1 to Settlement Agreement(6)
         10.3     Purchase Agreement, dated as of January 15, 2003, between the
                  Shelbourne JV LLC and Realty Holdings of America, LLC (9)
         10.4     Agreement, dated as of January 15, 2003, among Presidio
                  Capital Investment Company, LLC (and certain of its
                  subsidiaries), Shelbourne Management, NorthStar Capital
                  Investment Corp., each of the Shelbourne REITs and its
                  operating partnership and HX Investors, L.P. (9)


                                       41
<PAGE>


         10.5     Loan Agreement, dated as of February 19, 2003, among
                  Shelbourne Properties I L.P., Shelbourne Properties II L.P.,
                  Shelbourne Properties III L.P., Shelbourne Richmond Company
                  LLC, Shelbourne Matthews Company LLC, Shelbourne Las Vegas
                  Company LLC, Century Park I Joint Venture, Seattle Landmark
                  Joint Venture, Tri-Columbus Associates and Fleet National Bank
                  and the other lending institutions which may become party
                  thereto and Fleet National Bank, as agent (10)
         10.6     Form of Guaranty, dated as of February 19, 2003, from
                  Shelbourne Properties II, Inc. and Shelbourne Properties II
                  L.P. (10)
         10.7     Form of Indemnity, Contribution and Subrogation Agreement,
                  dated as of February 19, 2003, among the REITs and the
                  operating partnerships (10)
         10.8     Form of Deed of Trust, Assignment of Leases and Rents,
                  Security Agreement and Fixture Filing with respect to the
                  Collateral Properties dated as of February 19, 2003 in favor
                  of Fleet National Bank (10)
         10.9     Cash Management Agreement, dated February 19, 2003, among
                  Shelbourne Properties I L.P., Shelbourne Properties II L.P.,
                  Shelbourne Properties III L.P., Fleet National Bank, as agent
                  for itself and the Lenders, and various subsidiaries of the
                  Shelbourne OP's listed on Exhibit A thereto (10)
         99.1     Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
                  2002.

------------------
(1)   incorporated by reference to the Registration Statement of the Company on
      Form S-4 filed on February 11, 2000, as amended
(2)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on February 14, 2002
(3)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on May 14, 2002.
(4)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on July 2, 2002.
(5)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on July 8, 2002
(6)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on August 5, 2002
(7)   incorporated by reference to Appendix A to the Company's Definitive Proxy
      Statement on Schedule 14A filed on September 27, 2002
(8)   incorporated by reference to the Quarterly Report on Form 10-Q of the
      Company filed on November 14, 2002.
(9)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on January 15, 2003.
(10)  incorporated by reference to the Current Report of the Company on Form 8-K
      filed on February 24, 2003.





                                       42
<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.

Dated:  March 28, 2003                 By: /s/ Michael L. Ashner
                                          ------------------------------
                                           Michael L. Ashner
                                           Chief Executive Officer



Dated:  March 28, 2003                 By: /s/ Carolyn B. Tiffany
                                          ------------------------------
                                           Carolyn B. Tiffany
                                           Chief Financial Officer


         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.


<TABLE>
<CAPTION>
                    NAME                                   TITLE                                   DATE
                    ----                                   -----                                   ----
<S>                                              <C>                                               <C>
        /s/ Michael L. Ashner                    Chief Executive Officer and Director              March 28, 2003
        -----------------------------------
            MICHAEL L. ASHNER


        /s/ Arthur Blasberg, Jr.                 Director                                          March 28, 2003
        -----------------------------------
            ARTHUR BLASBERG, JR.


        /s/ Howard Goldberg                      Director                                          March 28, 2003
        -----------------------------------
            HOWARD GOLDBERG


        /s/ Steven Zalkind                       Director                                          March 28, 2003
        -----------------------------------
            STEVEN ZALKIND
</TABLE>





                                       43
<PAGE>





                         SHELBOURNE PROPERTIES II, INC.
                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

                                 CERTIFICATIONS

         I, Michael L. Ashner, certify that:

         1.   I have reviewed this annual report on Form 10-K of Shelbourne
              Properties II, Inc.;

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

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

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

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

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

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

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

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

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

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


              Date:  March 28, 2003           /s/ Michael L. Ashner
                                              -----------------------
                                                  Michael L. Ashner
                                                  Chief Executive Officer



                                       44
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.
                           FORM 10-K DECEMBER 31, 2002

                                 CERTIFICATIONS

         I, Carolyn B. Tiffany, certify that:

         1.   I have reviewed this annual report on Form 10-K of Shelbourne
              Properties II, Inc.;

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

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

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

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

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

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

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

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

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

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




              Date:  March 28, 2003            /s/ Carolyn B. Tiffany
                                              -----------------------
                                                   Carolyn B. Tiffany
                                                   Chief Financial Officer



                                       45
<PAGE>




                         SHELBOURNE PROPERTIES II, INC.
                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002


EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit
Number          Description                                                              Page
------          -----------                                                              ----
<S>            <C>                                                                       <C>
2.1            Stock Purchase Agreement among HX Investors, Exeter Capital
               Corporation and the Company                                                (4)
2.2            Amendment No. 1 to Stock Purchase Agreement                                (6)
2.3            Plan of Liquidation                                                        (7)
3.1            Amended and Restated Certificate of Incorporation of the Company           (1)
3.2            Amended and Restated Bylaws of the Corporation                             (1)
4.1            Limited Partnership of the operating partnership                           (1)
4.2            Stockholder Rights Agreement                                               (1)
4.3            Amendment to Stockholder Rights Agreement                                  (2)
4.4            Restated Partnership Unit Designation for 5% Class A Preferred
               Partnership Units (incorporated by reference to Exhibit E-1 of
               Exhibit 10.4)                                                              (9)
4.5            Stockholder Agreement, among the Companies and HX Investors, LP
               and Exeter Capital Corporation, dated as of April 30, 2002                 (3)
4.6            Amendment No. 2 to Stockholder Rights Agreement                            (5)
4.7            Partnership Unit Designation of the Class B Partnership Units of
               the Operating Partnership                                                  (8)
10.1           Settlement Agreement and Mutual Release between HX Investors, the
               Companies and Shelbourne Management                                        (4)
10.2           Amendment No. 1 to Settlement Agreement                                    (6)
10.3           Purchase Agreement, dated as of January 15, 2003, between the
               Shelbourne JV LLC and Realty Holdings of America, LLC                      (9)
10.4           Agreement, dated as of January 15, 2003, among Presidio Capital
               Investment Company, LLC (and certain of its subsidiaries),
               Shelbourne Management, NorthStar Capital Investment Corp., each
               of the Shelbourne REITs and its operating partnership and HX
               Investors, L.P.                                                            (9)
10.5           Loan Agreement, dated as of February 19, 2003, among Shelbourne
               Properties I L.P., Shelbourne Properties II L.P., Shelbourne
               Properties III L.P., Shelbourne Richmond Company LLC, Shelbourne
               Matthews Company LLC, Shelbourne Las Vegas Company LLC, Century
               Park I Joint Venture, Seattle Landmark Joint Venture,
               Tri-Columbus Associates and Fleet National Bank and the other
               lending institutions which may become party thereto and Fleet
               National Bank, as agent                                                    (10)
10.6           Form of Guaranty, dated as of February 19, 2003, from Shelbourne
               Properties II, Inc. and Shelbourne Properties III L.P.                     (10)
10.7           Form of Indemnity, Contribution and Subrogation Agreement, dated
               as of February 19, 2003, among the REITs and the operating
               partnerships                                                               (10)
10.8           Form of Deed of Trust, Assignment of Leases and Rents, Security
               Agreement and Fixture Filing with respect to the Collateral
               Properties dated as of February 19, 2003 in favor of Fleet
               National Bank                                                              (10)
10.9           Cash Management Agreement, dated February 19, 2003, among
               Shelbourne Properties I L.P., Shelbourne Properties II L.P.,
               Shelbourne Properties III L.P., Fleet National Bank, as agent for
               itself and the Lenders, and various subsidiaries of the
               Shelbourne OP's listed on Exhibit A thereto                                (10)
99.1           Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    48
</TABLE>

------------------
(1)   incorporated by reference to the Registration Statement of the Company on
      Form S-4 filed on February 11, 2000, as amended
(2)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on February 14, 2002
(3)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on May 14, 2002.
(4)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on July 2, 2002.
(5)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on July 8, 2002
(6)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on August 5, 2002





                                       46
<PAGE>



(7)   incorporated by reference to Appendix A to the Company's Definitive Proxy
      Statement on Schedule 14A filed on September 27, 2002
(8)   incorporated by reference to the Quarterly Report on Form 10-Q of the
      Company filed on November 14, 2002.
(9)   incorporated by reference to the Current Report of the Company on Form 8-K
      filed on January 15, 2003.
(10)  incorporated by reference to the Current Report of the Company on Form 8-K
      filed on February 24, 2003.



