UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2001
                                       or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the transition period from____________ to
      ____________.

                         Commission File Number: 0-15753

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


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

     c/o First Winthrop Corporation
      7 Bulfinch Place - Suite 500                        02114
               Boston, MA
----------------------------------------   ------------------------------------
(Address of principal executive offices)                (Zip Code)
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                                 (212) 319-2600
             ------------------------------------------------------
              (Registrant's telephone number, including area code)


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

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

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

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<CAPTION>
<S>                                  <C>
        Title of Each Class           Name of Exchange on Which Registered
               None                                   None
</TABLE>

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [ ]

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

As of March 26, 2002, 822,828 shares of common stock with an aggregate market
value of $43,157,328 were issued and outstanding and held by non-affiliates.


<PAGE>


                                Table of Contents

                                                                            Page

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

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

     Item 2.  Properties......................................................16

     Item 3.  Legal Proceedings...............................................21

     Item 4.  Submission of Matters to a Vote of Security Holders.............21


PART II.......................................................................22


     Item 5.  Market for Registrant's Common Equity and Related Stockholder
              Matters.........................................................22

     Item 6.  Selected Financial Data.........................................24

     Item 7.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations...........................................24

     Item 7A. Quantitative and Qualitative Disclosures About Market Risk......33

     Item 8.  Financial Statements and Supplementary Data.....................34

     Item 9.  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure........................................34

Part III......................................................................35

     Item 10. Directors and Executive Officers................................35

     Item 11. Compensation....................................................38

     Item 12. Security Ownership Of Certain Beneficial Owners And
              Management......................................................39

     Item 13. Certain Relationships and Related Transactions..................40


Part IV.......................................................................42


     Item 14. Exhibits, Financial Statement Schedules and Reports
              on Form 8-K.....................................................42



                           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.


<PAGE>


                                     PART I

Item 1.    Business

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

                                    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. Currently, we operate and hold four office buildings, three shopping
centers, three industrial warehouses and a vacant parcel of land. See "Item 2.
Properties" for a description of our properties.

     We own our property portfolio through our directly and indirectly wholly
owned subsidiary, Shelbourne Properties II, LP (the "Operating Partnership"), a
Delaware limited partnership. The Operating Partnership is the direct owner of
our property portfolio. The general partner of the Operating Partnership is
Shelbourne Properties 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. We seek to achieve this objective by managing our existing properties,
making capital improvements to and/or selling properties and by making
additional real estate-related investments. We may invest in a variety of real
estate-related investments, including undervalued assets and value-enhancing
situations, in a broad range of property types and geographical locations. We
may raise additional capital by mortgaging existing properties or by selling
equity or debt securities. We may acquire investments for cash or by issuing
equity securities, including limited partnership interests in the Operating
Partnership.

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

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

Corporate History

     Prior to the merger described below, the owner of the Corporation's
properties was High Equity Partners L.P. - Series 86, a Delaware limited
partnership (the "Predecessor Partnership"). The Predecessor Partnership was
formed as of November 14, 1985. 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 successor 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.

                                       3

<PAGE>


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

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

     As amended, the Predecessor Partnership Agreement (a) provided for a
Partnership Asset Management Fee equal to 1.25% of the Gross Asset Value of the
Predecessor Partnership (as defined in that agreement) and a fixed 1999
Partnership Asset Management Fee of $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 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

                                       4

<PAGE>


Predecessor Partnership. The common stock of the Corporation is listed on the
American Stock Exchange under the symbol HXE.

     As described above, the Predecessor Partnership invested all of the net
proceeds of its offering of Units in real estate. Revenues from the following
properties represented 10% or more of the Predecessor Partnership's and,
subsequently, our gross revenues during each of the last three fiscal years:
during 2001, 568 Broadway and Sutton Square represented 28% and 15% of gross
revenues, respectively; during 2000, 568 Broadway represented 26% of gross
revenues; during 1999, 568 Broadway and Sutton Square represented 25% and 15%
gross revenues respectively. See "Item 2. Properties" for a description of the
Predecessor Partnership's and our properties.

Recent Developments

     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 each of the advisory agreements (the "Advisory Agreements") between
the Companies and an affiliate of PCIC and (ii) repurchased all of the shares of
capital stock in the Companies held by a subsidiary of PCIC, Millennium Funding
III, LLC (the "Shares").

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

     Pursuant to the Transaction, the Corporation paid PCIC approximately $17.9
million in cash and the Operating Partnership issued preferred partnership
interests with an aggregate liquidation preference of $1,015,148 and a note with
an aggregate stated amount of between approximately $22.0 million and $23.6
million, depending upon the timing of the repayment of the note.

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

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

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

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

Competition

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

                                       5

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Industry Segments and Seasonality

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

Employees

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

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

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

     In connection with the conversion, effective April 17, 2001 the Corporation
entered into a contract with Shelbourne Management pursuant to which Shelbourne
Management provided the Corporation with all management, advisory and property
management services. For providing these services, Shelbourne Management
received (1) an annual asset management fee, payable quarterly, equal to 1.25%
of the gross asset value of the Corporation as of the last day of each year, (2)
property management fees of up to 6% of property revenues, (3) $150,000 for
non-accountable expenses and (4) reimbursement of expenses incurred in
connection with performance of its services. This agreement was contributed to
the Corporation pursuant to the Transaction described in "Recent Developments"
above.

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

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

                                       6

<PAGE>

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


                                       7

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                                  RISK FACTORS

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

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

                         Risks Relating to Our Business

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

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

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

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

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

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

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

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

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

     Scheduled lease expirations in our property portfolio over the next five
fiscal years average approximately 12% annually, based on occupied space at
December 31, 2001. When leases for our properties expire, we may be unable to
promptly renew leases with existing tenants or lease the properties to new
tenants. In addition, even if we were able to enter into renewal or new leases
in a timely manner, the terms of those leases may be less favorable to us than
the terms of expiring leases because:

                                       8

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

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

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

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

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

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

     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 has
rejected the lease in its bankruptcy and, accordingly, the space is now vacant

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

     Our real estate portfolio consists of office properties in four markets
(Seattle, New York, San Diego and Richmond, VA), retail properties in three
markets (Melrose Park, IL, Raleigh, NC and Matthews, NC) and industrial
properties in a single market (Columbus, Ohio). As a result, our business is
substantially dependent on the economies of these markets. A material downturn
in demand for office, industrial or retail space in any one of these markets
could have a material impact on our ability to lease the office, industrial or
retail space in our portfolio and may adversely impact our cash flows and
operating results.

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

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

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

     The September 2001 terrorist attacks in New York and Washington, D.C. and
related circumstances may adversely affect the U.S. economy and, in particular,
the economies of the U.S. cities in which we own properties.

                                       9
<PAGE>


This could have a material adverse impact on our ability to lease the office
space in our portfolio. As a result, the property operating income from our
office properties, and therefore our operating results, may suffer.

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

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

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

     The Note we issued and distributed to preferred shareholders as part of the
stock buy-back transaction described in "Item 1. Business - Recent Developments"
above with a principal amount at maturity of $23,658,488 is due on August 14,
2002. We do not expect to have sufficient cash or other liquid assets to pay
this debt. As such, we intend to refinance this debt. However, financing may not
be available on terms favorable to us at that time. If we are unable to
refinance this debt on favorable terms or at all, we may need to liquidate
assets in order to meet our payment obligations on the Note. Prevailing market
conditions for a sale of assets may not be favorable at that time. As a result,
the selling price for any assets we may sell might be lower than if we had been
able to sell at a more favorable time.

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

     Our leverage, which we define as the principal amount of our debt at
maturity divided by shareholders' equity as of our most recent financial
statements, is currently approximately 34.03%. Our degree of leverage could
adversely affect our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, developments or other general corporate
purposes. Our degree of leverage could also make us more vulnerable to a
downturn in our business or the economy generally. We have entered into certain
financial agreements that contain financial and operating covenants limiting our
ability under certain circumstances to incur additional secured and unsecured
indebtedness. There is also a risk that a significant increase in the ratio of
our indebtedness to the measures of asset value used by financial analysts may
have an adverse effect on the market price of our common stock.

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

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

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

     We are subject to various federal, state and local laws and regulations
relating to environmental matters. Under these laws, we are exposed to liability
primarily as an owner or operator of real property and, as such, we


                                       10

<PAGE>


may be responsible for the cleanup or other remediation of contaminated
property. Contamination for which we may be liable could include historic
contamination, spills of hazardous materials in the course of our tenants'
regular business operations and spills or releases of hydraulic or other toxic
oils. An owner or operator can be liable for contamination or hazardous or toxic
substances in some circumstances whether or not the owner or operator knew of,
or was responsible for, the presence of such contamination or hazardous or toxic
substances. In addition, the presence of contamination or hazardous or toxic
substances on property, or the failure to properly clean up or remediate such
contamination or hazardous or toxic substances when present, may materially and
adversely affect our ability to sell or rent such contaminated property or to
borrow using such property as collateral.

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

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

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

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

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

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

Our insurance may not cover some potential losses

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

     We currently have insurance for earthquake risks, subject to certain policy
limits and deductibles, and will continue to carry such insurance if it is
economical to do so. We cannot assure you that earthquakes may not seriously
damage our properties, 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.


                                       11

<PAGE>

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

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

     We participate in one office, two retail and three industrial property
joint ventures or partnerships. The office properties that we own through joint
ventures or partnerships total approximately 667,000 square feet, with our
ownership interest totaling approximately 300,300 square feet. The industrial
properties that we own through joint ventures or partnerships total
approximately 1,010,500 square feet, with our ownership interest totaling
approximately 208,800 square feet. Though our co-venturer in each case is
currently under common management with us, a joint venture or partnership
involves risks, including the risk that a co-venturer or partner:

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

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

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

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

     o    the sale of the properties;

     o    refinancing;

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

     o    capital improvements; and

     o    calling for capital contributions.

As a result of this joint decision-making power, our ability to sell our
interest in a property or a joint venture or partnership within our desired time
frame or on any other desired basis may be inhibited.

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 could change
our REIT status.

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

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


                                       12

<PAGE>


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

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

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

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

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

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

     o    the effect of non-deductible capital expenditures;

     o    the creation of reserves; or

     o    required debt or amortization payments.

