<PAGE>   1
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

(MARK ONE)

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

                 For the quarterly period ended March 31, 1997
                               
                                       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: 333-11625


       Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
             (Exact name of registrant as specified in its charter)

                   Delaware                            94-3240473
        -------------------------------           -------------------
        (State or other jurisdiction of            (I.R.S. Employer  
        incorporation or organization)            Identification No.)

              50 California Street
                   Suite 2020
           San Francisco, California                      94111
    ---------------------------------------             ----------
    (Address of principal executive offices)            (Zip Code)

                                 (415) 288-9575
              ---------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report

        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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    [X] Yes    [ ] No

               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

        Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.    [ ] Yes    [ ] No

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

        As of April 30, 1997, there were no shares of common stock outstanding.





<PAGE>   2


                                     PART I
                                     ITEM I

                              FINANCIAL STATEMENTS








                                       1

<PAGE>   3
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                              (Unaudited)         (Audited)
                                                                            March 31, 1997   December 31, 1996
                                                                            --------------   -----------------
<S>                                                                           <C>               <C>
ASSETS

      Cash and cash equivalents                                               $   89,941        $   66,798
      Restricted cash                                                            119,316            65,109
      Accounts receivable                                                        114,744           110,006
      Investment                                                                 200,000           200,000
      Mortgage notes receivable                                                4,962,226         4,696,238
      Real estate held for sale                                                1,257,701         1,312,520
      Organization costs (net of accumulated amortization
            of $4,295 at March 31, 1997 and $3,216 at
            December 31, 1996)                                                    17,733            18,459
      Deferred offering costs                                                    263,580           233,131
                                                                              ----------        ----------

      Total assets                                                            $7,025,241        $6,702,261
                                                                              ==========        ==========


LIABILITIES AND STOCKHOLDERS' EQUITY

      Liabilities
            Mortgage note holdbacks                                           $  119,197        $   64,991
            Due to affiliates                                                     53,552            21,294
            Other liabilities                                                     54,198            91,393
            Mortgage notes payable                                               867,753           578,395
                                                                              ----------        ----------
      Total liabilities                                                        1,094,700           756,073
                                                                              ----------        ----------
      Stockholders' Equity
            Preferred stock, $.01 par value (liquidation value
                  $9.50 per share), 675,000 shares authorized;
                  641,283 and 641,283 shares issued and outstanding at
                  March 31, 1997 and December 31, 1996, respectively               6,413             6,413
            Common stock, $.01 par value, 2 million
                  shares authorized; none issued and outstanding                      --                --
            Additional paid in capital (Preferred stock)                       5,924,128         5,939,775
                                                                              ----------        ----------
      Total stockholders' equity                                               5,930,541         5,946,188
                                                                              ----------        ----------

      Total liabilities and stockholders' equity                              $7,025,241        $6,702,261
                                                                              ==========        ==========
</TABLE>




                 See accompanying notes to financial statements.

<PAGE>   4


                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                     Combined
                                                                    (Successor)   (Predecessors)
                                                                    -----------   --------------
                                                                        Three Months Ended
                                                                             March 31,
                                                                       1997            1996
                                                                     --------        --------
<S>                                                                  <C>             <C>
REVENUES
      Interest income                                                $182,781        $177,118
      Points                                                           24,608              --
      Other income                                                     25,867          35,930
                                                                     --------        --------
            Total revenues                                            233,256         213,048
                                                                     --------        --------

EXPENSES
      Loan servicing fees and other expenses to related party          29,179          15,025
      Interest expense                                                 39,959              --
      Provision for loan losses                                            --          15,000
      Operating expenses of real estate held                           19,147
      General and administrative                                       10,592        $  2,236
                                                                     --------        --------
            Total expenses                                             98,877          32,361
                                                                     --------        --------

NET INCOME                                                           $134,379        $180,687
                                                                     ========        ========