                                       47
<PAGE>


                                  Exhibit 99.1


                         SHELBOURNE PROPERTIES II, INC.
                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002


                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of Shelbourne Properties II, Inc.,
(the "Company"), on Form 10-K for the year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, in the capacities and on the date indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of
1934; and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

         Date:  March 28, 2003                /s/ Michael L. Ashner
                                              -----------------------------
                                              Michael L. Ashner
                                              Chief Executive Officer


         Date:  March 28, 2003                /s/ Carolyn B. Tiffany
                                              -----------------------------
                                              Carolyn B. Tiffany
                                              Chief Financial Officer



                                       48
<PAGE>



                 ANNUAL REPORT ON FORM 10-K: ITEM 8 AND 14(a)(2)



                         SHELBOURNE PROPERTIES II, INC.

                             A DELAWARE CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                    I N D E X

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

Consolidated financial statements, years ended December 31,
2002, 2001 and 2000

Consolidated Statement of Net Assets and Balance Sheet ...................F-2

Consolidated Statements of Operations and Changes in Net Assets ..........F-3

Consolidated Statements of Equity.........................................F-5

Consolidated Statements of Cash Flows.....................................F-6

Notes to Consolidated Financial Statements................................F-7
</TABLE>


<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of Shelbourne Properties II, Inc.

We have audited the accompanying consolidated statement of net assets
(liquidation basis) as of December 31, 2002, and the related consolidated
statement of changes in net assets (liquidation basis) for the period October
30, 2002 to December 31, 2002. In addition, we have audited the accompanying
consolidated balance sheet of Shelbourne Properties II, Inc. (the
"Corporation"), as of December 31, 2001, and the related consolidated statements
of operations, equity, and cash flows for each of the two years in the period
ended December 31, 2001, and for the period January 1, 2002 to October 29, 2002.
These financial statements are the responsibility of the Corporation'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.

As discussed in Note 1 to the financial statements, the stockholders of the
Corporation approved a plan of liquidation on October 29, 2002. As a result the
Corporation has changed its basis of accounting from the going concern basis to
the liquidation basis effective October 30, 2002.

In our opinion, such consolidated financial statements present fairly, in all
material respects (1) the net assets (liquidation basis) of the Corporation and
its subsidiaries as of December 31, 2002, (2) the change in their net assets
(liquidation basis) and their cash flows (liquidation basis) for the period
October 30, 2002 to December 31, 2002, (3) their financial position at December
31, 2001, (4) the results of their operations and their cash flows for each
of the two years in the period ended December 31, 2001 and for the period
January 1, 2002 to October 29, 2002, and (5) the results of their operations and
their cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidation financial statements, because of the
inherent uncertainty of valuation when a company is in liquidation, the amounts
realizable from the disposition of the remaining assets and the amounts
creditors agree to accept in settlement of the obligations due them may differ
materially from the amount shown in the accompanying consolidated statement of
net assets as of December 31, 2002.


DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 25, 2003



                                      F-1
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.


          CONSOLIDATED STATEMENT OF NET ASSETS AS OF DECEMBER 31, 2002
            (LIQUIDATION BASIS) AND CONSOLIDATED BALANCE SHEET AS OF
                     DECEMBER 31, 2001 (GOING CONCERN BASIS)
                      (SEE NOTE 2 - BASIS OF PRESENTATION)


<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                    --------------------------------------------------
                                                                            2002                        2001
                                                                    ---------------------      -----------------------
                                                                     Liquidation Basis          Going Concern Basis
                                                                    ---------------------      -----------------------
<S>                                                                             <C>                       <C>
ASSETS
Real estate, net                                                                $      -                  $41,327,041
Real estate held for sale                                                     17,091,316                            -
Investment in joint ventures                                                  62,344,354                            -
Cash and cash equivalents                                                     10,898,495                   26,011,761
Other assets                                                                     255,246                    3,191,467
Receivables, net                                                                  83,523                      151,706
                                                                    ---------------------      -----------------------

       Total Assets                                                           90,672,934                  $70,681,975
                                                                    ---------------------      -----------------------

LIABILITIES

Accounts payable and accrued expenses                                            691,344                  $ 1,168,273
Note payable                                                                  23,779,343                            -
Reserve for estimated costs during the period of liquidation                   1,600,000                            -

Deferrals of gains on real estate assets and joint ventures                   43,847,675                            -

COMMITMENTS AND CONTINGENCIES (Note 7)

CLASS B Partnership Interests (Note7)                                                  -                            -


CLASS A 5% Preferred Partnership Interests, at liquidation value
   (Note 8)                                                                    1,015,148                            -
                                                                    ---------------------      -----------------------

       Total Liabilities                                                      70,933,510                    1,168,273
                                                                    ---------------------      -----------------------

EQUITY/ NET ASSETS IN LIQUIDATION

Common stock:
     $.01 par value per share; authorized 2,500,000 shares;
     issued 1,237,916 shares; outstanding 894,792 and
     1,237,916 respectively                                                                                    12,379
Additional capital                                                                                         66,329,959
Retained earnings                                                                                           3,171,364
                                                                                               -----------------------

       Total Equity                                                                                        69,513,702
                                                                                               -----------------------

TOTAL LIABILITIES AND EQUITY                                                                             $ 70,681,975
                                                                                               -----------------------

NET ASSETS IN LIQUIDATION                                                   $ 19,739,424
                                                                    ---------------------
</TABLE>



        See notes to consolidated financial statements.


                                      F-2
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.


     CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE
        PERIOD OCTOBER 30, 2002 TO DECEMBER 31, 2002 (LIQUIDATION BASIS)
            AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD
                     JANUARY 1, 2002 TO OCTOBER 29, 2002 AND
      FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (GOING CONCERN BASIS)
                      (SEE NOTE 2 - BASIS OF PRESENTATION)

<TABLE>
<CAPTION>
                                                  PERIOD         PERIOD 1/1/02
                                               10/30/02 TO         TO 10/29/02
                                                12/31/2002          (GOING
                                              (LIQUIDATION          CONCERN               FOR THE YEARS ENDED DECEMBER 31,
                                                  BASIS)             BASIS)              2002           2001          2000
                                                  ------             ------              ----           ----          ----
<S>                                           <C>                <C>                <C>             <C>           <C>
Rental revenue                                 $   825,439        $ 3,546,822        $ 4,372,261     $11,569,278   $11,545,891

Costs and expenses:
  Operating expenses                                83,248          1,219,910          1,303,158       3,500,423     3,416,212
  Depreciation and amortization                          -          1,249,356          1,249,356       2,096,134     2,003,671
  Asset management fee                              33,333            174,249            207,582       1,342,002     1,171,252
  Transition management fee                              -            208,250            208,250               -             -
  Purchase of advisory agreements                        -         23,049,398         23,049,398               -             -
  Administrative expenses                          688,272          3,798,642          4,486,914       1,032,875     1,028,408
  Property management fee                           21,088            106,911            127,999         357,126       318,629
                                               -----------        -----------        -----------     -----------   -----------
                                                   825,941         29,806,716         30,632,657       8,328,560     7,938,172
                                               -----------        -----------        -----------     -----------   -----------

(Loss) income before equity income
from joint ventures, interest, other
income, and gain on sale of real
estate                                                (502)       (26,259,894)       (26,260,396)      3,240,718     3,607,719

  Equity income from joint ventures                631,300          3,479,303          4,110,603               -             -
  Interest expense                                (193,172)          (851,669)        (1,044,841)              -             -
  Interest income                                   12,056            153,046            165,102         709,913       815,468
  Other income                                           -                549                549          29,576        54,881
  Gain on sale of real estate                    6,760,285                  -          6,760,285       3,207,975             -
                                               -----------        -----------        -----------     -----------   -----------

Net income (loss) from continuing
operations                                       7,209,967        (23,478,665)       (16,268,698)      7,188,182     4,478,068
Net loss from discontinued operations                    -           (304,336)          (304,336)       (338,031)     (374,792)
                                               -----------        -----------        -----------     -----------   -----------
Net income (loss)                                7,209,967        (23,783,001)       (16,573,034)      6,850,151     4,103,276
Preferred dividends                                (32,168)           (32,146)           (64,314)              -             -
                                               -----------       ------------       ------------     -----------   -----------
Net income (loss) available for common
shareholders                                     7,177,799       $(23,815,147)      $(16,637,348)    $ 6,850,151   $ 4,103,276
                                               ===========       ============       ============     ===========   ===========

Net assets at October 29, 2002                  27,831,952
Adjustments to liquidation basis                (2,743,237)
Liquidating distribution - common shares       (12,527,090)
                                              ------------
Net assets at December 31, 2002               $ 19,739,424
                                              ============
</TABLE>



        See notes to consolidated financial statements.