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

                       Risks Relating to Our Capital Stock

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

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

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

     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.


                                       13

<PAGE>

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

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

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

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

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

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

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

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

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

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

                  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.

                                       14

<PAGE>


20549, as well as the regional offices at the Woolworth Building, 233 Broadway
Ave., New York, New York 10279 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may obtain copies of this material
for a fee by writing to the SEC's Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, D.C. 20549. You may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
can also access some of this information electronically by means of the SEC's
website on the Internet at http://www.sec.gov, which contains reports, proxy and
information statements and other information that the underlying securities
issuer and the underlying securities guarantor have filed electronically with
the SEC. In addition, you may inspect reports and other information concerning
us at the offices of the American Stock Exchange LLC, which are located at 86
Trinity Place, New York, NY 10006 and can be contacted at (212) 306-1000.


                                       15

<PAGE>


Item 2.    Properties

Property Portfolio

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

     (1) CENTURY PARK I

     On November 7, 1986, a joint venture (the "Century Park Joint Venture")
comprised of the Predecessor Partnership and Integrated Resources High Equity
Partners L.P. - Series 85 ("HEP-85"), an affiliated public limited partnership,
purchased the fee simple interest in Century Park I ("Century Park I"), an
office complex. In a transaction similar to the merger described under "Item 1.
Business - Recent Developments" above, on February 14, 2001, Shelbourne
Properties I, LP became the successor in interest to HEP-85's assets (HEP-85 and
Shelbourne I are collectively referred to as Shelbourne I), including its
interest in the Century Park Joint Venture.

     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.

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

     (2) 568 BROADWAY

     On December 2, 1986, a joint venture (the "Broadway Joint Venture")
comprised of the Predecessor Partnership and Shelbourne I acquired a fee simple
interest in 568-578 Broadway ("568 Broadway"), a commercial building in New York
City, New York. Until February 1, 1990, the Predecessor Partnership and
Shelbourne I 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"), an affiliated public limited
partnership, which contributed $10,000,000 for a 22.15% interest in the joint
venture. In a transaction similar to the merger described under "Item 1.
Business - Recent Developments" above, on February 14, 2001, Shelbourne
Properties III, LP became the successor in interest to HEP-88's assets (HEP-88
and its successor, Shelbourne III are collectively referred to as Shelbourne
III), including its interest in the Broadway Joint Venture. The Operating
Partnership and Shelbourne Properties I, LP each retain a 38.925% interest in
the joint venture.

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


                                       16

<PAGE>

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

     (3) 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, LP 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 our
deductibles.

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

     (4) 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", as of February 14, 2002 we granted a mortgage on Commerce Plaza
to Shelbourne Management LLC as security for the note we issued as a
distribution to the preferred shareholder of the Operating Partnership. For more
information concerning this mortgage, please see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" below.


                                       17

<PAGE>


     (5) MELROSE CROSSING

     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.

     (6) 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", as of February 14, 2002 we granted a mortgage on Matthews
Festival to Shelbourne Management LLC as security for the note we issued as a
distribution to the preferred shareholder. For more information concerning this
mortgage, please see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" below.

     (7) SUTTON SQUARE SHOPPING CENTER

     On April 15, 1988, the Predecessor Partnership purchased a fee simple
interest in Sutton Square Shopping Center ("Sutton Square"), located in Raleigh,
North Carolina. Sutton Square is a 101,965 square foot neighborhood shopping
center located on a 10 acre site in North Raleigh. Construction was completed in
phases in 1984-85 and 1986-87.

     The center is located on a main retail corridor and competes with numerous
other neighborhood and community centers. Sixteen are located within a three
mile radius.

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

     (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-


                                       18

<PAGE>


Columbus. Columbus Corp. subsequently sold its interest in Tri-Columbus to
Shelbourne II. Our ownership was not affected by the transfer of Columbus
Corp.'s interest in the venture to Shelbourne II. As part of Volvo's lease
renewal in late 2000, 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.

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

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

     (9) 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.

Occupancy

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

<TABLE>
<CAPTION>
                                    OCCUPANCY
--------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>
PROPERTY                              |  12/31/2001    12/31/2000    12/31/1999
--------                              |  ----------    ----------    ----------
568 Broadway Office Building          |     97%           100%          100%
Century Park I Office Complex         |     100%          100%          100%
Commerce Plaza I                      |     73%           82%           100%
Matthews Township Festival            |     64%           63%            93%
Melrose Crossing Shopping Center      |     27%           12%            16%
Melrose Out Parcel                    |      0%            0%            0%
Seattle Tower Office Building         |     90%           95%            98%
Sutton Square Shopping Center         |     100%          100%          100%
Tri-Columbus-Grove City               |     100%          100%          100%
Tri-Columbus-Hilliard                 |     100%          100%           0%
Tri-Columbus-Orange                   |     100%          100%          100%
</TABLE>


                                       19

<PAGE>


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

<TABLE>
<CAPTION>
                                       Principal        Square Feet                        Lease
                      Name of         Business of        Leased by                       Expiration       Renewal
    Property           Tenant           Tenant            Tenant        Annual Rent         Date          Options
---------------------------------- ------------------ ---------------- --------------- --------------- ---------------
<S>               <C>              <C>                     <C>           <C>                <C>          <C>
                  |
568 Broadway      |Scholastic      Publishing              87,010        $1,548,836         4/30/08      1-5 yr.
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Century Park      |San Diego Gas   Utilities               75,969        $1,098,360        11/30/07      1-5 yr.
                  |& Electric
                  |
                  |Per-Se          Physician's             64,817          $855,584         7/31/05      2-5 yr.
                  |Technologies    billing service
                  |
                  |CitiFinancial   Loan servicing          25,988          $349,539        10/31/02      1-5 yr.
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Commerce Plaza    |Branch          Banking                  9,416          $160,072         6/30/06      2-5 yr.
                  |Banking &
                  |Trust
                  |
                  |Robertshaw      Appliance               18,120          $298,980         1/31/04        None.
                  |Controls        control
                  |                manufacturer
                  |
                  |Sinclair        Communications           9,621          $168,079         4/30/03      1-5 yr.
                  |Telecable/
                  |Radio One
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Melrose Crossing  |Nightmares,     Seasonal Party          14,405           $18,000        12/31/02        None.
                  |Inc.            Place
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Matthews Festival |A&P (1)         Grocery retailer        40,526          $364,734        11/30/07      4-5 yr.
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Seattle Tower     |Electric        Telephone               23,475          $463,361         8/31/09         None
                  |Lightwave       switching company
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Sutton Square     |Eckerd Drug     Retailer                10,356           $86,991         9/30/05      2-5 yr.
                  |
                  |Harris Teeter   Grocery retailer        34,000          $264,060        11/30/14      4-5 yr.
------------------+--------------- ------------------ ---------------- --------------- --------------- ---------------
                  |
Tri-Columbus      |Volvo           Truck parts            583,000        $1,418,825        12/31/05      1-5 yr.
                  |                distributor
                  |
                  |Simmons USA     Mattress               190,000          $541,500         4/30/04      1-5 yr.
                  |                wholesaler
                  |
                  |The Computer    Computer               237,500          $591,771         1/31/03      1-4 yr.
                  |Group, Inc.     distributor
</TABLE>

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


                                       20

<PAGE>

Capital Improvements

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

Item 3.     Legal Proceedings

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

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

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

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

     During 2001, matters were submitted to a vote of our security holders on
one occasion. The consent of limited partners was sought to approve the
conversion of the Predecessor Partnership into the Operating Partnership. The
consent solicitation expired April 16, 2001 and holders of a majority of the
Units approved the conversion. On April 17, 2001, the conversion was completed
as described in "Item 1. Business - Corporate History" on page 3 above.


                                       21

<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.

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

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
</TABLE>


     On March 25, 2002, the closing sale price of the Common Stock as reported
by the ASE was $52.45. The Corporation had approximately 3,005 holders of record
of Common Stock as of March 25, 2002.

     The Corporation has authorized 2,500,000 shares of Common Stock, issued
1,237,916 and 894,792 shares are outstanding as of March 25, 2002. Prior to the
merger of the Operating Partnership and the Predecessor Partnership on April 17,
2001, the Predecessor Partnership had 588,010 Units issued and outstanding and
approximately 10,455 holders of record of Units.

Dividends

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

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

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


                                       22

<PAGE>


<TABLE>
<CAPTION>
                            STOCKHOLDER RECORD DATE
PERIOD ENDED                                              DIVIDEND / SHARE (1)
-------------------------- ------------------------- -------------------------------
                          |
<S>                       <C>                        <C>
March 30, 1999            |    October 1, 1998              $.58 / share (2)
June 30, 1999             |     March 31, 1999              $.58 / share (2)
August 30, 1999           |     June 30, 1999               $.58 / share (2)
--------------------------+------------------------- -------------------------------
December 31, 2001         |    December 17, 2001           $2.11 / share (2)
                          |
</TABLE>

     Explanatory Note:

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

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

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

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

Recent Sales of Unregistered Securities

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


                                       23

<PAGE>


Item 6.   Selected Financial Data

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

<TABLE>
<CAPTION>
                                 2001              2000            1999            1998           1997
-------------------------- ------------------ --------------- --------------- --------------- --------------
<S>                           <C>                <C>             <C>             <C>            <C>
Total Revenue             |   $15,916,861(3)     $12,675,585     $12,800,623     $11,883,246    $12,660,956
Net Income                |     6,850,151(3)       4,103,276       3,852,480       3,100,160   2,845,625(1)
Net Income per Share      |             5.53            3.31            3.11            2.50           2.30
Distributions per Share   |         2.11 (4)              --            1.16            2.30           2.02
(2) (3)                   |
Total Assets              |      $70,681,975     $67,141,583     $63,413,501     $61,837,211    $61,919,546
                          |
</TABLE>

     (1)  Total revenues and net income for the year ended December 31, 1997
          include a $950,691 gain, or $0.77 per Share, from the sale of a
          property, 230 East Ohio.

     (2)  All distributions are in excess of accumulated undistributed net
          income and therefore represent a return of capital to investors on a
          generally accepted accounting principles basis.