NET INCOME PER PREFERRED SHARE                                       $   .282        $   .279

WEIGHTED AVERAGE PREFERRED SHARES OUTSTANDING                         641,464         647,521
</TABLE>





                 See accompanying notes to financial statements.
<PAGE>   5


                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                                   Combined
                                                                             (Successor)        (Predecessors)
                                                                             -----------        --------------
                                                                                    Three Months Ended
                                                                                        March 31,
                                                                                1997                1996
                                                                             -----------         -----------
<S>                                                                          <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                                             $   134,378         $   180,687
      Adjustments to reconcile net income to net cash
      provided by operating activities:
            Amortization                                                           1,080                  --
            Increase (decrease) in accounts receivable                            (4,737)            (35,190)
            Accrued interest capitalized to real estate
                held for sale                                                    (13,826)                 --
            Increase (decrease) in loan loss reserve                                  --              15,000
            Increase (decrease) in due to affiliates                              32,258             (24,162)
            Increase (decrease) in other liabilities                              (8,196)            (16,424)
                                                                             -----------         -----------
                  Net cash provided by (used in) operating activities            140,957             119,911
                                                                             -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES
      (Increase) decrease in restricted cash                                     (54,207)              6,026
      Increase (decrease) in mortgage note holdbacks                              54,207              (6,026)
      Investments in mortgage notes receivable                                (1,345,000)           (362,100)
      Repayments of mortgage notes receivable                                    963,946             773,655
      Net proceeds from sale of foreclosed property                              485,658                  --
      Capital costs of foreclosed property                                       (11,922)                 --
                                                                             -----------         -----------
            Net cash provided by (used in) investing activities                   92,682             411,555
                                                                             -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES
      Redemption of shares                                                            --             (44,825)
      Deferred offering costs                                                    (53,474)                 --
      Receipt of subscriptions receivable                                             --             265,511
      Payment of mortgage notes payable                                           (6,642)                 --
      Organizational and offering costs                                             (354)                 --
      Dividends paid                                                            (150,026)           (162,987)
                                                                             -----------         -----------
            Net cash provided by (used in) financing activities                 (210,496)             57,699
                                                                             -----------         -----------

NET INCREASE (DECREASE) IN CASH                                                   23,143             589,165
CASH AT BEGINNING OF PERIOD                                                       66,798             829,978
                                                                             -----------         -----------

CASH AT END OF PERIOD                                                        $    89,941         $ 1,419,143
                                                                             ===========         ===========


SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest expense paid                                                  $        --         $        --
      Taxes paid                                                             $        --         $        --
</TABLE>




                 See accompanying notes to financial statements.
<PAGE>   6

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)


1.    Organization

      Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
      "Trust"), a Delaware corporation, primarily invests in mortgage loans
      secured by real estate. The Trust was formed December 12, 1995 to
      facilitate the combination of the mortgage investment operations of
      Capital Alliance Income Trust I, a Delaware business trust, and Capital
      Alliance Income Trust II, a Delaware business trust, (collectively
      referred to as the "Predecessors", individually referred to as "CAIT I"
      and "CAIT II", respectively). CAIT I and CAIT II were both privately-held
      mortgage investment trusts which invested primarily in loans secured by
      deeds of trust on one-to-four unit residential properties. The Manager,
      Capital Alliance Advisors, Inc. (the "Manager") originates, services and
      sells the Trust's loans.

      The effective date of the combination (the "Combination") was midnight
      April 30, 1996, pursuant to the issuance of a permit by the California
      Commissioner of Corporations which qualified the issuance of the preferred
      shares of the Trust issued in the Combination. Under the Agreement and
      Plan of Reorganization among the Trust and the Predecessors, each
      outstanding share of the Predecessors' Class "A" shares was exchanged into
      one (1) share of the Trust's Series A preferred stock (the "Preferred
      Shares") and the outstanding shares of the Predecessors' Class "B" shares
      were exchanged into Preferred Shares equal to one percent (1%) of the
      total number of Preferred Shares to be issued in the Combination of the
      Predecessors.

      At midnight April 30, 1996, the Trust (Successor) exchanged 347,715 and
      296,015 Preferred Shares to CAIT I and CAIT II, respectively, for all
      whole shares of the Predecessors' outstanding Class "A" and Class "B"
      shares. Thereafter, all assets and liabilities of the Predecessors were
      transferred to the Trust.