                                      F-3
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.


       CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR
      THE PERIOD OCTOBER 30, 2002 TO DECEMBER 31, 2002 (LIQUIDATION BASIS)
    AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 2002
          TO OCTOBER 29, 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2001
                             AND 2000 CONCERN BASIS)
                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                  PERIOD          PERIOD 1/1/02
                                                10/30/02 TO        TO 10/29/02
                                                12/31/2002          (GOING
                                                (LIQUIDATION        CONCERN           FOR THE YEARS ENDED DECEMBER 31,
                                                  BASIS)            BASIS)          2002            2001           2000
                                                  ------            ------          ----            ----           ----
<S>                                             <C>              <C>                <C>              <C>           <C>
Earnings (loss) per share -- Basic and
Diluted

Net income (loss) from continuing operations                                       ($17.43)          $5.80         $3.61

Net loss from discontinued operations                                                (0.32)          (0.27)        (0.30)
                                                                                   -------       ---------     ---------

Net income (loss) per common share                                                  (17.75)           5.53          3.31
                                                                                   =======       =========     =========

Weighted average common shares                                                     937,035       1,237,916     1,237,916
                                                                                   =======       =========     =========
</TABLE>





        See notes to consolidated financial statements.



                                      F-4
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                CONSOLIDATED STATEMENTS OF EQUITY FOR THE PERIOD
                      JANUARY 1, 2002 TO OCTOBER 29, 2002
      AND THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (GOING CONCERN BASIS)


<TABLE>
<CAPTION>
                                                 PARTNERS' EQUITY                                  STOCKHOLDERS' EQUITY
                                                 ----------------                                  --------------------
                                              GENERAL        LIMITED                     ADDITIONAL     TREASURY       RETAINED
                                             PARTNERS       PARTNERS     COMMON STOCK     CAPITAL         STOCK        EARNINGS
                                             --------       --------     ------------     -------         -----        --------
<S>                                         <C>           <C>             <C>            <C>          <C>             <C>
       Balance, January 1, 2000             $ 3,059,560   $ 58,112,718    $         -    $         -             -    $         -


       Net income                               205,164      3,898,112              -              -             -              -
                                            -----------   ------------   ------------   ------------  ------------    -----------

       Balance, December 31, 2000             3,264,724     62,010,830              -              -             -              -

       Net income through April 17, 2001         51,439      1,015,345              -              -             -              -

       Conversion of Partnership to REIT     (3,316,163)   (63,026,175)        12,379     66,329,959             -              -

       Net income after conversion                    -             -               -              -             -      5,783,367

       Distributions ($2.11 per share)                -             -               -              -             -     (2,612,003)
                                            -----------   ------------   ------------   ------------  ------------    -----------
       Balance, December 31, 2001                     -             -         12,379      66,329,959             -      3,171,364

       Net loss                                       -              -              -              -             -    (23,783,001)

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

       Dividends paid-Preferred                       -              -              -              -             -        (32,146)
                                            -----------   ------------   ------------   ------------  ------------    -----------
       Balance, October 29, 2002            $         -    $         -    $    12,379   $ 66,329,959  $(17,866,603)  $(20,643,783)
                                            ===========   ============   ============   ============  ============    ===========


<CAPTION>



                                                       TOTAL
                                                       -----
<S>                                                   <C>
       Balance, January 1, 2000                       $  61,172,278


       Net income                                         4,103,276
                                                      -------------

       Balance, December 31, 2000                        65,275,554

       Net income through April 17, 2001                  1,066,784

       Conversion of Partnership to REIT                          -

       Net income after conversion                        5,783,367

       Distributions ($2.11 per share)                   (2,612,003)
                                                      -------------
       Balance, December 31, 2001                        69,513,702

       Net loss                                         (23,783,001)

       Purchase of treasury stock                       (17,866,603)

       Dividends paid-Preferred                             (32,146)
                                                      -------------
       Balance, October 29, 2002                      $  27,831,952
                                                      =============
</TABLE>



        See notes to consolidated financial statements.


                                      F-5

<PAGE>



                         SHELBOURNE PROPERTIES II, INC.


     CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS OCTOBER 30, 2002
TO DECEMBER 31, 2002 (LIQUIDATION BASIS) AND JANUARY 1, 2002 TO OCTOBER 29, 2002
    AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (GOING CONCERN BASIS)


<TABLE>
<CAPTION>
                                                             PERIOD       PERIOD 1/1/02
                                                          10/30/02 TO      TO 10/29/02
                                                           12/31/2002        (GOING
                                                          (LIQUIDATION       CONCERN           FOR THE YEARS ENDED DECEMBER 31,
                                                              BASIS)          BASIS)          2002           2001           2000
                                                          ------------        ------        --------       --------       --------
<S>                                                      <C>             <C>             <C>            <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)                                         $ 7,209,967     $(23,783,001)   $(16,573,034)  $  6,850,151   $ 4,103,276
Adjustments to reconcile net income (loss) to net
 cash provided by (used in) operating activities:
   Depreciation and amortization                                    -        1,249,356       1,249,356      2,096,134     2,003,742
   Straight line adjustment for stepped lease rentals               -           15,567          15,567        243,063       (89,564)
   Change in bad debt reserve                                  38,139          (34,146)          3,993              -             -
   Purchase of advisory agreement                                   -       23,049,398      23,049,398              -             -
   Distributions in excess of income from joint
     ventures                                                 768,829        6,209,542       6,978,371              -             -
   Gain on sale                                            (6,760,285)               -      (6,760,285)    (3,207,975)            -
   Loss from discontinued operations                                -          304,336         304,336        338,031       374,792

Changes in operating assets and liabilities:
   Accounts payable and accrued expenses                      168,989         (113,213)         55,776       (165,410)     (274,977)
   Receivables                                                (52,560)          77,159          24,599        (46,207)      (52,052)
   Due to affiliates                                                -                -               -       (512,473)       45,945
   Other assets                                                62,881       (1,342,102)     (1,279,221)      (509,974)     (365,206)
                                                          -----------     ------------    ------------   ------------   -----------
   Net cash provided by operating activities                1,435,960        5,632,896       7,068,856      5,085,340     5,745,956
                                                          -----------     ------------    ------------   ------------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES-
Discontinued operations                                             -         (458,584)       (458,584)      (242,880)     (360,408)
Improvements to real estate                                   (50,063)        (478,907)       (528,970)    (1,705,797)     (453,951)
Proceeds from sale of Commonwealth                                  -                -               -      7,879,568             -
Proceeds from sale of Sutton Square                        16,456,646                -      16,456,646              -             -
                                                          -----------     ------------    ------------   ------------   -----------
Net cash provided by (used in) investing activities        16,406,583         (937,491)     15,469,092      5,930,891      (814,359)

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock                                          -      (17,866,603)    (17,866,603)             -             -
Proceeds from note payable                                          -       29,779,343      29,779,343              -             -
Paydown of note payable                                    (6,000,000)               -      (6,000,000)             -             -
Dividends - Common and Preferred                          (12,591,404)               -     (12,591,404)    (2,612,003)            -
Payoff of note payable                                              -      (22,034,250)    (22,034,250)             -             -
                                                          -----------     ------------    ------------   ------------   -----------
Net cash used in financing activities                     (18,591,404)     (10,121,510)    (28,712,914)    (2,612,003)            -
                                                          -----------     ------------    ------------   ------------   -----------
(Decrease) increase in cash and cash equivalents             (748,861)      (5,426,105)     (6,174,966)     8,404,228     4,931,597
                                                          -----------     ------------    ------------   ------------   -----------
Cash and cash equivalents, beginning of period             11,647,356       26,011,761      26,011,761     17,607,533    12,675,936
Cash and cash equivalents related to investments in
 joint ventures                                                     -       (8,938,300)     (8,938,300)             -             -
                                                          -----------     ------------    ------------   ------------   -----------
Adjusted cash and cash equivalents, beginning of period    11,647,356       17,073,461      17,073,461     17,607,533    12,675,936
                                                          -----------     ------------    ------------   ------------   -----------
Cash and cash equivalents, end of period                  $10,898,495     $ 11,647,356    $ 10,898,495   $ 26,011,761   $17,607,533
                                                          ===========     ============    ============   ============   ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest                                    $   193,172     $    851,669    $  1,044,841   $          -   $         -
                                                          ===========     ============    ============   ============   ===========
</TABLE>

        See notes to consolidated financial statements.