     (3)  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.

     (4)  Distributions made on December 21, 2001 are based on the total shares
          issued and outstanding.

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

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

Overview

     The Corporation was formerly a Delaware limited partnership, High Equity
Partners L.P. - Series 86 ("HEP-86"), which was converted to a REIT on April 17,
2001 by merging with Shelbourne Properties II LP, a Delaware limited
partnership, which is currently the operating partnership of the Corporation
(the "Operating Partnership"). The Corporation holds its investment in the
properties through its Operating Partnership in which it had a 99% direct
interest at December 31, 2001. The other 1% is held indirectly through the
general partner of the Operating Partnership, Shelbourne Properties 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 ("PCIC") and paid $17,866,603
in cash. As part of that repurchase, Shelbourne Management LLC, a wholly-owned
subsidiary of PCIC, contributed the advisory agreement between the Corporation
and the Operating Partnership and Shelbourne Management LLC, dated as of April
17, 2001, (the "Advisory Agreement") pursuant to which it had provided financial
and investment advisory services to the Corporation and the General Partner. As
partial consideration for the Advisory Agreement, the Operating Partnership 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. The preferred units


                                       24

<PAGE>


will be automatically redeemed upon the occurrence of certain events of default
by the Corporation on its obligations under that agreement.

     As an initial distribution on the Preferred Units, the Corporation issued a
note to Shelbourne Management LLC (the "Note") in the principal amount of
$23,658,488, except that if the Note is repaid in full prior to April 30, 2002,
the principal amount will be reduced to $22,034,250 and if the Note is repaid in
full after April 30, 2002 and on or prior to May 15, 2002, the principal amount
shall be reduced to $22,440,310. As security for the note, mortgages were placed
on the following properties: Century Park I, Seattle Tower Office Building,
Commerce Plaza, Matthews Township Festival Shopping Center, Sutton Square
Shopping Center and the TMR Warehouses. In addition, the Operating Partnership
granted Shelbourne Management Company LLC a security interest in its joint
venture interest in the 568 Broadway Office Building. The Corporation agreed to
repay the Note entirely from the proceeds of new third party borrowings, which
Presidio will have the option to guarantee.

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

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

Critical Accounting Policies

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying financial statements and related footnotes. In preparing
these financial statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. The Corporation does not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.

     Impairment of long-lived assets. At December 31, 2001 and December 31,
2000, the Corporation had approximately $41.3 million and $45.9 million of real
estate (net), accounting for approximately 58% and 68%, respectively, of the
Corporation's total assets. Property and equipment is carried at cost net of
adjustments for impairment. The fair value of the Operating Partnership's
property and equipment is dependent on the performance of the properties.

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

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


                                       25

<PAGE>


flows or market comparables, as most appropriate for each property. Independent
certified appraisers are utilized to assist management, when warranted.

     For the years ended December 31, 2001, 2000, and 1999, no impairment losses
have been recorded. Cumulative impairment losses from previous years amount to
$48,671,150. Impairment write-downs recorded by the Corporation do not affect
the tax basis of the assets and are not included in the determination of taxable
income or loss.

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

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

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

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

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

New Accounting Policies

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

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS No.
141 also changes the criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. There was no effect from this
statement on the Corporation's financial statements.


                                       24

<PAGE>


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

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The provisions
of this Statement generally are to be applied prospectively. The Corporation
does not expect that this statement will have a material effect on the
Corporation's financial statements.

Liquidity And Capital Resources

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

Real Estate

     The Corporation currently has investments in three shopping centers, four
office properties, three industrial parks and a vacant parcel of land, all of
which were acquired for cash. Subsequent to December 31, 2001, seven of these
properties became subject to mortgages or security interests, pending repayment
of the Note. When the Note is refinanced, the lender may take a security
interest in some or all of the properties owned by the Corporation. The
Corporation generates rental revenue from its commercial properties and is
responsible for each property's operating expenses as well as the Operating
Partnership and its own administrative expenses.

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

     The Corporation uses working capital reserves and any undistributed cash
from operations as the primary source of liquidity. For the year ended December
31, 2001 all capital expenditures were funded from cash flow and working capital
reserves. As of December 31, 2001, the Corporation had working capital reserves
of approximately $24,843,488. Working capital reserves are temporarily invested
in short-term money market instruments and are expected, together with cash flow
from operations, to be sufficient to fund future capital improvements to the
Corporation's properties.

     The Corporation had $26,011,761 of cash and cash equivalents at December
31, 2001 as compared to $17,607,533 at December 31, 2000. During the year ended
December 31, 2001, cash and cash equivalents increased $8,404,228 as a result of
$4,844,138 cash provided by operations. Cash flow from investing activities at
December 31, 2001 were $6,172,093 due to the proceeds received upon the sale of
a property, Commonwealth Industrial Park, which was partially offset by
improvements to real estate. The net proceeds from the sale were $7,879,568. The
cost of the improvements to the properties amounted to $1,707,475. A cash
distribution, made to comply with the requirements for maintaining REIT status,
was made on December 21, 2001 in the amount of $2,612,003. The Corporation
realized a tax loss on the sale of $1,421,228. The Corporation's primary source
of funds is cash flow from the operations of its properties, principally rents
received from tenants.


                                       27

<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
properties for capital improvements and capitalized tenant procurement costs:


<TABLE>
<CAPTION>
                                                                        Years Ended December 31,

PROPERTY                                          2001                  2000                  1999
---------------------------------------- --------------------- --------------------- ----------------------
<S>                                            <C>                   <C>                   <C>
Century Park I Office Complex                     $66,729              $23,328               $173,238

568-578 Broadway                                 $234,873             $151,361               $154,617

Seattle Tower Office Building                  $1,208,184              $87,155               $355,407

Commonwealth Industrial Park (1)                       $0             $293,946                     $0

Melrose Crossing                                  $53,347                   $0                $26,487

Matthews Festival                                 $71,292              $14,708                $25,689

Sutton Square                                     $18,985             $102,952                $33,918

TMR Warehouses                                    $73,530              $24,735                $29,311

Melrose Out Parcel                                     $0                   $0                     $0

Commerce Plaza I                                 $433,360              $86,386               $162,046
                                         --------------------- --------------------- ----------------------

                                Totals:        $2,160,300             $784,571               $960,713
                                               ==========             ========               ========
</TABLE>


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

     The capital expenditures for 2001 were mostly in the ordinary course of
business with the exception of the Seattle Tower property, where there were
exceptional expenditures relating to repair of damage caused by an earthquake.
Those expenditures, however, should be fully covered by insurance. Major capital
expenditures budgeted for 2002 consist primarily of approximately $225,000 in
facade improvements and exterior painting and approximately $49,000 in corridor
and restroom upgrades and window repairs at 568 Broadway, with the expenditures
split among the participants in the joint venture according to the percentage of
their interests therein. In addition, approximately $197,000 in elevator shaft
and roof repairs at Seattle Tower and $500,000 in additional earthquake repairs
are projected for Seattle Tower in 2002. These costs are expected to be entirely
covered by insurance proceeds.

     Certain properties require periodic investments of capital for tenant costs
related to new and renewal leasing. The most significant tenant procurement
costs budgeted for 2002 include approximately $210,000 in costs associated with
making the sub-cellar at 568 Broadway into leaseable space, approximately
$412,000 in tenant improvements obligations associated with the Tri-Columbus
property leased to Volvo and other existing leases at 568 Broadway, Commerce
Plaza, and Seattle Tower as well as approximately $433,000 in projected tenant
improvements costs anticipated in conjunction with the procurement of new leases
at Seattle Tower, Melrose Crossing, Commerce Plaza and Matthews Festival.
Leasing commissions associated with these leases are budgeted to be
approximately $405,000 for 2002. Where applicable, these costs will be split
among the co-venturers in the joint venture according to the percentage of their
interest therein.


                                       28

<PAGE>

     The Corporation has budgeted expenditures for capital improvements and
capitalized tenant procurement costs of $2,011,826 in 2002. These costs are
expected to be incurred in the normal course of business and are expected to be
funded from cash flow from operations and working capital reserves. However,
such expenditures will depend upon the level of leasing activity and other
factors that cannot be predicted with certainty.

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

Real Estate Market

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

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

     Despite a significant decline in 2001 in business development in the Puget
Sound region due to a slowdown in the technological sector of the economy,
leasing activity at the property continues to be strong. The property's
positions as an historically significant building and its location in the
central business district continue to make it desirable for many tenants.
Nonetheless, due to the age of many of the leases at the building, and the
functional obsolescence of the building for many potential tenants, much of the
space at Seattle Tower is currently leased at below market rental rates. The
property thus has the potential for substantially improved operations as current
leases expire and the capital needs of the property are addressed. In an effort
to maximize rents, over the next four years, in excess of $590,000 is budgeted
for capital improvements at Seattle Tower, which will be paid for by each
co-venturer according to the percentage of its interest in the joint venture.
This capital work will attempt to address the extremely outdated mechanical
systems and the lack of technological infrastructure at the property, both of
which are currently impeding the property's realization of market rental rates.
It is anticipated that these improvements coupled with expected overall growth
in the office market in downtown Seattle would position the property for a
substantial improvement in operations in the future.

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

     The prospects for Sutton Square Shopping Center, which is located in the
Raleigh Durham market are also generally favorable. That market is experiencing
high demand for retail space and low vacancy. The Raleigh Durham area is also
experiencing household formation and income growth, and the property's
sub-markets is deemed to be middle to upper middle-income.

     Matthews Festival is located in the Charlotte, North Carolina market that
is experiencing generally favorable market conditions. However, while it is
still meeting its leasehold obligations, the anchor tenant at Matthew's Festival
no longer operates a store at the site and this has hindered leasing efforts at
the property. In addition, in October 2000 a tenant leasing approximately 29% of
the property's square footage and operating a


                                       29

<PAGE>

movie theatre defaulted on its lease obligations as a result of a bankruptcy
filing. The lack of an operating anchor tenant and the loss of the movie theatre
tenant at Matthew's Festival has adversely affected the property's ability to
lease in-line space and the property is thus experiencing declining operations.