      Effective February 12, 1997, the Trust registered its common shares with
      the Securities and Exchange Commission pursuant to the Securities Act of
      1933, as amended in connection with a "best efforts" offering of up to
      1,500,000 common shares at $8.00 per share. Pending the official notice of
      issuance, the shares will be listed on the American Stock Exchange. The
      Trust actively commenced marketing its shares in May, 1997.

2.    Basis of presentation

      The accompanying financial statements include the accounts of the Trust
      and the Predecessors. The financial information presented as of any date
      other than December 31 has been prepared from the books and records
      without audit. The accompanying financial statements have been prepared in
      accordance with the instructions to Form 10-Q and do not include all of
      the information and the footnotes required by generally accepted
      accounting principles for complete statements. In the opinion of
      management, all adjustments, consisting only of normal recurring
      adjustments, necessary for a fair presentation of such financial
      statements, have been included.

      The preparation of the financial statements in conformity with generally
      accepted accounting principles 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.



<PAGE>   7

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)

2.    Basis of presentation (continued)

      These financial statements should be read in conjunction with the
      financial statements and notes thereto for the year ended December 31,
      1996 contained in the Trust's 1996 Annual Report to Stockholders.

      The unaudited interim financial statements for the three months ended
      March 31, 1996 represent the combined financial statements of the
      Predecessors (prior to the merger). The unaudited interim financial
      statements for the three months ended March 31, 1997 represent the
      financial statements of the Trust (Successor) after the merger described
      in Note 1.

      The operations of the Predecessors have been combined with the Trust due
      to the common management and directors. The Combination has been accounted
      for as a purchase. CAIT I is considered the acquiring entity and CAIT II
      the acquired entity. The purchase price represents the net assets of CAIT
      II as of April 30, 1996 approximating $2,771,351. This amount is the
      carrying amount of assets less liabilities which approximates fair market
      value. Therefore, there is no excess purchase price or Goodwill. The fair
      market value of net assets acquired was used to determine the purchase
      price since the value of the Trust's Preferred Shares exchanged is not
      readily determinable and the fair value of net assets acquired is more
      clearly evident.

3.    Summary of significant accounting policies

      Cash and cash equivalents. Cash and cash equivalents include cash and
      liquid investments with an original maturity of three months or less. The
      Trust deposits cash in financial institutions insured by the Federal
      Deposit Insurance Corporation. At times, the Trust's account balances may
      exceed the insured limits. Restricted cash are amounts segregated and are
      to be disbursed only to mortgage loan borrowers upon completion of certain
      improvements on the secured property (see Note 4).

      Revenue recognition. Interest income is recorded on the accrual basis of
      accounting in accordance with the terms of the loans. When the payment of
      principal or interest is 90 or more days past due, management reviews the
      likelihood that the loan will be repaid. For these delinquent loans,
      management continues to record interest income and establishes a loan loss
      reserve as necessary to protect against losses in the loan portfolio
      including accrued interest.

      Loan loss reserve. Management reviews its loan loss provision periodically
      and the Trust maintains an allowance for losses on mortgage notes
      receivable at an amount that management believes is sufficient to protect
      against losses in the loan portfolio given the individual loan to value of
      the Trust's loan portfolio based on the latest independent appraisals.
      Accounts receivable deemed uncollectible are written off or reserved. The
      Trust does not accrue interest income on impaired loans (Note 5).



<PAGE>   8

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)

3.    Summary of significant accounting policies (continued)

      Investment. The Trust holds an interest in 99% of the outstanding Class B
      preferred shares (20,000 shares of non voting stock) of beneficial
      interest of Sierra Capital Acceptance ("Investee"), a Delaware business
      trust which originates and sells residential mortgage loans. Sierra
      Capital Services, Inc., a related party, owns 99% of the Class A common
      shares of beneficial interest of the Investee and maintains voting
      control. The Class B preferred shares are entitled to a 15% return per
      annum. All net profits and losses are allocated to the Class A common
      shares. Class A common shareholders are required to contribute or loan
      additional capital to cover any operating losses. The Investee is taxed as
      a partnership. The Trust accounts for its investment under the equity
      method and accrues earnings as described above (15% return) in accordance
      with the Investee's trust agreement. Earnings from this investment are
      recorded as interest income on the Statements of Operations.