                                      F-6

<PAGE>



                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION

         Shelbourne Properties II, Inc., a Delaware corporation (the
         "Corporation") was formed on April 17, 2001. The Corporation's
         wholly-owned operating partnership, Shelbourne Properties II L.P., a
         Delaware limited partnership (the "Operating Partnership", and together
         with the Corporation, the "Company"), holds directly and indirectly all
         of the Company's properties. Pursuant to a merger that was consummated
         on April 17, 2001, the Operating Partnership became the successor by
         merger High Equity Partners, Series 86 (the "Predecessor Partnership").

         In August 2002, the Board of Directors adopted a Plan of Liquidation
         (the "Plan of Liquidation") and directed that the Plan of Liquidation
         be submitted to the Corporation's stockholders for approval. The
         stockholders of the Corporation approved the Plan of Liquidation at a
         Special Meeting of Stockholders held on October 29, 2002. The Plan of
         Liquidation contemplates the orderly sale of all of the Corporation's
         assets for cash or such other form of consideration as may be
         conveniently distributed to the Corporation's stockholders and the
         payment of (or provision for) the Corporation's liabilities and
         expenses, as well as the establishment of a reserve to fund the
         Corporation's contingent liabilities. The Plan of Liquidation gives the
         Corporation's Board of Directors the power to sell any and all of the
         assets of the Corporation without further approval by the stockholders.

         The Corporation currently expects that the liquidation will be
         substantially completed not later than October 29, 2004, although there
         can be no assurance in this regard. As a result, it is currently
         anticipated that not later than October 29, 2004 any then remaining
         assets and liabilities will be transferred to a liquidating trust. With
         the transfer to a liquidating trust, the liquidation will be completed
         for federal and state income tax purposes, although one or more
         distributions of the remaining cash and net proceeds from future asset
         sales may occur subsequent to the establishment of a liquidating trust.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION

         As a result of the adoption of the Plan of Liquidation and its approval
         by the Corporation's stockholders, the Corporation adopted the
         liquidation basis of accounting for the period subsequent to October
         29, 2002. Under the liquidation basis of accounting, assets are stated
         at their estimated net realizable value. Liabilities including the
         reserves for estimated costs during the period of liquidation are
         stated at their anticipated settlement amounts. The valuation of
         investments in joint ventures and real estate held for sale is based
         upon current contracts, estimates as determined by independent
         appraisals or other indications of sales values. The valuations for
         other assets and liabilities under the liquidation basis of accounting
         are based on management's estimates as of December 31, 2002. The actual
         values realized for assets and settlement of liabilities may differ
         materially from the amounts estimated.

         The accompanying consolidated financial statements include the accounts
         of the Corporation and its wholly owned subsidiaries, the Operating
         Partnership and Shelbourne Properties II GP LLC, the general partner of
         the Operating Partnership and a wholly owned subsidiary of the
         Corporation. Intercompany accounts and transactions have been
         eliminated in consolidation.

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

         USE OF ESTIMATES

         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


                                      F-7
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)

         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 EQUIVALENTS

         The Corporation considers all short-term investments that have original
         maturities of three months or less from the date of acquisition to be
         cash equivalents.

         ACCOUNTS RECEIVABLE

         Accounts Receivable are stated net of allowance for doubtful accounts
         of $92,693 and $105,200 as of December 31, 2002 and December 31, 2001,
         respectively.

         REVENUE RECOGNITION

         Prior to the adoption of the liquidation basis of accounting, base
         rents were recognized on a straight-line basis over the terms of the
         related leases. Subsequent to the adoption of the liquidation basis of
         accounting, the amount of the previously deferred straight-line rent
         was grouped with real estate for purposes of comparing such balances to
         their net realizable value and, if such amounts when aggregated with
         real estate exceeded the net realizable value, the amount of the excess
         was included in the write-off of other assets as part of the adjustment
         to the liquidation basis of accounting. At October 29, 2002
         approximately $299,737 of deferred straight-line rent was included in
         other assets that was subsequently grouped with real estate with no
         write-off required.

         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," and the Emerging Issues
         Task 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 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 are owned in joint ventures with Shelbourne
         Properties I L.P. and/or Shelbourne Properties III L.P. Prior to April
         30, 2002, the Corporation owned an undivided interest in the assets
         owned by these joint ventures and was severally liable for indebtedness
         it incurred in connection with its ownership interest in those
         properties. Therefore, for periods prior to April 30, 2002, the
         Corporation's consolidated financial statements had presented the
         assets, liabilities, revenues and expenses of the joint ventures on a
         pro rata basis in accordance with the Corporation's percentage of
         ownership.

         After April 30, 2002, as a result of the Operating Partnership's
         incurring debt in connection with entering into the Credit Facility
         discussed in Note 6, the Corporation was no longer allowed to account
         for its investments in joint ventures on a pro-rata consolidation basis
         in accordance with its percentage of ownership but must instead utilize
         the equity method of accounting. Accordingly, the Corporation's
         consolidated balance sheet at December 31, 2002 and the Corporation's
         consolidated statements of operations commencing January 1, 2002
         reflect the equity method of accounting.

         If the change to equity accounting had been reflected upon the December
         31, 2001 consolidated balance sheet, the changes would have been to
         reduce real estate by $16.3 million, cash and cash equivalents by


                                      F-8
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)

         $8.9 million, receivables by $0.1 million, accounts payable and accrued
         expenses by $0.5 million and to increase other assets by $6.1 million
         and investment in joint ventures by $18.7 million.

         REAL ESTATE

         Subsequent to the adoption of the liquidation basis of accounting, real
         estate assets were adjusted to their net realizable value and
         classified as real estate held for sale. Additionally, the Corporation
         suspended recording any further depreciation expense.

         Prior to the adoption of the liquidation basis of accounting, real
         estate was carried at cost, net of adjustments for impairment. The
         Corporation evaluated the recoverability of the net carrying value of
         its real estate and related assets at least annually, and more often if
         circumstances dictated. If there was an indication that the carrying
         amount of a property might not be recoverable, the Corporation prepared
         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. Impairment write-downs recorded by the
         Predecessor Partnership did not affect the tax basis of the assets and
         were not included in the determination of taxable income or loss.

         Repairs and maintenance are charged to expense as incurred.
         Replacements and betterments are capitalized.