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

     Demand for office and research and development space in the Kearny Mesa
office sub-market in which Century Park is located is very strong contributing
to historically high occupancy levels in the area. New supply that is entering
the marketplace is, however, expected to slow the growth of rental rates and the
market has begun to soften slightly. Nonetheless, overall growth in the real
estate market is expected to continue and the property is believed to be well
situated and adequately configured to benefit from this anticipated improvement.
The extent to which Century Park will realize the benefit of any market
appreciation will, however, be subject to the terms of the existing leases at
the property, which are not scheduled to expire for several years.

     Commerce Plaza is located in the northwestern section of Richmond,
Virginia, an area that has seen generally good economic conditions in the recent
past. The property is in an expanding neighborhood that is considered to be the
primary suburban office sub-market in the Richmond area. However, several
developments in the area have produced an increase in competitive space for the
property and leasing activity as the property has been impaired as a result. The
most significant of these developments, Innsbrook Office Park has been
established as the most desirable office location in the immediate area,
resulting in Commerce Plaza becoming a secondary alternative with lower rental
rates. Nonetheless, Commerce Plaza's operations are expected to benefit from the
overall ongoing growth in the area.

     Technological changes are also occurring which may reduce the space needs
of many tenants and potential tenants and may alter the demand for amenities and
power supplies at our properties. As a result of these changes and the continued
risk for overall market volatility, our potential for realizing the full value
of its investment in the properties is at continued risk.

Impairment Of Assets

     The Corporation evaluates the recoverability of the net carrying value of
its real estate and related assets at least annually, and more often if
circumstances dictate as required by SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." If there is an indication that the carrying
amount of a property may not be recoverable, the Corporation prepares an
estimate of the future undiscounted cash flows expected to result from the use
of the property and its eventual disposition, generally over a five-year holding
period. In performing this review, management takes into account, among other
things, the existing occupancy, the expected leasing prospects of the property
and the economic situation in the region where the property is located.

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

     Impairment adjustments to reduce the carrying value of the real estate
assets recorded by the Corporation do not affect the tax basis of the assets and
are not included in the determination of taxable income or loss.


                                       30

<PAGE>

     Management is not aware of any other current trends, events, or commitments
that will have a significant impact on the long-term value of the properties.
However, because the cash flows used to evaluate the recoverability of the
assets and their fair values are based upon projections of future economic
events such as property occupancy rates, rental rates, operating cost inflation
and market capitalization rates which are inherently subjective, the amounts
ultimately realized at disposition may differ materially from the net carrying
values at the balance sheet dates. The cash flows and market comparables used in
this process are based on good faith estimates and assumptions developed by
management. Unanticipated events and circumstances may occur and some
assumptions may not materialize. Actual results may vary from the estimates, and
the variances may be material.

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

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

<TABLE>
<CAPTION>
                                                 HISTORICAL COST
                                                       LESS           ADJUSTMENT           12/31/01
                                                   ACCUMULATED           FOR            CARRYING VALUE
                 DESCRIPTION                       DEPRECIATION       IMPAIRMENT

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

<S>                                               <C>                 <C>                   <C>
Century Park I Office Complex, Kearny Mesa,       $15,553,508         $11,700,000           $3,853,508
California (50% owned)

568 Broadway Office Building, New York, New        15,379,049          10,821,150            4,557,899
York (38.925% owned)

Seattle Tower Office Building, Seattle,             9,684,155           6,050,000            3,634,155
Washington (50% owned)

Commerce Plaza Office Building, Richmond,           7,756,458           2,700,000            5,056,458
Virginia

Melrose Crossing Shopping Center Retail            13,797,187          12,100,000            1,697,187
Building, Melrose Park, Illinois

Matthews Township Festival Shopping Center         13,132,109           5,300,000            7,832,109
Retail Building, Matthews, North Carolina

Sutton Square Shopping Center Retail                9,911,755                  --            9,911,755
Building, Raleigh, North Carolina

TMR Warehouse Industrial Buildings, Hilliard,       4,297,342                  --            4,297,342
Grove City and Delaware, Ohio (20.66% owned)

Melrose (lot #7) Vacant Lot, Melrose Park,            486,628                  --             486,628
Illinois
                                                ----------------- -------------------- ----------------------

                                        Total:    $89,998,191         $48,671,150            $41,327,041
                                                  ===========         ===========            ===========
</TABLE>


                                       31

<PAGE>

Funds from Operations

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

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

<TABLE>
<CAPTION>
                                                                   2001            2000           1999
------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>            <C>
Net Income                                                      $3,642,176(1)     $4,103,276     $3,852,480
Plus: Depreciation and amortization related to real estate          2,233,839      2,171,324      2,092,145
                                                                   ----------     ----------     ----------
                  Funds from Operations:                           $5,876,015     $6,274,600     $5,944,625

                                                                   ==========     ==========     ==========
</TABLE>

     (1)  Net income does not include a $3,207,975 gain on the sale of
          Commonwealth Industrial Park.

Results of Operations

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

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

     Net Income

     The Corporation experienced an increase in net income of $2,746,875, or
66.94%, 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 12.94%, 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.

     Rental Revenues

     Rental revenues increased by 0.96% 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 5.76%, 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,


                                       32

<PAGE>


property management fees and depreciation and amortization expense. Asset
management fees increased by $170,750, or 14.5%, in 2001 due to an increase in
the gross asset value of the Corporation. Operating expenses increased by
$251,451, or 6.61% 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.

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

     Net Income

     The Predecessor Partnership experienced an increase in net income of
$250,796, or 6.5%, for the year ended December 31, 2000 to $4,103,276 compared
to 1999 net income of $3,852,480 due to increased interest income and lower
costs and expenses, which more than offset reduced rental revenues and other
income.

     Rental Revenues

     Rental revenues decreased by $373,458, or 3.1%, during the year ended
December 31, 2000 to $11,805,236 from $12,178,694 for the same period in 1999
due to a decreases in step lease rental adjustments recorded for GAAP purposes
(adjustments to account for the recognition of rent on a straight-line basis) of
$344,056 and escalation rent, which was partially offset by an increase in base
rent of $157,670. Escalation rent consists of reimbursements of property level
operating expenses received by the Predecessor Partnership from the tenants at
the property. Escalation rent decreased in 2000 as compared to 1999 due to
reduced operating expenses at the properties.

     Interest and Other Income

     Interest income increased $308,689, or 37.9%, from $506,779 in 1999 to
$815,468 in 2000 due to higher interest rates and higher cash balances during
the current year compared to 1999. Other income decreased by $60,269 from
$115,150 in 1999 to $54,881 in 2000 due to a decrease in fees from investor
servicing primarily related to a decrease in investor transfers.

     Costs and Expenses

     Costs and expenses decreased by $375,834, or 4.2%, during the year ended
December 31, 2000 to $8,572,309 compared to $8,948,143 in 1999, due to decreases
in administrative expenses and operating expenses, which were partially offset
by increases in partnership asset management fees and a slight increase in
depreciation and amortization expense. Administrative expenses for the year
ended December 31, 2000 decreased $342,970 or 24.2% compared to 1999 due to
lower professional fees related to the settlement of the litigation and
reorganization of the Predecessor Partnership. Operating expenses decrease by
$271,593, or 6.7%, to $3,804,524 in 2000 as compared to 1999 due to savings in
real estate tax expense and repairs and maintenance expense, which were
partially offset by increases in utilities, personnel and property management
fee expense. Partnership asset management fees increased by $197,959 in 2000 due
to an amendment to the partnership agreement that significantly reduced the
amount payable in 1999 and changed the method of calculating such fee in
subsequent years.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

     Market risk is the risk of loss from adverse changes in market prices and
interest rates. As of December 31, 2001, we did not have any debt outstanding or
any investments in long-term financial instruments that exposed us to market
risks. However, as described under "Item 1. Business - Recent Developments", as
of February 14, 2002, we issued a note to Shelbourne Management LLC (the "Note")
in the principal amount of $23,658,488 with a maturity date of August 14, 2002.
If the Note is repaid from third party indebtedness, it will bear an effective
rate of interest equal to the initial rate of interest applicable to that third
party indebtedness. If the Note is not repaid from third party indebtedness, the
interest rate payable at maturity or earlier repayment is 8% per annum. As such,
our exposure to market risk for changes in interest rates is contingent upon
refinancing this indebtedness. If we do


                                       33

<PAGE>

refinance this indebtedness, our exposure will depend on the level of interest
rates at the time of that potential refinancing. If we do not refinance this
indebtedness, we will not be exposed to market risks from changing interest
rates.

Item 8.     Financial Statements and Supplementary Data

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

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

     None.


                                       34

<PAGE>


                                    Part III

Item 10.    Directors and Executive Officers

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


<TABLE>
<CAPTION>
       Name                  Age          Position Held                  Term of Service
       --------------------------------------------------------------------------------------------
<S>                       <C>         <C>                       <C>
                          |
       Donald W. Coons    |  38             Director            February 8, 2001-present
                          |
       Dallas Lucas       |  39       Director, Secretary,      February 8, 2001-February 14,
                          |            Treasurer and Chief      2002, as Director
                          |             Financial Officer
                          |
                          |                                     November 20, 2001-February 14,
                          |                                     2002 as Secretary and Chief
                          |                                     Financial Officer
                          |
                          |
                          |                                     November 20, 2001-present, as
                          |                                     Treasurer
                          |
       Robert Martin      |  40             Director            February 8, 2001-present
                          |
       W. Edward Scheetz  |  37        Director, Co-Chief       February 8, 2001-present, as
                          |             Executive Officer       Director
                          |
                          |
                          |                                     August 15, 2001-February 14,
                          |                                     2002, as Co-Chief Executive
                          |                                     Officer
                          |
</TABLE>