      Income taxes. The Trust intends at all times to qualify as a real estate
      investment trust ("REIT") for federal income tax purposes, under Sections
      856 through 860 of the Internal Revenue Code of 1986, as amended and
      applicable Treasury Regulations. Therefore, the Trust generally will not
      be subject to federal corporate income taxes on its net income that is
      currently distributed to stockholders. To qualify as a REIT, the Trust
      must elect to be so treated and must meet on a continuing basis certain
      requirements relating to the Trust's organization, sources of income,
      nature of assets, and distribution of income to shareholders. In addition,
      the Trust must maintain certain records and request certain information
      from its stockholders designed to disclose actual ownership of its stock.

      In order to maintain its qualification as a REIT, the Trust must annually
      satisfy three gross income requirements. First, at least 75% of the
      Trust's gross income (excluding gross income from prohibited transactions)
      for each taxable year must be derived from, among other things, interest
      on obligations secured by mortgages on real property and rents from real
      property. Second, at least 95% of the Trust's gross income (excluding
      gross income from prohibited transactions) for each taxable year must be
      derived from the sources described under the 75% gross income test,
      dividends, interest, and gain from the sale or disposition of stock or
      securities. Third, short-term gain from the disposition of securities,
      gain from prohibited transactions, and gain on the disposition of real
      property held for less than four years (apart from involuntary conversions
      and disposition of foreclosure property) must represent less than 30% of
      the Trust's gross income (including gross income from prohibited
      transactions) for each taxable year.

      The Trust, at the close of each quarter of its taxable year, must also
      satisfy three tests relating to the nature of its assets. First, at least
      75% of the value of the Trust's total assets must be represented by, among
      other things, mortgages on real property, real property, cash, cash items
      and government securities. Second, not more than 25% of the Trust's total
      assets may be represented by securities other than those in the 75% asset
      class. Third, of the investments included in the 25% asset class, the
      value of any one issuer's securities owned by the Trust may not exceed 5%
      of the value of the Trust's otal assets and the Trust may not own more
      than 10% of any one issuer's outstanding voting securities.


<PAGE>   9

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)

3.    Summary of significant accounting policies (continued)

      The Trust, in order to qualify as a REIT, is required to distribute
      dividends (other than capital gain dividends) to its stockholders in an
      amount at least equal to the sum of 95% of the Trust's "REIT taxable
      income" (excluding the Trust's net capital gain) and 95% of the net income
      (after tax), if any, from foreclosure property.

      If the Trust fails to qualify for taxation as a REIT in any taxable year,
      and the relief provisions do not apply, the Trust will be subject to tax
      on its taxable income at regular corporate rates. Distributions to
      stockholders in any year in which the Trust fails to qualify will not be
      deductible by the Trust nor will they be required to be made. Unless
      entitled to relief under specific statutory provisions, the Trust will
      also be disqualified from taxation as a REIT for the four taxable years
      following the year during which qualification was lost.

      Based on the Trust's belief that it has operated in a manner so as to
      allow it to elect in its first tax return to be taxed as a REIT since
      inception, no provision for federal income taxes has been made in the
      financial statements.

      Fair value of financial instruments. For cash and cash equivalents, the
      carrying amount is a reasonable estimate of fair value. For mortgage note
      receivables, fair value is estimated by discounting the future cash flows
      using the current interest rates at which similar loans would be made to
      borrowers with similar credit ratings and for the same remaining
      maturities. It was determined that the difference between the carrying
      amount and the fair value of the mortgage notes receivable is immaterial.

      Organizational costs. Organization costs are capitalized and amortized on
      a straight-line basis over five years.

      Deferred offering costs. Deferred offering costs relate to an initial
      public offering of common stock. When the offering is completed the costs
      will be offset against the proceeds and recorded as a reduction of
      stockholders' equity.