         REAL  ESTATE  HELD  FOR  SALE  AND   ADJUSTMENTS  TO
         LIQUIDATION BASIS OF ACCOUNTING

         On October 30, 2002, in accordance with the liquidation basis of
         accounting, assets were adjusted to estimated net realizable value and
         liabilities were adjusted to estimated settlement amounts, including
         estimated costs associated with carrying out the liquidation. The
         valuation of investments in joint ventures and real estate held for
         sale is based on current contracts, estimates as determined by
         independent appraisals or other indications of sales value, net of
         estimated selling costs and capital expenditures of approximately
         $4,257,000 anticipated during the liquidation period. The valuations of
         other assets and liabilities are based on management's estimates as of
         December 31, 2002. The actual values realized for assets and settlement
         of liabilities may differ materially from amounts estimated. The net
         adjustment at October 30, 2002 required to convert from the going
         concern (historical cost) basis to the liquidation basis of accounting
         totaled $2,743,237, which is included in the consolidated statement of
         changes in net assets (liquidation basis) for the period October 30,
         2002 to December 31, 2002. Significant increases (decreases) in the
         carrying value of net assets are summarized as follows:

<TABLE>
<CAPTION>
<S>      <C>
         Increase to reflect estimated net realizable values of certain real estate properties        $   8,628,174
         Deferral of appreciated gain and incentive fee on real estate properties                        (8,628,174)
         Write-off of other assets                                                                         (250,638)
         Increase to reflect net realizable value of investments in joint ventures                       41,979,786
         Deferral of appreciated gain and incentive fee on investments in joint ventures                (41,979,786)
         Reserve for additional costs associated with liquidation                                        (1,600,000)
         Write-off of deferred debt costs                                                                  (892,599)
                                                                                                     ----------------
         Adjustment to reflect the change to liquidation basis of accounting                          $  (2,743,237)
                                                                                                     ================
</TABLE>

         Adjusting assets to estimated net realizable value resulted in the
         adjustment in value of certain real estate properties. The anticipated
         gains associated with the adjustment in value of these real estate
         properties have been deferred until such time as a sale occurs. The
         write-down of other assets included amounts for unamortized lease
         commissions and straight-line rent which resulted in a write-off of
         $250,638.

         On December 20, 2002, the Operating Partnership sold the Sutton Square
         Shopping Center for $16,750,000, recognizing $6,760,285 of deferred
         gain.


                                      F-9
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)

         TREASURY STOCK

         Treasury stock was stated at cost.

         DEPRECIATION AND AMORTIZATION

         Upon the adoption of the liquidation basis of accounting, deferred loan
         fees of $892,599 were written off to reflect the balances at their net
         realizable value. Direct lease costs associated with the real estate
         were grouped with real estate for purposes of comparing carrying
         amounts to their net realizable value, and if such amounts when
         aggregated with real estate exceeded the net realizable value, these
         costs were written off.

         Prior to the Corporation adopting the liquidation basis of accounting,
         depreciation was computed using the straight-line method over the
         useful life of the property, which is estimated to be 40 years. The
         cost of properties represented the initial cost of the properties to
         the Company plus acquisition and closing costs less impairment
         adjustments. Tenant improvements, leasing costs and deferred loan fees
         were amortized over the applicable lease term.

         FINANCIAL INSTRUMENTS

         The carrying values reflected in the consolidated statements of net
         assets at December 31, 2002 reasonably approximate the fair values for
         cash and cash equivalents, other assets, receivables, accounts payable,
         accrued expenses and note payable. Additionally, as the Corporation
         currently expects that the liquidation will be substantially completed
         not later than October 2004, the net realizable value of notes payable
         approximates the fair value. In making such assessment, the Corporation
         has utilized discounted cash flow analyses, estimates, and quoted
         market prices as deemed appropriate.

         RESERVE  FOR  ESTIMATED  COSTS  DURING  THE PERIOD OF
         LIQUIDATION

         Under liquidation accounting, the Corporation is required to estimate
         and accrue the costs associated with executing the Plan of Liquidation.
         These amounts can vary significantly due to, among other things, the
         timing and realized proceeds from property sales, the costs of
         retaining agents and trustees to oversee the liquidation, the costs of
         insurance, the timing and amounts associated with discharging known and
         contingent liabilities and the costs associated with cessation of the
         Company's operations. These costs are estimates and are expected to be
         paid out over the liquidation period. Such costs do not include costs
         incurred in connection with ordinary operations.

         INCOME TAXES

         The Corporation is operating with the intention of qualifying as a real
         estate investment trust ("REIT") under Sections 856-860 of the Internal
         Revenue Code of 1986 as amended. Under those sections, a REIT which
         pays at least 90% of its ordinary taxable income as a dividend to its
         stockholders each year and which meets certain other conditions will
         not be taxed on that portion of its taxable income which is distributed
         to its stockholders.



                                      F-10
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)

         The Corporation paid to stockholders an amount greater than its taxable
         income; therefore, no provision for federal income taxes is required.
         For federal income tax purposes, the cash dividends distributed to
         stockholders are characterized as follows:

                                                2002              2001
                                                ----              ----
         Liquidating Distribution               100%                -
         Ordinary Income                          -                54%
         Return of Capital                        -                46%
                                                ----              ----
                  Total                         100%              100%

         Prior to the conversion to a REIT, no provision had been made for
         federal, state and local income taxes since they were the personal
         responsibility of the partners. A final tax return and K-1's were
         issued for the short tax year ended 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,
         impairment of long-lived assets and the initial write off of
         organization costs for book purposes, the tax basis of the
         Corporation's net assets exceeds its book value by $61,206,115 and
         $38,594,489 at December 31, 2002 and 2001, respectively.

         AMOUNTS PER SHARE

         Basic earnings (loss) per share is computed based on weighted average
         common shares outstanding during the period. The number of limited
         partnership units outstanding prior to the conversion was restated to
         reflect the effects of the conversion.

         DISTRIBUTIONS PER SHARE

         On November 5, 2002, the Board of Directors declared a dividend of
         $14.00 per share. The dividend was subsequently paid on November 21,
         2002 to all stockholders of record as of November 15, 2002.

         On December 7, 2001 the Board of Directors declared a dividend of $2.11
         per share. The dividend was subsequently paid on December 21, 2001 to
         all stockholders of record as of December 17, 2001.

         RECENTLY ISSUED ACCOUNTING STANDARDS

         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 did not have a material affect on the financial
         statements.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
         Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
         Technical Corrections," which updates, clarifies and simplifies
         existing accounting pronouncements will be effective for fiscal years
         beginning after May 15, 2002. This statement will not have a material
         effect on the Corporation's financial statements.

         In November 2002, the FASB issued Interpretation No. 45, Guarantors'
         Accounting and Disclosure Requirements for Guarantees, Including
         Indirect Guarantees of Indebtedness of Others. The Interpretation
         elaborates on the disclosures to be made by a guarantor in its
         financial statements about its obligations under certain guarantees
         that it has issued. It also clarifies that a guarantor is required to
         recognize, at the inception of a guarantee, a liability for the fair
         value of the obligation undertaken in issuing the guarantee. This
         Interpretation does not prescribe a specific approach for subsequently
         measuring the guarantor's recognized liability over the term of the
         related guarantee. The disclosure provisions of this Interpretation



                                      F-11
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.       SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES (CONTINUED)

         are effective for the Corporation's December 31, 2002 financial
         statements. The initial recognition and initial measurement provisions
         of this Interpretation are applicable on a prospective basis to
         guarantees issued or modified after December 31, 2002. This
         Interpretation had no effect on the Corporation's financial statements.

         In January 2003, the FASB issued Interpretation No. 46, Consolidation
         of Variable Interest Entities. This Interpretation clarifies the
         application of existing accounting pronouncements to certain entities
         in which equity investors do not have the characteristics of a
         controlling financial interest or do not have sufficient equity at risk
         for the entity to finance its activities without additional
         subordinated financial support from other parties. The provisions of
         the Interpretation will be immediately effective for all variable
         interest in variable interest entities created after January 31, 2003,
         and the Corporation will need to apply its provisions to any existing
         variable interest in variable interest entities by no later than
         December 21, 2004. The Corporation does not expect that this will have
         an impact on the Corporation's consolidated financial statements.

3.       CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES

         During the years ended December 31, 2000, 2001 and 2002, as in prior
         years, property management services (the "Property Management
         Services") and asset management services, investor relation services
         and accounting services (the "Asset Management Services") have been
         provided to (i) the Predecessor Partnership by affiliates of the
         general partners of the Predecessor Partnership's (the "Predecessor
         General Partners") and (ii) the Company by affiliates of the Company.