                                       35

<PAGE>


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


<TABLE>
<CAPTION>
       Name                  Age          Position Held                  Term of Service
       ------------------------------------------------------------------------------------------
<S>                        <C>     <C>                         <C>
                          |
       Peter Ahl          |   37   Director, Vice President    February 8, 2001-February 14,
                          |                                    2002, as Director
                          |
                          |
                          |                                    August 15, 2001-February 14,
                          |                                    2002, as Vice President
                          |
       Michael Ashner     |   49      Director, President      February 8, 2001-August 15, 2001
                          |                                    as President and Director
                          |
       Michael Bebon      |   40           Director            February 8, 2001-March 27, 2002
                          |
       Peter Braverman    |   48        Vice President         February 8, 2001-August 15, 2001
                          |                                    as Vice President
                          |
       David T. Hamamoto  |   43      Director, Co-Chief       February 8, 2001-February 14,
                          |            Executive Officer       2002, as Director
                          |
                          |
                          |                                    August 15, 2001-February 14,
                          |                                    2002, as Co-Chief Executive
                          |                                    Officer
                          |
       Steven B. Kauff    |   40        Vice President         February 8, 2001-February 14, 2002
                          |
       David G. King, Jr. |   39   Director, Vice President    February 8, 2001-February 14, 2002
                          |
       Lara Sweeney       |   29   Vice President, Secretary   February 8, 2001-August 15, 2001
                          |
       Carolyn Tiffany    |   35   Vice President, Treasurer   February 8, 2001-April 10, 2001,
                          |                                    as treasurer
                          |
                          |
                          |                                    February 8, 2001-August 15, 2001,
                          |                                    as Vice President
                          |
                          |
</TABLE>


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

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


                                       36

<PAGE>

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

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

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

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

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

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

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

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

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

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

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


                                       37

<PAGE>


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

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

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

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

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

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

Item 11.   Compensation

     (a)    Executive Compensation

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

     (b)    Director Compensation

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


                                       38

<PAGE>


Item 12.   Security Ownership Of Certain Beneficial Owners And Management

(a) Security Ownership of Certain Beneficial Owners.

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


<TABLE>
<CAPTION>
Name of Beneficial Owner             Number of Shares owned       % of Class
--------------------------------------------------------------------------------
<S>                             <C>                             <C>
                                |
HX Investors, L.P. (1)          |           70,164                   7.84%
                                |
</TABLE>


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

(b) Security Ownership of Management.

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


<TABLE>
<CAPTION>
Name of Beneficial Owner             Number of Shares owned       % of Class
--------------------------------------------------------------------------------
<S>                             <C>                             <C>
                                |
Michael Bebon, Director (1)     |           500                      0.06%
                                |
Robert Martin, Director         |          1,300                     0.15%
                                |
</TABLE>

     (1)  Michael Bebon resigned from his position as a director of the
          Corporation on March 27, 2002.

(c) Changes in Control.

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


                                       39

<PAGE>


Item 13.    Certain Relationships and Related Transactions

Compensation for Services

     The Predecessor General Partners and certain affiliated entities have,
during the year ended December 31, 2001, earned or received compensation or
payments for services or reimbursements from us, the Predecessor Partnership, or
Presidio subsidiaries as follows:


<TABLE>
<CAPTION>
                                                                           Compensation from us, the
                                                                      Predecessor Partnership or Presidio
Name of Recipient                    Capacity in Which Served                     subsidiaries
--------------------------------------------------------------------- -------------------------------------
<S>                            <C>                                    <C>
Resources High Equity Inc.   | Predecessor Investment General         $454,252 (1)
                             | Partner
                             |
Resources Capital Corp.      | Predecessor Administrative General     $1,067(2)
                             | Partner
                             |
Presidio AGP Corp.           | Predecessor Associate General Partner  $1,067 (3)
                             |
Kestrel Management, L.P.     | Property Manager                       $369,139 (4)
                             |
Shelbourne Management LLC    | Business Manager                       $1,087,750 (5)
                             |
</TABLE>


(1)  $59,444 represents payment for non-accountable expenses of the Predecessor
     Investment General Partner and $394,808 represents a Partnership Management
     Fee for managing the affairs of the Predecessor Partnership and the
     Corporation. Furthermore, under the Predecessor Partnership's Limited
     Partnership Agreement which was in effect until April 17, 2001, 5% of the
     Predecessor Partnership's net income and net loss is allocated to the
     Predecessor General Partners (0.1% to the Predecessor Associate General
     Partner, 4.8% to the Predecessor Administrative General Partner and 0.1% to
     the Predecessor Investment General Partner). Pursuant thereto, for the year
     ended December 31, 2001, $51,205 of the Predecessor Partnership's net
     income was allocated to the Predecessor Investment General Partner.

(2)  For the year ended December 31, 2001, $1,067 of the Predecessor
     Partnership's net income was allocated to the Predecessor Administrative
     General Partner.

(3)  For the year ended December 31, 2001, $1,067 of the Predecessor
     Partnership's net income was allocated to the Predecessor Associate General
     Partner.

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

(5)  This amount was earned pursuant to an advisory agreement with Shelbourne
     Management LLC for performance of certain functions relating to the
     management of our business. $140,566 represents payment for expenses of
     Shelbourne Management and $947,194 represents an asset management fee for
     managing the affairs of the Corporation, property management fees and
     $150,000 for non-accountable expenses.

Recent Developments

     On February 14, 2002, the Corporation, Shelbourne Properties I, Inc. and
Shelbourne Properties III, Inc. (together the "Companies") announced the
consummation of a transaction whereby the Companies (i) purchased each of the
advisory agreements between the Companies and an affiliate of PCIC and (ii)
repurchased all of the shares of capital stock in the Companies held by PCIC.
Pursuant to the Transaction, for the Advisory Agreements and the Shares, the
Companies paid PCIC an aggregate of $44 million in cash, preferred partnership
interests in their respective operating partnerships with a liquidation
preference of $2.5 million, and notes with a stated amount of


                                       40

<PAGE>

between $54.3 million and $58.3 million, depending upon the timing of the
repayment of the notes. For further details concerning this transaction, please
see "Item 1. Business - Recent Developments" on page 3 above.

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


                                       41

<PAGE>


                                     Part IV

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

     (a)  Financial Statements and Financial Statement Schedules

     (1)  Financial Statements

          Independent Auditor's Report

          Consolidated Balance Sheets as of December 31, 2001 and 2000

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

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

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

     (2)  Financial Statement Schedules

          III - Real Estate and Accumulated Depreciation

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

     (b)  Reports on Form 8-K

          None.

     (c)  Exhibits

     Exhibit
     Number     Description

     2.1        Form of Merger Agreement*

     3.1        Amended and Restated Certificate of Incorporation of the
                Corporation*

     3.2        Amended and Restated Bylaws of the Corporation*

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

     4.2        Shareholders Rights Agreement*

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

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

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

     21.1       Listing of Subsidiaries

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

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

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

     99.4       Deed of Trust, Security Agreement, Financing Statement, Fixture
                Filing and Assignment of Leases, Rents and Security Deposits
                (Raleigh, North Carolina) dated as of February


                                       42

<PAGE>

                14, 2002 among the Operating Partnership, Shelbourne Management
                and Chicago Title Insurance Company as Trustee

     99.5       Deed of Trust, Security Agreement, Financing Statement, Fixture
                Filing and Assignment of Leases, Rents and Security Deposits
                (Matthews, North Carolina) dated as of February 14, 2002 among
                the Operating Partnership, Shelbourne Management and Chicago
                Title Insurance as Trustee

     99.6       Deed of Trust, Security Agreement, Financing Statement, Fixture
                Filing and Assignment of Leases, Rents and Security Deposits
                (Richmond, Virginia) dated as of February 14, 2002 among the
                Operating Partnership, Shelbourne Management and Alexander Title
                Agency Incorporated as Trustee

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

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

     99.9       Negative Covenant and Declaration by Seattle Landmark Joint
                Venture, as Declarant, to Shelbourne Management, as Beneficiary,
                dated as of March 15, 2002.

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

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

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

     (d) Financial Statements.

         None.
                                       43

<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            SHELBOURNE PROPERTIES II, INC.


Dated:  March 29, 2002                      By:     /s/  Dallas Lucas
                                                  ------------------------------
                                                  Name:  Dallas Lucas
                                                  Title: Treasurer




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



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


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

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


                                       44

<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, 2001, 2000 AND 1999

                                    I N D E X

                                                                            Page
                                                                          Number

Independent Auditors' Report.................................................F-1

Consolidated financial statements, years ended December 31, 2001, 2000 and
1999

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

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

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

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

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





<PAGE>


INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying balance sheets of Shelbourne Properties II,
Inc. (formerly High Equity Partners L.P. - Series 86), (the "Company") as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, equity, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14(a) 2. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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


DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 25, 2002



                                      F-1

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.



                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                              December 31,
                                                   ----------------------------------
                                                          2001              2000
                                                   ---------------    ---------------
<S>                                                <C>                <C>
ASSETS

Real estate, net                                   $   41,327,041     $   45,939,430
Cash and cash equivalents                              26,011,761         17,607,533
Other assets                                            3,191,467          3,461,815
Receivables, net of allowances of
   $105,200 and $246,614, respectively                    151,706            132,805
                                                   --------------     --------------

TOTAL ASSETS                                       $   70,681,975     $   67,141,583
                                                   ==============     ==============



LIABILITIES AND EQUITY

Accounts payable and accrued expenses              $    1,168,273     $    1,353,556
Due to affiliates                                               -            512,473
                                                   --------------     --------------

   Total liabilities                                    1,168,273          1,866,029
                                                   --------------     --------------

COMMITMENTS AND CONTINGENCIES (Note 6 & 7)

EQUITY:

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

Limited partners' equity (588,010 units
   issued and outstanding)                                      -         62,010,830
General partners' equity                                        -          3,264,724
                                                   --------------     --------------

   Total equity                                        69,513,702         65,275,554
                                                   --------------     --------------

TOTAL LIABILITIES AND EQUITY                       $   70,681,975     $   67,141,583
                                                   ==============     ==============
</TABLE>

                 See notes to consolidated financial statements.


                                      F-2

<PAGE>

                         SHELBOURNE PROPERTIES II, INC.