      Real estate held for sale. Real estate held for sale results from
      foreclosure of loans and at time of foreclosure is recorded at the lower
      of carrying amount or fair value of the property minus estimated costs to
      sell. At this time senior debt to which the asset is subject is reported
      as mortgage payable. Subsequent to foreclosure, the foreclosed asset value
      is periodically reviewed and is adjusted to fair value. No depreciation is
      taken on the real estate held for sale. Income and expenses related to
      real estate held for sale are recorded as interest income, interest
      expense and general and administrative expenses on the Statements of
      Operations.




<PAGE>   10

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)

3.    Summary of significant accounting policies (continued)

      Pro-forma earnings per share. Historically the Preferred Shares received
      100% of the net income. The Preferred Shares will receive an annual
      preferred allocation of income and distribution. After meeting this
      preference, 100% of any additional income earned from the proceeds of the
      offering will be allocated to the Common Shares until the distribution
      matches the Preferred Shares (see Note 9). No common shares were
      outstanding in prior periods.

4.    Mortgage note holdbacks

      Pursuant to mortgage loan agreements between the Trust and certain of its
      borrowers, a portion of the loan proceeds are held by the Trust in
      segregated accounts to be disbursed only to such borrowers upon completion
      of certain improvements on the secured property. As of March 31, 1997 and
      1996, mortgage note holdbacks from the consummation of mortgage loans made
      amounted to $119,197 and $64,991, respectively.

5.    Mortgage notes receivable

      Mortgage notes receivable represent transactions with customers in which
      the Trust has invested in home equity loans on residential real estate.
      The Trust is subject to the risks inherent in finance lending including
      the risk of borrower default and bankruptcy.

      Mortgage notes receivable are stated at the principal outstanding.
      Interest on the mortgages is due monthly and principal is due as a balloon
      payment at loan maturity. The notes are secured by deeds of trust on
      residential properties located primarily in California which results in a
      concentration of credit risk. The value of the loan portfolio may be
      affected by changes in the economy or other conditions of the geographical
      area. A portion of the notes are secured by a second position on the
      underlying properties and loans are non-conforming loans to B/C-credit
      borrowers.

      The Trust measures impairment based on the fair value of the related
      collateral since all loans subject to this measurement are collateral
      dependent. There was no investment in impaired loans for all periods
      presented.


<PAGE>   11

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)


6.    Accounts receivable

      Accounts receivable consists of accrued interest on mortgage notes
      receivable and other amounts due from borrowers.

7.    Mortgage notes payable

      As of March 31, 1997 the Trust held five mortgage notes payable totaling
      $867,753. These notes are payable to various banks and secured by first
      deeds of trust on various residential foreclosed properties, with interest
      accruing at 8.25% to 8.95% per annum, except one at 11.5% and principal
      and interest payments of $6,857 due monthly. The maturity dates vary and
      the balances outstanding are due, with any unpaid interest, on January 1,
      2010 through June 1, 2025. Management believes that the loans will be paid
      in full upon the sale of the foreclosed properties in 1997.

8.    Related party transactions

      The Manager, which is owned by several of the Trustees and their
      affiliate, contracted with the Trust to provide administration services
      and receives a fee for these services from the Trust. The Manager is
      entitled to a per annum Base Management Fee payable monthly in arrears of
      an amount equal to 1% of the Gross Mortgage Assets of the Trust (computed
      monthly) plus 1/2% of cash or money-market or equivalent assets and
      incentive compensation for each fiscal quarter, equal to 25% of the net
      income of the Trust in excess of an annualized return on equity for such
      quarter equal to the ten year U.S. Treasury Rate plus 2% provided that the
      payment of such incentive compensation does not reduce the Trust's
      annualized return on equity for such quarter to less than the ten year
      U.S. Treasury Rate plus 2% and amounts payable on account of the Series A
      Preferred Preference Amount have been paid. The Manager is also entitled
      to reimbursement for clerical and administrative services at cost based on
      relative utilization of facilities and personnel. Additionally, the
      Manager will receive a Loan Origination and Servicing Fee payable monthly
      equal to 2% of the Gross Mortgage Assets together with certain
      miscellaneous fees from borrowers customarily payable in connection with
      origination and servicing of mortgages and fees for other services
      requested by the Trust. The Manager bears all expenses of services for
      which it is separately compensated. During the three months ended March
      31, 1996, the Predecessors paid $15,025 to the Manager. During the three
      months ended March 31, 1997, the Trust paid $21,683 to the Manager.