         ASSET MANAGEMENT SERVICES

         Pursuant to the terms of the Predecessor Partnership's partnership
         agreement and, after April 17, 2001, the terms of the Advisory
         Agreement (the "Advisory Agreement") between the Corporation, the
         Operating Partnership and Shelbourne Management LLC ("Shelbourne
         Management"), a wholly-owned subsidiary of Presidio Capital Investment
         Company, LLC ("PCIC"), the Corporation was obligated to pay for Asset
         Management Services 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. In addition, the Corporation was obligated to
         (i) pay $200,000 for non-accountable expenses and (ii) reimburse the
         Predecessor General Partners or the Shelbourne Management, as the case
         may be, for expenses incurred in connection with the performance of its
         services. Effective February 14, 2002, in connection with the
         Transaction (as described below), the fee for providing Asset
         Management Services was reduced to $333,333 per annum. Effective
         October 1, 2002, as provided for in the Plan of Liquidation, the fee
         for providing Asset Management Services was further reduced to $200,000
         per annum.

         Asset Management Services were provided to the Corporation during the
         years ended December 31, 2000, 2001 and 2002 as follows:

         o    During the year ended December 31, 2000 and from January 1, 2001
              to April 17, 2001, by Resources Supervisory Management Corp.
              ("Resources Supervisory"), an affiliate of the Predecessor General
              Partners.

         o    Effective April 17, 2001 through February 13, 2002, pursuant to
              the terms of the Advisory Agreement, by Shelbourne Management.

         o    Effective February 14, 2002 through September 30, 2002, by PCIC.

         o    Effective October 1, 2002, as contemplated by the Plan of
              Liquidation, by Kestrel.

         In each case, at the time that Resources Supervisory, Shelbourne
         Management, PCIC and Kestrel provided the Asset Management Services,
         such entities were affiliates of the Corporation.


                                      F-12
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.       CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

         PROPERTY MANAGEMENT SERVICES

         As with the Asset Management Services, the Predecessor Partnership and
         the Operating Partnership have contracted with affiliates to provide
         Property Management Services pursuant to agreements that provide for a
         fee of up to 6% of property revenue. For the period from January 1,
         2000 through September 30, 2000, Resources Supervisory provided the
         Property Management Services. Effective October 1, 2000, Kestrel began
         providing Property Management Services.

         The following table summarizes the amounts paid to affiliates for Asset
         Management Fees, Property Management Fees and expense reimbursements
         for the twelve-month periods ended December 31, 2002, 2001 and 2000.

         YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                             Resources       Shelbourne
                                            Supervisory      Management          PCIC           Kestrel
                                            -----------      ----------          ----           -------
<S>                                         <C>              <C>                <C>            <C>
         Expense Reimbursement              $  200,000       $     -            $     -        $       -
         Asset Management Fee                1,171,252             -                  -                -
         Transition Management Fee                   -             -                  -                -
         Property Management Fees           $  254,820       $     -            $     -        $  95,844


         YEAR ENDED DECEMBER 31, 2001

                                             Resources       Shelbourne
                                            Supervisory      Management          PCIC           Kestrel
                                            -----------      ----------          ----           -------
         Expense Reimbursement              $   59,444       $  140,556         $     -        $       -
         Asset Management Fee                  394,808          947,194               -                -
         Transition Management Fee                   -                -               -                -
         Property Management Fees           $        -       $        -         $     -        $ 369,139


         YEAR ENDED DECEMBER 31, 2002

                                             Resources       Shelbourne
                                            Supervisory      Management          PCIC           Kestrel
                                            -----------      ----------          ----           -------
         Expense Reimbursement               $     -          $  25,000         $     -        $       -
         Asset Management Fee                      -            157,582               -           50,000
         Transition Management Fee                 -                  -         208,250                -
         Property Management Fees            $     -          $       -         $     -        $ 366,524
</TABLE>


         ALLOCATION OF NET INCOME OF PREDECESSOR PARTNERSHIP/DIVIDENDS
         BY THE CORPORATION

         Prior to April 17, 2001, the Predecessor General Partners were
         allocated 5% of the net income of the Predecessor Partnership that
         amounted to $205,164 in 2000.



                                      F-13
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.       CONFLICTS OF INTEREST AND  TRANSACTIONS  WITH RELATED (CONTINUED)

         Dividends payable to affiliates for the years ended December 31, 2001
         and 2002 on account of shares of common stock owned are as follows:

                                                      Year Ended December 31,
                                                      -----------------------
                                                         2002          2001
                                                       --------      -------

         Presidio Capital Investment Company LLC      $        -     $ 723,992
         HX Investors, L.P.                            5,194,168        86,299

         THE TRANSACTION

         On February 14, 2002, the Corporation, Shelbourne Properties I, Inc.
         and Shelbourne Properties III, Inc. (the "Companies") consummated a
         transaction (the "Transaction") whereby the Corporation purchased the
         343,124 shares of the Corporation's common stock held by subsidiaries
         of PCIC and the Advisory Agreement was contributed to the Operating
         Partnership. Pursuant to the Transaction, the Corporation paid PCIC
         $17,866,603 in cash and the Operating Partnership issued preferred
         partnership interests with an aggregate liquidation preference of
         $1,015,148 and a note in the amount of $22,034,250. This note was
         satisfied in April 2002 from the proceeds of the Credit Facility.

4.       REAL ESTATE

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                 -------------------------------------------------
                                                        2002                         2001
                                                 LIQUIDATION BASIS            GOING CONCERN BASIS
                                                 ----------------------    -----------------------
<S>                                                 <C>                          <C>
             Real estate held for sale              $17,091,316                  $     -
             Land                                        -                         9,636,715
             Buildings and improvements                  -                        57,034,945
                                                 ----------------------    -----------------------
                                                     17,091,316                   66,671,660
             Less:  Accumulated depreciation             -                       (25,344,619)
                                                 ----------------------    -----------------------
                                                    $17,091,316                  $41,327,041
                                                 ======================    =======================
</TABLE>


         On December 6, 2001, Commonwealth Industrial Park was sold for
         $8,200,000. After all the expenses, prorations, adjustments, and
         settlement charges, the Partnership received $7,879,568 in net
         proceeds. The Corporation realized a gain on sale of $3,207,975. The
         REIT realized a tax loss on sale of $1,421,228.

         On December 20, 2002, the Corporation sold Sutton Square Shopping
         Center for $16,750,000. The Corporation received $10,393,025 in net
         proceeds after the required pay down of the note payable described in
         Note 6 of $6,000,000, expenses, and settlement charges. The Corporation
         realized an accounting gain on sale of approximately $6,760,000 and a
         tax gain of approximately $7,373,000.

         On February 28, 2003, Melrose Crossing I, was sold to an unaffiliated
         third party for a gross purchase price of $3,247,200. Net proceeds,
         after closing costs and adjustments, from the sale were approximately
         $2,900,000. Operations of Melrose Crossing I have been reclassified as
         discontinued operations on the statement of operations prior to October
         29, 2002.



                                      F-14
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.       REAL ESTATE (CONTINUED)

         The following is a summary of the Corporation's share of anticipated
         future receipts under noncancellable leases for real estate held for
         sale:

<TABLE>
<CAPTION>
                       2003          2004           2005          2006          2007        THEREAFTER     TOTAL
                       ----          ----           ----          ----          ----        ----------     -----
<S>                 <C>           <C>           <C>            <C>           <C>              <C>        <C>
        Total       $2,252,045    $1,710,865    $1,556,049     $1,393,640    $1,010,734       $99,814    $8,023,147
                    ==========    ==========    ==========     ==========    ==========       =======    ==========
</TABLE>

         At December 31, 2002, all wholly owned properties were except for
         Melrose Crossing were pledged as collateral for the credit facility
         described in Note 6.

5.       INVESTMENT IN JOINT VENTURES

         The Corporation invests in four joint ventures, (568 Broadway, Century
         Park, Seattle Landmark and Tri-Columbus) which were historically
         accounted for on a pro-rata consolidation basis.

         Effective January 1, 2002, as a result of the Corporation incurring
         debt during 2002, the Corporation was no longer permitted under
         generally accepted accounting principles to account for its investments
         in joint ventures on a pro-rata consolidation basis. The Corporation
         must instead utilize the equity method of accounting. Accordingly, the
         Corporation's consolidated balance sheet at December 31, 2002 and the
         Corporation's consolidated statement of operations commencing January
         1, 2002 reflect the equity method of accounting.

         On October 30, 2002, the Corporation adopted the liquidation basis of
         accounting. Subsequent to the adoption of the liquidation basis of
         accounting, the investments in joint ventures were adjusted to their
         net realizable value based on current contracts, estimates as
         determined by independent appraisals or other indications of sales
         value.