                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                       For the Years Ended December 31,
                                              ----------------------------------------------------
                                                  2001               2000               1999
                                              --------------     --------------     --------------

<S>                                           <C>                <C>                <C>
Rental Revenue                                $   11,918,573     $   11,805,236     $   12,178,694
                                              --------------     --------------     --------------

Costs and Expenses:
         Operating expenses                        4,055,975          3,804,524          4,076,117
         Depreciation and amortization             2,233,839          2,171,324          2,092,145
         Asset management fee                      1,342,002          1,171,252            973,293
         Administrative expenses                   1,065,755          1,074,505          1,417,475
         Property management fee                     369,139            350,704            389,113
                                              --------------     --------------     --------------
                                                   9,066,710          8,572,309          8,948,143
                                              --------------     --------------     --------------

Income before interest and other income            2,851,863          3,232,927          3,230,551

         Interest income                             709,913            815,468            506,779
         Other income                                 80,400             54,881            115,150
         Gain on sale                              3,207,975                  -                  -
                                              --------------     --------------     --------------

Net Income                                    $    6,850,151     $    4,103,276     $    3,852,480
                                              ==============     ==============     ==============



Earnings per share - Basic and Diluted

Net income per common share                   $         5.53     $         3.31     $         3.11
                                            ================   ================   ================

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




                 See notes to consolidated financial statements.

                                      F-3

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                        CONSOLIDATED STATEMENTS OF EQUITY


<TABLE>
<CAPTION>
                                              Partners' Equity                             Shareholders' Equity
                                         --------------------------- ---------------------------------------------------------------
                                           General        Limited                       Additional       Retained
                                          Partners        Partners     Common Stock      Capital         Earnings         Total

<S>                                       <C>           <C>             <C>            <C>             <C>             <C>
Balance, January 1, 1999                 $ 2,938,117    $55,805,281     $         -    $         -     $         -     $58,743,398

Net income                                   192,624      3,659,856               -              -               -       3,852,480

Distributions ($1.15 per share)              (71,181)    (1,352,419)              -              -               -      (1,423,600)
                                         -----------    -----------    ------------   ------------    ------------     -----------

Balance, December 31, 1999                 3,059,560     58,112,718               -              -               -      61,172,278

Net income                                   205,164      3,898,112               -              -               -       4,103,276
                                         -----------   ------------    ------------   ------------    ------------     -----------

Balance, December 31, 2000                 3,264,724     62,010,830               -              -               -      65,275,554

Net income through April 17, 2001             51,439      1,015,345               -              -               -       1,066,784

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

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

Distributions ($2.11 per share)                    -              -               -              -      (2,612,003)     (2,612,003)
                                         -----------    -----------     -----------    -----------     -----------     -----------

Balance, December 31, 2001               $         -    $         -     $    12,379    $66,329,959     $ 3,171,364     $69,513,702
                                         ===========    ===========     ===========    ===========     ===========     ===========
</TABLE>





                 See notes to consolidated financial statements.


                                      F-4

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                          For the Years Ended December 31,
                                                                      2001              2000               1999

CASH FLOW FROM OPERATING ACTIVITIES:

<S>                                                              <C>               <C>                <C>
Net Income                                                       $    6,850,151    $    4,103,276     $    3,852,480
Adjustments to reconcile net income to net cash provided by
operating activities:
     Depreciation and amortization                                    2,233,839         2,171,324          2,092,145
     Straight line adjustment for stepped lease rentals                 243,063           (89,564)          (433,619)
     Gain on sale                                                    (3,207,975)                -                  -
Changes in operating assets and liabilities:
     Accounts payable and accrued expenses                             (185,282)         (421,139)          (128,111)
     Receivables                                                        (18,901)          (54,235)           164,670
     Due to affiliates                                                 (512,473)           45,945            (12,678)
     Other assets                                                      (558,284)         (370,059)          (306,092)
                                                                 --------------   ---------------     --------------
Net cash provided by (used in) operating activities                             4,844,138         5,385,548          5,228,795
                                                                 --------------    --------------    ---------------

CASH FLOWS FROM INVESTING ACTIVITIES

     Proceeds from sale                                               7,879,568                 -                  -
     Improvements to real estate                                     (1,707,475)         (453,951)          (637,623)
                                                                 --------------    --------------    ---------------
Net cash provided by (used in) investing activities                   6,172,093          (453,951)          (637,623)
                                                                 --------------   ---------------    ---------------

CASH FLOWS FROM FINANCING ACTIVITIES

     Distributions                                                   (2,612,003)                -         (2,135,401)
                                                                 --------------    --------------    ---------------

Increase in Cash and Cash Equivalents                                 8,404,228         4,931,597          2,455,771

Cash and Cash Equivalents, Beginning of Year                         17,607,533        12,675,936         10,220,165
                                                                 --------------    --------------     --------------

Cash and Cash Equivalents, End of Year                           $   26,011,761    $   17,607,533     $   12,675,936
                                                                 ==============    ==============     ==============
</TABLE>




                 See notes to consolidated financial statements.


                                      F-5

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION

     High Equity Partners L.P. - Series 86 (the "Predecessor Partnership"), a
     limited partnership, organized under the Delaware Revised Uniform Limited
     Partnership Act on November 14, 1985 for the purpose of investing in,
     holding and operating income-producing real estate was converted to a Real
     Estate Investment Trust ("REIT") on April 17, 2001 named Shelbourne
     Properties II, Inc. ("Shelbourne" or the "Corporation") by merging with
     Shelbourne Properties II LP, a Delaware limited partnership, that would be
     the operating partnership of the REIT. Shelbourne began the year invested
     in three shopping centers and eight office/industrial properties and none
     of which are encumbered by debt. On December 6, 2001, Shelbourne sold
     Commonwealth Industrial Park. This leaves the REIT with investments in
     three shopping centers and seven office/industrial properties.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

     The consolidated financial statements include the accounts of Shelbourne
     Properties II, Inc. and its wholly owned subsidiaries, Shelbourne
     Properties II, L.P. and Shelbourne Properties II GP, LLC. Intercompany
     accounts and transactions have been eliminated in consolidation.

     Financial Statements

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

     Cash and Cash Equivalents

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

     Revenue Recognition

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

     Investments in Joint Ventures

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


                                      F-6

<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Real Estate

     Real estate is carried at cost, net of adjustments for impairment. Repairs
     and maintenance are charged to expense as incurred. Replacements and
     betterments are capitalized. Shelbourne evaluates the recoverability of the
     net carrying value of its real estate and related assets at least annually,
     and more often if circumstances dictate. If there is an indication that the
     carrying amount of a property may not be recoverable, Shelbourne prepares
     an estimate of the future undiscounted cash flows expected to result from
     the use of the property and its eventual disposition, generally over a
     five-year holding period. In performing this review, management takes into
     account, among other things, the existing occupancy, the expected leasing
     prospects of the property and the economic situation in the region where
     the property is located.

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

     Impairment write-downs recorded by the Predecessor Partnership do not
     affect the tax basis of the assets and are not included in the
     determination of taxable income or loss.

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

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

     Depreciation and Amortization

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

     Income Taxes

     Shelbourne is operating with the intention of qualifying as a REIT under
     Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under
     those sections, a REIT which distributes at least 90% of its taxable income
     as a dividend to its shareholders each year and which meets certain other
     conditions will not be taxed on that portion of its taxable income which is
     distributed to its shareholders. Shelbourne distributed to shareholders 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 shareholders are characterized as follows:


                                      F-7

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


<TABLE>
<CAPTION>
                                            2001
             ------------------------------------------

<S>                                          <C>
             Ordinary Income                 54%

             Return of Capital               46%

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

             Total                          100%
</TABLE>



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

     Taxable income differs from net income for financial reporting purposes
     principally because of differences in the timing of recognition of rental
     income and depreciation. As a result of these differences, impairment of
     long-lived assets and the initial write off of organization costs for book
     purposes, the tax basis of Shelbourne's net assets exceeds its book value
     by $38,594,489 and $44,551,091 at December 31, 2001 and 2000, respectively.

     Amounts per Share

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

     Distributions Per Share

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

     Net Income and Distributions per Unit of Limited Partnership Interest Prior
     to Conversion

     Prior to the conversion, net income and distributions per unit of limited
     partnership interest were calculated based upon the number of limited
     partnership units outstanding (588,010) for each of the years ended
     December 31, 2000 and 1999. No distributions were paid in 2000.

     Recently Issued Accounting Standards

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

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 141 "Business Combinations." SFAS No. 141 requires that all business
     combinations be accounted for under the purchase method of accounting. SFAS
     No. 141 also changes the criteria for the separate recognition of
     intangible assets acquired in a business combination. SFAS No. 141 is
     effective for all business combinations initiated after June 30, 2001.
     There was no effect from this statement on Shelbourne's financial
     statements.


                                      F-8

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
     or Disposal of Long-Lived Assets," which addresses financial accounting and
     reporting for the impairment or disposal of long-lived assets. This
     statement supersedes SFAS No. 121, "Accounting for the Impairment of
     Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
     accounting and reporting provisions of APB Opinion No. 30, "Reporting the
     Results of Operations - Reporting the Effects of a Disposal of a Business
     and Extraordinary, Unusual and Infrequently Occurring Events and
     Transactions," for the disposal of a segment of a business. SFAS No. 144 is
     effective for fiscal years beginning after December 15, 2001, and interim
     periods within those fiscal years. The provisions of this Statement
     generally are to be applied prospectively. Shelbourne does not expect that
     this statement will have a material effect on the Shelbourne's financial
     statements.

3.   CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES

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

     A.   Prior to April 17, 2001

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

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

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

     Effective as of August 28, 1997, Presidio had a management agreement with
     NorthStar Presidio Management Company LLC ("NorthStar Presidio"), an
     affiliate of NorthStar Capital Investment Corp., pursuant to which
     NorthStar Presidio provided the day-to-day management of Presidio and its
     direct and indirect subsidiaries and affiliates. For the years ended
     December 31, 2001, 2000 and 1999, reimbursable expenses incurred by
     NorthStar Presidio, which is related to the Predecessor Partnership,
     amounted to approximately $0, $0 and $102,025 respectively. Effective
     October 21, 1999, Presidio entered into a Services Agreement with AP-PCC
     III, L.P. (the "Agent") pursuant to which the Agent was retained to


                                      F-9

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     provide asset management and investor relation services to the Predecessor
     Partnership and other entities affiliated with the Predecessor Partnership.