      As described in Note 3, the Trust holds an investment in Sierra Capital
      Acceptance and receives a 15% return per annum. For the three months ended
      March 31, 1996, the Predecessors earned interest of $5,000 from this
      investment. For the three months ended March 31, 1997, the Trust earned
      interest of $7,500 from this investment.


<PAGE>   12


                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          NOTES TO FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
                                   (UNAUDITED)

9.    Preferred Stock

      The Preferred Shares are entitled to a distribution preference in an
      amount equal to an annualized return on the Net Capital Contribution of
      Preferred Shares at each dividend record date during such year (or, if the
      Directors do not set a record date, as of the first day of the month)
      equal to the lesser of 10.25% or 150 basis points over the Prime Rate
      (determined on a not less than quarterly basis). The distribution
      preference on the Preferred Shares is not cumulative.

      After declaration of dividends for a given quarter to the Preferred Shares
      in the amount of the distribution preference, no further distributions may
      be declared on the Preferred Shares for the quarter until the current
      Distributions declared on each Common Share for that quarter equals the
      distribution preference for each Preferred Share for such quarter. Any
      additional distributions generally will be allocated such that the amount
      of distributions per share to the holders of the Preferred Shares and
      Common Shares for the quarter are equal.

      Holders of Preferred Shares are entitled to receive all liquidating
      distributions until the aggregate adjusted net capital contribution of all
      Preferred Shares has been reduced to zero. Thereafter, holders of Common
      Shares are entitled to all liquidation distributions until the aggregate
      adjusted net Capital contributions of all Common Shares has been reduced
      to zero. Any subsequent liquidating distributions will be allocated among
      the holders of the Common Shares and Preferred Shares pro rata.

      The Preferred Shares, at the option of the Board of Directors, are
      redeemable by a Shareholder annually on June 30 for redemption requests
      received by May 15 of such year. The Board of Directors may in their sole
      discretion deny, delay, postpone or consent to any or all requests for
      redemption. The redemption amount to be paid for redemption of such
      Preferred Shares is the adjusted net capital contribution plus unpaid
      accrued dividends, divided by the aggregate net capital contributions plus
      accrued but unpaid dividends attributable to all Preferred Shares
      outstanding, multiplied by the net asset value of the Trust attributable
      to the Preferred Shares which shall be that percentage of the Trust's net
      asset value that the aggregate adjusted net capital contributions of all
      Preferred Shares bears to the adjusted net capital contributions of all
      Shares outstanding. A liquidation charge is charged by the Trust in
      connection with each redemption as follows: 2% of redemption amount in
      1997, 1% of redemption amount in 1998, and none thereafter.


<PAGE>   13


                                    ITEM II

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS










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<PAGE>   14

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


            The financial statements of Capital Alliance Income Trust Ltd., A
Real Estate Investment Trust (the "Trust") included herein were prepared based
upon the combined historical operations of Capital Alliance Income Trust I
("CAIT I") and Capital Alliance Income Trust II("CAIT II") (CAIT I and CAIT II
are collectively referred to as the "Predecessors"). The operations of the
Predecessors have been combined due to the common management and directors. The
unaudited interim financial statements subsequent to the merger represent the
operations of the Trust (Successor). (See Note 2 to the financial statements).

GENERAL

            Predecessors: The Combination. The Trust resulted from the
consolidation of CAIT I and CAIT II (the "Combination") on April 30, 1996. The
Trust exchanged shares of preferred stock for all of the outstanding whole
shares of CAIT I and CAIT II at April 30, 1996. Holders of the fractional shares
of CAIT I and CAIT II received cash in lieu of fractional shares of preferred
stock of the Trust. Thereafter, all assets and liabilities of CAIT I and CAIT II
were transferred to the Trust. CAIT I and CAIT II were both privately-held
mortgage investment trusts which invested primarily in loans secured by deeds of
trust on residential property. The Trust was incorporated in Delaware on
December 12, 1995. CAIT I resulted from the reorganization of Capital Alliance
Managed Income Fund, L.P., a California limited partnership ("CAMIF") on March
9, 1993. CAMIF was formed July 11, 1991 and was also in the business of
investing in home equity loans. CAIT II was formed October 18, 1994 and began
its first year of operations in 1995. CAIT I and CAIT II were formed and managed
by Capital Alliance Advisors, Inc. ("CAAI") which also manages the Trust and
originates, services and sells the Trust's mortgage loans.