         On October 31, 2002, 568 Broadway Joint Venture, a joint venture in
         which the Corporation indirectly held a 38.925% interest, entered into
         a contract to sell its property located at 568 Broadway, New York, New
         York for a gross price of $87,500,000. At December 31, 2002, a
         non-refundable deposit of $7,000,000 was being held by the joint
         venture until the sale of the property was completed. The property was
         sold on February 28, 2003. In connection with the sale, the buyer
         assumed a $10,000,000 loan obligation secured by the property and paid
         the balance of the remaining purchase price in cash.

         At December 31, 2002, all the investments in joint ventures were
         pledged as collateral for the note payable described in Note 6.

6.       CREDIT FACILITY

         On May 1, 2002, the operating partnerships of the Companies and certain
         of the operating partnerships' subsidiaries entered into a $75,000,000
         revolving credit facility with Bayerische Hypo-Und Vereinsbank AG, New
         York Branch, as agent for itself and other lenders (referred to as the
         "Credit Facility" or the "Note Payable"). The Credit Facility was
         satisfied on February 20, 2003. (See note 9 below.) The Credit Facility
         had a term of three years and was prepayable in whole or in part at any
         time without penalty or premium. The Companies initially borrowed
         $73,330,073 under the Credit Facility. The Company's share of the
         proceeds amounted to $29,779,343 of which $22,034,250 was used to repay
         the note issued in the Transaction, $215,768 to pay associated accrued
         interest and $840,624 to pay costs associated with the Credit Facility.
         The excess proceeds of approximately $6,688,701 were deposited into the
         Company's operating cash account. The Companies have the right, from
         time to time, to elect an annual interest rate equal to (i) LIBOR plus
         1.5% for the portion of the Note Payable secured by mortgages on
         certain real properties (Conversion rate), (ii) LIBOR plus 2.5% for the
         portion of the Note Payable secured by a pledge


                                      F-15
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.       CREDIT FACILITY (CONTINUED)

         of partnership interests (LIBOR rate) or (iii) the greater of (a)
         agent's prime rate or (b) the federal funds rate plus 1.5% (Base rate).
         The Companies are required to pay the lenders, from time to time, a
         commitment fee equal to .25% of the unborrowed portion of the Credit
         Facility. Such fee paid during the term of the Credit Facility was
         $1,392. Interest was payable monthly in arrears. The average interest
         rate at December 31, 2002 was approximately 3.8%.

         The Credit Facility was secured by (i) a pledge by the operating
         partnerships of their membership interest in their wholly-owned
         subsidiaries that hold their interests in joint ventures with the other
         Companies and (ii) mortgages on certain real properties owned directly
         or indirectly by the operating partnerships. All of the properties of
         the Company were security for the Credit Facility, except for its two
         real properties located in Illinois.

         Under the terms of the Credit Facility, the Companies could sell the
         pledged property only if certain conditions were met. If properties
         were sold, the Companies were required to pay a fixed release price to
         the lender except in the case of core properties, which included, with
         respect to properties in which the Company held an interest, as 568
         Broadway, Century Park and Seattle Tower, in which case the Companies
         were required to pay the lender the greater of the net proceeds or the
         release amount. On December 20, 2002, in connection with the Company
         selling Sutton Square, the Credit Facility was paid down $6,000,000 out
         of sales proceeds. In addition, the Companies were required to maintain
         certain debt yield maintenance ratios and comply with restrictions
         relating to engaging in certain equity financings, business
         combinations and other transactions that might result in a change of
         control (as defined under the Credit Facility).

         The Companies were jointly and severally liable under the Credit
         Facility but had entered into a Contribution and Cross-Indemnification
         Agreement.

7.       CLASS B PARTNERSHIP INTERESTS

         Under the Plan of Liquidation which has been approved by the
         Corporation's Board of Directors and stockholders, HX Investors is
         entitled to receive an incentive payment of 15% of (i) the cash and
         other proceeds generated from operating the assets and properties of
         the Company, plus the aggregate fair value of all consideration
         received from the disposal of the assets and properties of the Company
         less (ii) the sum of all direct costs incurred in connection with such
         disposal (the "Incentive Fee"), after the payment of a priority return
         of approximately $66.25 per share to stockholders of the Corporation
         plus interest thereon compounded quarterly at 6% per annum (the
         "Priority Return"). On August 19, 2002, the Board of Directors of the
         Corporation authorized the issuance by the Operating Partnership of,
         and the Operating Partnership issued, Class B Units to HX Investors
         which Class B Units provide distribution rights to HX Investors
         consistent with the intent and financial terms of the Incentive Fee.
         The Class B Units entitle the holder thereof to receive distributions
         equal to 15% of gross proceeds after the Priority Return. After giving
         effect to dividends paid from August 19, 2002 to March 24, 2003, the
         remaining unpaid per share Priority Return is $9.66.

8.       CLASS A 5% PREFERRED PARTNERSHIP INTERESTS

         In connection with the Transaction, the Operating Partnership issued to
         Shelbourne Management 1,015.148 Class A 5% Preferred Partnership Units
         (the "Class A Units"). The Class A Units entitled the holder to a
         quarterly distribution equal to 1.25% of the aggregate liquidation
         preference of the Class A Units ($1,015,148). In addition, upon the
         liquidation of the Operating Partnership, each Class A Unit was
         entitled to a liquidation preference of $1,000 per unit. The Class A
         Units are not convertible into common units of the Operating
         Partnership or shares in the Corporation and the holders of the Class A
         Units do not have voting rights except in limited circumstances.
         Although the holders of the Class A Units do not have redemption
         rights, pursuant to the terms of the Purchase and Contribution
         Agreement entered into in connection with the Transaction, Shelbourne
         Management had the right to cause the Operating Partnership to
         reacquire the Class A Units upon the occurrence of certain events
         including, without limitation, if the


                                      F-16
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.       CLASS A 5% PREFERRED PARTNERSHIP INTERESTS (CONTINUED)

         aggregate assets of the Companies is below approximately $75 million or
         the outstanding debt under which the Companies are obligated is less
         than $55 million, for a purchase price equal to the liquidation
         preference plus an amount (the "Put Premium") which was equal to
         approximately $6,605,000 at December 31, 2002 and declines each
         February 13, May 13, August 13 and November 13 until it reaches zero on
         May 13, 2007. Subsequent to year end, the terms of the Class A Units
         were modified to eliminate the liquidation preference and limit the
         circumstances under which the holders of the Class A Units could cause
         the Operating Partnership to purchase the Class A Units at a premium.

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

9.       CHANGE IN CONTROL

         On July 1, 2002, the Companies entered into a settlement agreement with
         respect to certain outstanding litigation involving the Companies. In
         connection with the settlement, the Corporation entered into a stock
         purchase agreement (the "Stock Purchase Agreement") with HX Investors
         and Exeter Capital Corporation ("Exeter"), the general partner of HX
         Investors, pursuant to which HX Investors, the owner of approximately
         12% of the outstanding common stock of the Corporation, agreed to
         conduct a tender offer for up to an additional 30% of the Corporation's
         outstanding stock at a price per share of $62.00 (the "HX Investors
         Offer"). The tender offer commenced on July 5, 2002 following the
         filing of the required tender offer documents with the Securities and
         Exchange Commission by HX Investors.

         Pursuant to the Stock Purchase Agreement, the Board of Directors of the
         Corporation approved a plan of liquidation for the Corporation (the
         "Plan of Liquidation") and agreed to submit the Plan of Liquidation to
         its stockholders for approval. HX Investors agreed to vote all of its
         shares in favor of the Plan of Liquidation. Under the Plan of
         Liquidation, HX Investors was to receive an incentive payment of 25% of
         gross proceeds after the payment of a priority return of approximately
         $66.25 per share was made to the stockholders of the Corporation.

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

         Contemporaneous with filing its July 29, 2002 lawsuit, Longacre
         publicly announced that its related companies, together with outside
         investors, were prepared to initiate a competing tender offer for the
         same number of shares of common stock of the Corporation as were
         tendered for under the HX Investors Offer, at a price per share of
         $68.20. Over the course of the next several days, Longacre and HX
         Investors submitted competing proposals to the board of directors of
         the Corporation and made those proposals public. On August 4, 2002,
         Longacre notified the Corporation that it was no longer interested in
         proceeding with its proposed offer.