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

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

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

     Prior to the merger in April 2001, the Predecessor Partnership had a
     property management services agreement with Resources Supervisory
     Management Corp. ("Resources Supervisory"), an affiliate of the Managing
     General Partner, to perform certain functions relating to the management of
     the properties of the Partnership. Portions of the property management fees
     were paid to unaffiliated management companies, which were engaged for the
     purpose of performing the management functions for certain properties.
     Effective October 2000, Kestrel Management L.P. ("Kestrel"), an affiliate
     of the Agent began performing all property management services directly for
     the Predecessor Partnership. For the years ended December 31, 2000, and
     1999, Resources Supervisory was entitled to receive an aggregate of
     $254,820, and $389,113 respectively, of which $152,415 was received by
     Kestrel in 2000 and $102,405, and $319,610 was paid to unaffiliated
     management companies, respectively. From October 1, 2000 through December
     31, 2000, Kestrel received $95,844. For the year ended December 31, 2001
     Kestrel received $369,139.

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


                                      F-10

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     Pursuant to the amendment to the Agreement, which became effective on
     August 20, 1999, the annual partnership management fee for 1999 was reduced
     to $973,293. Further, the Agreement was amended (for the year 2000 and
     beyond) so that the partnership management fee will be calculated equal to
     1.25% of the Gross Asset Value of the Predecessor Partnership. For the
     years ended December 31, 2000 and 1999 the Managing General Partner earned
     $1,171,252, and $973,293, respectively.

     Prior to the conversion, the Predecessor General Partners were allocated 5%
     of the net income of the Predecessor Partnership that amounted to $205,164
     and $192,624 in 2000 and 1999, respectively. The General Partners were also
     entitled to receive 5% of distributions that amounted to $71,181 in 1999.
     There were no distributions were paid in 2000.

     In connection with a tender offer for units of the Predecessor Partnership
     made March 12, 1998 (the "Offer") by Olympia Investors, L.P., a Delaware
     limited partnership controlled by Carl Ichan ("Olympia"), Olympia and
     Presidio entered into an agreement dated March 6, 1998 (the "Olympia
     Agreement"). Subsequent to the expiration of the offer, Olympia announced
     that it had accepted for payment 32,750 units properly tendered pursuant to
     the Offer. Pursuant to the Olympia Agreement, Presidio purchased 50% of the
     units owned by Olympia as a result of the Offer, or 16,375 units, for
     $91.73 per unit. Presidio may be deemed to beneficially own the remaining
     units owned by Olympia as a consequence of the Olympia Agreement.

     Subsequent to the expiration of the tender offer described above,
     Millennium Funding III Corp. purchased 18,769 limited partnership units
     from August 1998 through February 1999. The total of these purchases and
     the units purchased from Olympia (as described above) represents
     approximately 13.7% of the outstanding limited partnership units of the
     Predecessor Partnership.

     As required by the settlement (see Note 6), an affiliate of the Predecessor
     General Partners, Millennium Funding 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. As a result
     of these purchases, as well as other purchases of Units by the affiliates,
     the Predecessor General Partners owned 139,649 Units representing
     approximately 23.75% of the total outstanding Units.

     B.   April 17, 2001 to December 31, 2001

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

     Effective April 17, 2001, Shelbourne entered into a contract with
     Shelbourne Management, LLC ("Shelbourne Management"), which contract has a
     term of 10 years, pursuant to which Shelbourne Management agreed to provide
     Shelbourne with all management, advisory and property management services.
     Shelbourne Management is owned by Presidio Capital Investment Company, LLC
     ("PCIC"), an entity controlled and principally owned by affiliates of
     former senior management of the Company. For providing these services,
     Shelbourne Management was to receive (1) an annual asset management fee,
     payable quarterly, equal to 1.25% of the gross asset value of Shelbourne as
     of the last day of each year, (2) property management fees of up to 6% of
     property revenues, (3) $150,000 for non-accountable expenses and (4)
     reimbursement of expenses incurred in connection with the performance of
     its services. This agreement was terminated on February 14, 2002 as part of
     the transaction described in Note 7 below.

     Subsequent to the conversion, all Predecessor Partnership Units owned were
     converted to common stock at three shares for one partnership unit.
     Affiliates of the Predecessor General Partner owned 343,124 shares and
     received a distribution in the amount of $723,992 in 2001.


                                      F-11

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

<TABLE>
<CAPTION>
                                                             Twelve Months Ended
                                                             -------------------

                                      December 31, 2001        December 31, 2000     December 31, 1999
                                      -----------------        -----------------     -----------------
                                  Predecessor
                                  General        Shelbourne        Predecessor           Predecessor
                                  Partners       Management     General Partners      General Partners
                                  ---------      ----------     ----------------      ----------------
<S>                               <C>              <C>             <C>                   <C>
        Expense Reimbursement     $  59,444        $140,556          $200,000              $200,000
        Asset Management Fee       $394,808        $947,194        $1,171,252            $1,417,475
</TABLE>



4.   REAL ESTATE

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

                                                        December 31,
                                            ------------------------------------
                                                 2001                  2000
                                            --------------       ---------------

     Land                                   $    9,636,715       $   11,669,652

     Buildings and improvements                 57,034,945           59,999,235
                                            --------------       --------------
                                                66,671,660           71,668,887

     Less:  Accumulated depreciation           (25,344,619)         (25,729,457)
                                            --------------       --------------

                                            $   41,327,041       $   45,939,430
                                            ==============       ==============

     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. Shelbourne realized a
     gain on sale of $3,207,975. The REIT realized a tax loss on sale of
     $1,421,228.

     During 2001, revenues from the 568 Broadway, and Sutton properties
     represented 28%, and 15% of gross revenues, respectively. During 2000,
     revenues from the 568 Broadway, Matthews and Sutton properties represented
     26%, 14% and 14% of gross revenues, respectively. During 1999, revenues
     from the 568 Broadway, Matthews and Sutton properties represented 26%, 14%
     and 14% of gross revenues, respectively. No single tenant accounted for
     more than 10% of the Shelbourne's rental revenues in 2001.

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

<TABLE>
<CAPTION>
                    2002          2003           2004          2005          2006      Thereafter      Total
                 ----------    ----------    ---------      ----------    ----------   -----------   -----------

<S>              <C>           <C>           <C>            <C>           <C>          <C>           <C>
     Total       $9,857,726    $8,629,464    $7,436,031     $6,494,046    $5,118,768   $13,781,297   $51,327,333
                 ==========    ==========    ==========     ==========    ==========   ===========   ===========
</TABLE>


                                      F-12

<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Predecessor Partnership recorded substantial write-downs for impairment
     prior to 1996. No write-downs were required for 2001, 2000 or 1999.
     Commonwealth Industrial Park was sold on December 6, 2001. The following
     table summarizes the write-downs recorded on the properties after the sale:

<TABLE>
<CAPTION>
          Property
          --------

<S>                                      <C>
          Century Park I                 $11,700,000
          568 Broadway                    10,821,150
          Seattle Tower                    6,050,000
          Commerce Plaza I                 2,700,000
          Melrose Crossing                12,100,000
          Matthews Festival                5,300,000
                                       -------------
                                         $48,671,150
                                       =============
</TABLE>


                                      F-13

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   DUE TO AFFILIATES

<TABLE>
<CAPTION>
                                                              December 31,
                                                          2001          2000
                                                      -----------    -----------

<S>                                                   <C>            <C>
     Predecessor Partnership asset management fee     $         -    $   462,473
     Non-accountable expense reimbursement                      -         50,000
                                                      -----------    -----------
                                                      $         -    $   512,473
                                                      ===========    ===========
</TABLE>



6.   SETTLEMENT OF LAWSUIT

     In April 1999, the California Superior Court approved the terms of the
     settlement of a class action and derivative litigation involving the
     Predecessor Partnership. Under the terms of the settlement, the Predecessor
     General Partners agreed to take the actions described below subject to
     first obtaining the consent of limited partners to amendments to the
     Agreement summarized below. The settlement became effective in August 1999
     following approval of the amendments. As amended, the Agreement (a)
     provided for a Partnership Asset Management Fee equal to 1.25% of the gross
     asset value of the Predecessor Partnership and a fixed 1999 Partnership
     Asset Management Fee of $973,293 or $312,139 less than the amount that
     would have been paid for 1999 under the prior formula and (b) fixed the
     amount that the Predecessor General Partners would 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 Agreement provided that, upon a reorganization of the
     Predecessor Partnership into a real estate investment trust or other public
     entity, the Predecessor General Partners will have no further liability to
     pay the Fee Give-Back Amount.

     As required by the settlement, as discussed above, Millennium Funding III,
     LLC, made a tender offer to limited partners to acquire up to 39,596 Units
     at a price of $103.05 per Unit. The offer closed in January 2000 and all
     39,596 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 partnership into a
     real estate investment trust or other entity whose shares were listed on a
     national securities exchange or on the NASDAQ National Market System. A
     Registration Statement was filed with the Securities and Exchange
     Commission on February 11, 2000 with respect to the restructuring of the
     Predecessor Partnership into a publicly-traded real estate investment
     trust. On or about February 15, 2001, a prospectus/consent solicitation
     statement was mailed to the limited partners of the Predecessor Partnership
     seeking their consent to the reorganization of the Predecessor Partnership
     into a real estate investment trust.

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

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

     On April 17, 2001 the conversion was accomplished by merging the
     Predecessor Partnership into the Operating Partnership. Pursuant to the
     merger, each limited partner received two shares of stock of the
     Corporation for each unit they owned, and the general partners received an
     aggregate of 61,896 shares of stock of the Corporation in exchange for
     their general partner interests. The common stock of the Corporation listed
     on the American Stock Exchange under the symbol HXE.


                                      F-14

<PAGE>


                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   SUBSEQUENT EVENTS

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

     Pursuant to the Transaction, Shelbourne paid PCIC $17,866,603 in cash and
     its operating partnership, Shelbourne Properties II LP issued preferred
     partnership interests with an aggregate liquidation preference of
     $1,015,148 and issued a note with an aggregate stated amount of
     $23,658,488.