            Recent Trends. The Trust's mortgage loan acquisitions in the
three-month period ended March 31, 1997 increased to $4,962,226 from $4,696,238
in the same period of the previous year, primarily due to a increase in cash
available for investments in mortgage loans.

            The Trust invests in non-conforming mortgage loans on one-to-four
unit residential properties because management believes that there is a large
demand for non-conforming mortgage loans on these kinds of properties which
produce higher yields without comparably higher credit risks when compared with
conforming mortgage loans. Management invests primarily in A-, B/C (or less)
credit rated home equity loans secured by deeds of trust. In general, B and C
credit rated home equity loans are made to borrowers with lower credit ratings
than borrowers of higher credit quality, such as A credit rated home equity
loans. Home equity loans rated A-, B/C (or less) tend to have higher rates of
loss and delinquency, but higher rates of interest than borrowers of higher
credit quality.

            Management believes there is increased demand for high-yielding
non-conforming mortgage loans caused by a demand by investors for higher yields
due to low interest rates over the past few years and increased securitization
of high-yielding non-conforming mortgage loans by the investment banking
industry.

            Loan Origination and Loan Servicing. Mortgage loan origination
consists of establishing a relationship with a borrower or his broker, obtaining
and reviewing documentation concerning the credit rating and net worth of
borrowers, inspecting and appraising properties that are proposed as the subject
of a home equity loan, processing such information and underwriting and funding
the mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, 




<PAGE>   15

holding escrow funds until fulfillment of mortgage loan requirements, contacting
delinquent borrowers, foreclosing in the event of unremedied defaults and
performing other administrative duties. Mortgage loan origination and loan
servicing were provided to the Trust by CAAI.

            Commitments and Contingencies. As of March 31, 1997, the Trust's
loan portfolio included total loans of $4,962,226 of which $283,450 representing
5.7% of the loans were delinquent. The balance of delinquent loans which were in
the process of foreclosure at March 31, 1997 totaled $294,450 or 6.3% of the
loan portfolio. In assessing the collectibility of these delinquent mortgage
loans, management estimates a net gain will be realized upon sale of the
properties securing these loans if it is necessary to foreclose the mortgage
loans due to the Trust. Management's estimate is based on an anticipated sales
price of the property based on the latest appraised value of the property
discounted at 15% less the sum of pre-existing liens, costs of sale, the face
amount of the mortgage loan and accrued interest receivable. The Trust generally
issues loan commitments only on a conditional basis and generally funds such
loans promptly upon removal of any conditions. Accordingly, the Trust does not
have any commitments to fund loans as of March 31, 1996 and March 31, 1997.

RESULTS OF OPERATIONS

            The following discussion relates to the Trust's Mortgage Investment
Business since its Mortgage Conduit Business was not organized or in operation
prior to March 31, 1997. The results of operations of the Trust for all periods
through December 31, 1996 were prepared based upon the combined historical
operations of the Predecessors through April 30, 1996 and of the Trust for
subsequent periods. In the comparison that follows references to the year ended
December 31, 1996 refer to the four months ended April 30, 1996 (predecessor)
and the eight months ended December 31, 1996 (Successor) added together. The
operations of the Predecessors have been combined due to the common management
and directors. The historical information presented herein is not necessarily
indicative of future operations.

            Three Months Ended March, 31, 1997 Compared to Three months Ended
March 31, 1996. Revenues for three months ended March 31, 1997 increased to
$233,256 as compared to $213,048 for the same period in the previous year. Such
revenues are composed primarily of interest income earned on mortgage notes
receivable and additional loan points in 1997.