         On August 5, 2002, the Corporation entered into an amendment to the
         Stock Purchase Agreement. Pursuant to the terms of the amendment, the
         purchase price per share offered under the HX Investors Offer was
         increased from $62.00 to $73.85. The amendment also reduced the
         incentive payment payable to HX Investors under the Plan of Liquidation
         from 25% to 15% of gross proceeds after payment of the approximately
         $66.25 per share priority return to stockholders of the Corporation
         (the "Incentive Fee"), and included certain corporate governance
         provisions.



                                      F-17
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.       CHANGE IN CONTROL (CONTINUED)

         On August 16, 2002, the HX Investors offer expired and HX Investors
         acquired 268,444 shares representing 30% of the outstanding shares.

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

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

10.      SUBSEQUENT EVENTS


         On January 13, 2003, the Board of Directors declared a dividend of
         $12,974,484 ($14.50 per share). The dividend was paid on January 31,
         2003 to stockholders of record at the close of business on January 23,
         2003.

         On January 15, 2003, a joint venture owned by the Operating Partnership
         and the operating partnerships of Shelbourne Properties I, Inc. and
         Shelbourne Properties III, Inc. acquired from Realty Holdings of
         America, LLC, an unaffiliated third party, a 100% interest in an entity
         that owns 20 motel properties triple net leased to an affiliate of
         Accor SA. The cash purchase price, which was provided from working
         capital, was approximately $2,700,000, of which approximately $878,000,
         $1,096,000 and $726,000 was paid by Shelbourne Properties I, Inc., the
         Corporation and Shelbourne Properties III, Inc., respectively. The
         properties are also subject to existing mortgage indebtedness in the
         current principal amount of approximately $74,220,000.

         The Companies formed the joint venture and acquired the interest in the
         new properties in order to facilitate the disposition of the other
         properties of the Companies and the distribution to stockholders of the
         sales proceeds in accordance with the Plan of Liquidation. Prior to the
         acquisition of the Accor S.A. properties, he holder of the Class A
         Units had the right to cause the Operating Partnerships to purchase the
         Class A Units at a substantial premium to their liquidation value (at
         the time of the acquisition, a premium of approximately $6,605,000 in
         the case of the Operating Partnership and approximately $16,265,000 for
         all three operating partnerships) unless the operating partnerships
         maintained at least approximately $54,200,000 of aggregate indebtedness
         ($22,026,000 in the case of the Operating Partnership) guaranteed by
         the holder of the Class A Units and secured by assets having an
         aggregate market value of at least approximately $74,800,000
         ($30,400,000 in the case of the Operating Partnership). These
         requirements significantly impaired the ability of the Corporation to
         sell its properties and make distributions in accordance with the Plan
         of Liquidation. In lieu of these requirements, the operating
         partnerships agreed to acquire the Accor S.A. properties for the
         benefit of the holder of the Class A Units. The holder of the Class A
         Units does, however, continue to have the right, under certain limited
         circumstances which the Companies do not anticipate will occur, to
         cause the operating partnerships to purchase the Class A Units at the
         premium described above. The terms of the Class A Units were also
         modified to eliminate the $2,500,000 aggregate liquidation preferences
         to which the holder of the Class A Units was previously entitled
         ($1,015,148 in the case of the Operating Partnership).



                                      F-18
<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.      SUBSEQUENT EVENTS (CONTINUED)

         The holder of the Class A Units has the right to require the operating
         partnerships to acquire other properties for its benefit at an
         aggregate cash cost to the operating partnerships of $2,500,00
         (approximately $1,015,000 of which would be paid by the Operating
         Partnership). In that event the Accor S.A. properties would not be held
         for the benefit of the holder of the Class A Preferred Units and would
         be disposed of as part of the liquidation of the Companies.

         On January 31, 2003, the Hilliard, Ohio property was sold to an
         unaffiliated third party for a gross sale price of $4,600,000. After
         satisfying the debt encumbering the property, closing adjustments and
         other closing costs, net proceeds were approximately $2,063,500,
         $426,330 of which is attributable to the Company's interest.

         On February 20, 2003, in a transaction further designed to provide
         flexibility to the Companies in implementing their respective plans of
         liquidation and enable them to distribute 100% of the net proceeds from
         the sale of the New York, New York property, direct and indirect
         subsidiaries (the "Borrowers") of each of the Companies entered into a
         Loan Agreement with Fleet National Bank, as agent for itself and other
         lenders ("Fleet") pursuant to which the Borrowers obtained a
         $55,000,000 loan (the "Loan"). The Companies believed that by entering
         into a single loan transaction instead of three separate loan
         transactions they were able to obtain a larger loan at a more favorable
         interest rate. The Loan bears interest at the election of the Borrowers
         at a rate of either LIBOR plus 2.75% or Fleet's prime rate (but not
         less than 5%) plus 100 basis points. At present the Borrowers have
         elected that the Loan bear interest at LIBOR plus 2.75%. The Loan
         matures on February 19, 2006, subject to two one year extensions. The
         Loan is prepayable in whole or in part at anytime without penalty or
         premium.

         The Loan is secured by mortgages on certain real properties owned
         directly and indirectly by the operating partnerships. The Borrowers
         are jointly and severally liable for the repayment of the amounts due
         under the Loan and the Operating Partnership and the Corporation (as
         well as the other Operating Partnerships and Companies) have guaranteed
         the repayment of the Loan. A portion of the proceeds of the Loan
         proceeds, as well as the balance of a note in the amount of $10,000,000
         secured by the 568 Broadway property, were used to satisfy the Credit
         Facility that had a balance due of $37,417,249.

         On February 28, 2003, 568 Broadway Joint Venture, a partnership in
         which the Operating Partnership indirectly holds a 38.925% interest,
         sold its property located in New York, New York for a gross purchase
         price of $87,500,000. The property was sold to 568 Broadway Holding
         LLC. After assumption of the debt encumbering the property
         ($10,000,000), closing adjustments and other closing costs, net
         proceeds were approximately $73,000,000 approximately $28,415,250 of
         which was allocated to the Operating Partnership.

         Also on February 28, 2003, the Operating Partnership sold its
         properties located in Melrose Park, Illinois for a gross purchase price
         of $3,247,200. The property was sold to Antonio Francesco Ingraffia, as
         trustee of the Antonio Francesco Ingraffia Living Trust, under Trust
         Agreement dated April 29, 1993, as to an undivided 1/2 interest and
         Domenico Gambino, as trustee of the Domenico Gambino Living Trust,
         under Trust Agreement dated April 28, 1993, as to an undivided 1/2
         interest. After closing adjustments and other closing costs, net
         proceeds were approximately $2,900,000.

         On February 28, 2003, the Board of Directors declared a dividend of
         $30.00 per share payable on March 18, 2003 to holders of record on
         March 10, 2003. The dividend was made from proceeds from the Fleet Loan
         and sales of the New York, New York property and the Melrose Park,
         Illinois property, as well as cash reserves.



                                      F-19
<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.      QUARTERLY DATA

         The following table presents unaudited financial data by quarter for
         the years ended December 31, 2002 and 2001. Periods prior to October
         30, 2002 were on a going concern basis, liquidation basis was used
         thereafter.

<TABLE>
<CAPTION>
                                                                                   Income (Loss) Available to
                                                     Income (Loss) Available to      Common Stockholders Per
                                Total Revenues           Common Stockholders                  Share
                              --------------------- ------------------------------ ----------------------------
<S>                               <C>                         <C>                         <C>
         Year 2002 Total          $4,773,826                   $(16,637,348)                 ($14.50)
         4th Quarter 2002          1,205,150                      7,431,805                     8.31
         3rd Quarter 2002          1,123,912                        216,821                     0.24
         2nd Quarter 2002          1,244,039                     (1,506,221)                   (1.68)
         1st Quarter 2002          1,200,725                    (22,779,753)                  (21.37)

         Year 2001 Total         $11,569,278                    $ 6,850,151                   $ 5.53
         4th Quarter 2001          2,738,465                      4,000,908                     3.23
         3rd Quarter 2001          2,924,694                      1,024,223                     0.83
         2nd Quarter 2001          2,921,797                        932,344                     0.75
         1st Quarter 2001          2,984,322                        892,676                     0.72
</TABLE>




                                      F-20