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

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

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

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

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

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


                                      F-15

<PAGE>

                         SHELBOURNE PROPERTIES II, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   QUARTERLY DATA

     The following table presents unaudited financial data by quarter for the
years ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                     ------------------------------------------------------------------------------------------------------
                         2001         2001         2001         2001         2000         2000        2000        2000
                       4TH QTR      3RD QTR       2ND QTR      1ST QTR      4TH QTR     3RD QTR     2ND QTR     1ST QTR
                     ------------------------------------------------------------------------------------------------------

<S>                    <C>           <C>          <C>          <C>          <C>         <C>         <C>         <C>
Rental Revenues        $2,816,299    $3,005,861   $3,042,154   $3,054,259   $2,868,450  $3,175,716  $2,844,905  $2,916,165
                     ------------------------------------------------------------------------------------------------------


   Operating Expenses   1,076,894     1,069,257      976,043      933,781    1,139,473     763,793     872,404   1,028,854

   Depreciation &
   Amortization           548,222       578,243      547,963      559,411      579,636     560,693     479,570     551,425

   Asset Management
   Fee                    340,477       335,499      334,378      331,648      462,474     276,624     216,077     216,077

   Administrative
   Expenses               161,349        60,135      350,881      493,390      289,436     138,979     331,784     314,306

   Property
   management fee          94,675        92,162       91,576       90,726       95,884      82,110      70,579     102,131
                     ------------------------------------------------------------------------------------------------------

                        2,221,617     2,135,296    2,300,841    2,408,956    2,566,903   1,822,199   1,970,414   2,212,793
                     ------------------------------------------------------------------------------------------------------


Income Before
Interest And Other
Income                    594,682       870,565      741,313      645,303      301,547   1,353,517     874,491     703,372


   Interest Income        146,353       147,558      182,429      233,573      267,319     215,256     183,116     149,777

   Other Income            51,898         6,100        8,602       13,800       19,081      25,750      10,050           -

   Gain On Sale         3,207,975             -            -            -            -           -           -           -
                     ------------------------------------------------------------------------------------------------------


Net Income             $4,000,908    $1,024,223     $932,344     $892,676     $587,947  $1,594,523  $1,067,657    $853,149
                     ======================================================================================================

Net Income Per
Common Share                $3.23         $0.83        $0.75        $0.72        $0.47       $1.29       $0.86       $0.69
                     ======================================================================================================

Weighted Average
Common Shares           1,237,916     1,237,916    1,237,916    1,237,916    1,237,916   1,237,916   1,237,916   1,237,916
                     ======================================================================================================
</TABLE>


                                      F-16


<PAGE>




                         SHELBOURNE PROPERTIES II, INC.,
                             A DELAWARE CORPORATION

                             ADDITIONAL INFORMATION

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                                      INDEX

                                                                            Page
                                                                          Number

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

Schedules - December 31, 2001, 2000 and 1999

    Schedule III - Real estate and accumulated depreciation                  S-1

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




<PAGE>



SHELBOURNE PROPERTIES II, INC.


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

<TABLE>
<CAPTION>
                                                                                                          Reductions
                                                                                                           Recorded
                                                                                    Costs Capitalized     Subsequent
                                                                                      Subsequent to           to
                                                             Initial Cost              Acquisition        Acquisition
                                                       ------------------------- ----------------------  -------------
                                                                     Buildings
                                                                        And                   Carrying
              Description                 Encumbrances    Land      Improvements Improvement    Costs     Write Downs
----------------------------------------  ------------ ----------  ------------- ----------- ----------  -------------
RETAIL:

<S>                         <C>           <C>         <C>          <C>          <C>         <C>           <C>
Melrose Crossing Shopping   Melrose
Center                      Park, IL      $---        $2,002,532   $12,721,968  $1,159,274  $1,064,777    $(12,100,000)

Matthews Township           Matthews, NC
Festival Shopping Center                   ---         2,973,646    12,571,750     446,845   1,581,384     (5,300,000)

Sutton Square Shopping      Raleigh, NC
Center                                     ---         2,437,500    10,062,500     525,753   1,025,898             --
                                           ---         ---------    ----------     -------   ---------             --

                                           ---         7,413,678    35,356,218   2,131,872   3,672,059    (17,400,000)
                                           ---         ---------    ----------   ---------   ---------    -----------

OFFICE:

Commerce Plaza Office       Richmond, VA
Building                                   ---           733,279     7,093,435   2,430,954     468,324     (2,700,000)

Century Pak I Office        Kearny
Complex                     Mesa, CA       ---         3,122,064    12,717,936   2,141,254   1,203,130    (11,700,000)

568 Broadway Office         New York, NY
Building                                   ---         2,318,801     9,821,517   5,352,710   1,220,484    (10,821,150)

Seattle Tower  Office       Seattle, WA
Building                                   ---         2,163,253     5,030,803   3,750,371     486,969     (6,050,000)
                                           ---         ---------     ---------   ---------     -------     ----------

                                           ---         8,337,397    34,663,691  13,675,289   3,378,907    (31,271,150)
                                           ---         ---------    ----------  ----------   ---------    -----------

INDUSTRIAL:

Commonwealth Industrial     Fullerton,
Park                        CA             ---         3,749,700     7,125,300     862,289     767,573     (5,800,000)

TMR Warehouses              Various, OH
                                           ---           369,215     5,363,935      58,268     435,653            ---

Melrose (Lot #7)            Melrose
                            Park, IL       ---           450,000           ---         ---      36,628            ---

Disposition of              Fullerton,
Commonwealth                CA             ---        (3,749,700)   (7,125,300)   (862,289)   (767,573)     5,800,000
                                           ---        ----------    ----------     --------    --------     ---------

                                           ---
                                           ---           819,215     5,363,935      58,268     472,281            ---
                                                         -------     ---------      ------     -------            ---


                                           $---      $16,570,290   $75,383,844 $15,865,429  $7,523,247   $(48,671,150)
                                           ====      ===========   =========== ===========  ==========   ============
<CAPTION>

                                                    Gross Amount At Which
                                                 Carried at Close of Period
                                            ------------------------------------
                                                      Buildings
                                                         And                   Accumulated  Date
                                           Land      Improvements    Total     Depreciation Acquired
                                        ---------  -------------- ----------   ------------ --------

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

Melrose Crossing Shopping   Melrose     $  569,462   $ 4,279,089  $ 4,848,551  $ 3,151,364     1988
Center                      Park, IL

Matthews Township           Matthews, NC 2,249,562    10,024,063   12,273,625    4,441,516     1988
Festival Shopping Center

Sutton Square Shopping      Raleigh, NC  2,637,550    11,414,101   14,051,651    4,139,896     1988
Center                                   ---------    ----------   ----------    ---------

                                         5,456,574    25,717.253   31,173,827   11,732,776
                                         ---------    ----------   ----------   ----------


OFFICE:

Commerce Plaza Office       Richmond, VA   556,352     7,469,640    8,025,992    2,969,534     1987
Building

Century Pak I Office        Kearny       1,092,744     6,391,640    7,484,384    3,630,876     1986
Complex                     Mesa, CA

568 Broadway Office         New York, NY   922,338     6,970,024    7,892,362    3,334,463     1986
Building

Seattle Tower  Office       Seattle, WA    724,808     4,656,588    5,381,396    1,747,241     1986
Building                                   -------     ---------    ---------    ---------

                                         3,296,242    25,487,892   28,784,134   11,682,114
                                         ---------    ----------   ----------   ----------


INDUSTRIAL:

Commonwealth Industrial     Fullerton,   2,032,937     4,671,925    6,704,862    2,207,206     1987
Park                        CA

TMR Warehouses              Various, OH    397,271     5,829,800    6,227,071    1,929,729     1988


Melrose (Lot #7)            Melrose        486,628           ---      486,628          ---     1988
                            Park, IL

Disposition of              Fullerton,  (2,032,937)   (4,671,925)  (6,704,862)  (2,207,206)
Commonwealth                CA          ----------    ----------   ----------   ----------


                                           883,899     5,829,800    6,713,699    1,929,729
                                           -------     ---------    ---------    ---------


                                        $9,636,715   $57,034,945  $66,671,660  $25,344,619
                                        ==========   ===========  ===========  ===========

</TABLE>

Commonwealth Industrial Park was sold on December 6, 2001.


Note: The aggregate cost for Federal income tax purposes is $116,097,002 at
      December 31, 2001.


                                      S-1

<PAGE>



SHELBOURNE PROPERTIES II, INC.

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

(A)      RECONCILIATION OF REAL ESTATE OWNED:


<TABLE>
<CAPTION>
                                                            December 31,
                                       ------------------------------------------------------
                                             2001                2000               1999
                                       ---------------     ---------------     --------------

<S>                                     <C>                 <C>                 <C>
BALANCE AT BEGINNING OF YEAR            $ 71,668,887        $  71,214,936       $  70,577,313

ADDITIONS DURING THE YEAR
     Improvements to Real Estate           1,707,635              453,951             637,623

SUBTRACTIONS DURING THE YEAR
     Sales - Net (2)                      (6,704,862)                  --                  --
                                        -------------       -------------       -------------

BALANCE AT END OF YEAR (1)              $ 66,671,660        $  71,668,887       $  71,214,936
                                        ============        =============       =============
</TABLE>

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

     (2)  COMMONWEALTH INDUSTRIAL PARK WAS SOLD ON DECEMBER 6, 2001

(B)   RECONCILIATION OF ACCUMULATED DEPRECIATION:

<TABLE>
<CAPTION>
                                                            December 31,
                                       ------------------------------------------------------
                                             2001                2000               1999
                                       ---------------     ---------------     --------------

<S>                                    <C>                 <C>                 <C>
BALANCE AT BEGINNING OF YEAR             $25,729,457          $23,937,163         $22,228,503

ADDITIONS DURING THE YEAR
     Depreciation Expense(1)               1,822,368            1,792,294           1,708,660

SUBTRACTIONS DURING THE YEAR
     Sales (2)                            (2,207,206)                  --                  --
                                       -------------        -------------       -------------

BALANCE AT END OF YEAR                 $  25,344,619        $  25,729,457       $  23,937,163
                                       =============        =============       =============
</TABLE>

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

(2)  COMMONWEALTH INDUSTRIAL PARK WAS SOLD ON DECEMBER 6, 2001.


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