            Expenses for the three months ended March 31, 1997 increased to
$98,877 as compared to $32,361 for the same period of the previous year. The
increase in expense was the result of increased loan servicing fees and
management fees resulting from the combination of the Trust on April 30, 1996
and the effectiveness of this Offering. In addition, total expenses include
interest expense and operating expenses on real estate held in 1997 as compared
to no expenses on property owned for the same period of the previous year.

INFLATION

            The financial statements of the Trust, prepared in accordance with
generally accepted accounting principles, report the Trust's financial position
and operating results in terms of historical dollars and does not consider the
impact of inflation. Inflation affects the Trust's operations primarily through
its effect on interest rates, since interest rates normally increase during
period of high inflation and decrease during periods of low inflation. When
interest rates increase, the demand for mortgage loans and a borrower's ability
to qualify for mortgage financing may be adversely affected.


<PAGE>   16




LIQUIDITY AND CAPITAL RESOURCES

            The liquidity of the Trust will be based upon the need to fund
investments in mortgage loans. In previous years, the Trust's mortgage
investment operations have been funded by capital contributions. The major
portion of the proceeds from issuance of common stock in this Offering will be
used to fund future investments in mortgage loans by the Trust's Mortgage
Investment Business. The Trust's liquidity requirements will be funded by
periodical payoffs of existing loans which are generally short term in duration,
by the sale of foreclosed properties and additional capital from the proceeds of
this Offering. Management believes that the Trust's liquidity is sufficient to
meet its cash requirements for the next twelve months regardless of whether the
Minimum Subscription Level is achieved in this Offering. Restrictions on cash
attributed to holdbacks do not significantly impact the Trust's liquidity.

            Net cash provided by operating activities during the three months
ended March 31, 1997 and 1996 was $140,957 and $119,911, respectively. Net cash
for all periods was positively affected by improved market conditions in the
mortgage banking industry.

            Net cash used in investing activities for the three months ended
March 31, 1997 and 1996 was $92,682 and $411, 555, respectively. During these
periods, funding of mortgage note receivable exceeded the repayment rate for
such receivables primarily due to higher mortgage loan acquisition volumes.

            Net cash (used in ) provided by financing activities during the
three months ended March 31, 1997 and 1996 was $(210,496) and $57,699,
respectively. For the three months ended March 31, 1997, net cash was negatively
affected by dividends paid to shareholders and offering costs. For the three
months ended March 31, 1996, receipt of subscriptions exceeded dividends paid to
shareholders and redemption of shares, having a positive effect on net cash.

            The Trust will use the net proceeds of its current public offering
to provide additional funding for the Trust's Mortgage Investment Business and,
to a more limited extent, the establishment of its planned Mortgage Conduit
Business. Management believes that cash flow from operations and the net
proceeds of the public offering plus the establishment of a warehouse line of
credit for the Mortgage Conduit Business will be sufficient to meet the
liquidity needs of the Trust's businesses for the next twelve months regardless
of whether the Minimum Subscription Level (i.e., $4,000,000) for the public
offering is achieved.


<PAGE>   17

                                    PART II

                               OTHER INFORMATION


ITEM 1          LEGAL PROCEEDINGS

                The Trust is not involved in any legal proceedings at this time.

ITEM 2          CHANGES IN SECURITIES

                There have been no changes in the securities at this time.

ITEM 3          DEFAULTS UPON SENIOR SECURITIES

                Not applicable.

ITEM 4          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                No matters have been submitted to the vote of Security Holders.

ITEM 5          OTHER INFORMATION

                Not applicable.

ITEM 6          EXHIBITS AND REPORTS ON FORM 8-K

                (a)     Exhibits

                        Not applicable.

                (b)     Form 8-K

                        The Registrant has not filed any reports on Form 8-K
                        during the quarter ended March 31, 1997.



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<PAGE>   18
                                   SIGNATURES

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

                                CAPITAL ALLIANCE INCOME TRUST LTD.
                                A Real Estate Investment Trust

Dated: 5/7/97                   By: /s/ Thomas B. Swartz
--------------------               -----------------------------------------
                                   Thomas B. Swartz, Chief Executive Officer

Dated: 5/7/97                   By: /s/ Jeannette Hagey
--------------------               -----------------------------------------
                                   Jeannette Hagey, Chief Financial Officer

ARK:pmm



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