UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                                    For the quarterly period ended June 30, 2005

                                       OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
                                               Commission File Number: 333-11625

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

              (Exact name of small business issuer in its charter)

          Delaware                                             94-3240473
--------------------------------                         ----------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                           Identification Number)

    100 Pine Street
    Suite 2450
    San Francisco, California                                    94111
-------------------------------------------              ---------------------
    (Address of principal executive office)                    (zip code)

                                 (415) 288-9575
--------------------------------------------------------------------------------
                           (Issuer's telephone number)

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

    Title of each class                Name of each exchange on which registered
    -------------------                -----------------------------------------
Common Stock $0.01 par value                    American Stock Exchange

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

As of August 8, 2005, the issuer's common shares closed at $9.34 and the
aggregate market value of the issuer's shares of Common Stock, $.01 par value,
held by non-affiliates of the issuer was approximately $3,866,760. At that date
approximately 414,000 common shares were outstanding and 300,000 common shares
were held by non-affiliates.

Transitional Small Business Disclosure Format.   Yes             No  X
                                                    -----          -----


<Page>
                                TABLE OF CONTENTS



PART I

     ITEM 1    FINANCIAL STATEMENTS                                         3-5

               NOTES TO FINANCIAL STATEMENTS                               6-19

     ITEM 2    MANAGEMENT'S DISCUSSION AND ANALYSIS                       20-25

     ITEM 3    CONTROLS AND PROCEDURES                                       25

PART II

     OTHER INFORMATION                                                    25-26

     SIGNATURES                                                              27

     CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT                        28

     CERTIFICATION OF FORM 10-QSB                                            29








                                     PART I
                                     ITEM 1.


                              FINANCIAL STATEMENTS

                                   [Pages 3-5]

                                       2
<Page>
                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                                 Balance Sheets

<Table>
<Caption>
                                                                          June 30,      December 31,
                                                                            2005            2004
                                                                          --------      ------------
                                                                        (Unaudited)
<S>                                                                    <C>             <C>
ASSETS
    Cash and cash equivalents                                          $  1,112,243    $    155,462
    Restricted cash                                                         246,702          98,755
    Marketable securities                                                    20,344           1,724
    Accounts receivable                                                   1,191,909         706,461
    Other assets, net                                                        14,780              --
    Due from affiliates                                                     266,170          23,170
    Mortgage notes receivable                                            22,388,596      19,053,474
    Allowance for losses                                                   (225,000)       (175,000)
                                                                       ------------    ------------
       Net mortgage notes receivable                                     22,163,596      18,878,474
    Real estate owned                                                            --         680,000
    Asset held for sale                                                   6,883,171       4,981,303
    Origination costs (net)                                                 215,546         243,899
                                                                       ------------    ------------
    Total assets                                                       $ 32,114,461    $ 25,769,248
                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
    Liabilities
        Mortgage note holdbacks                                        $    246,702    $     98,755
        Loans payable                                                    13,778,559       8,247,541
        Mortgage payable                                                       --           551,922
        Liability of asset held for sale                                  4,550,418       2,521,650
        Due to affiliate                                                     11,905            --
        Other liabilities                                                    68,326         274,210
                                                                       ------------    ------------
    Total liabilities                                                    18,655,910      11,694,078
                                                                       ------------    ------------

    Minority interest in subsidiary                                         (13,394)        (12,593)

    Stockholders' Equity
        Preferred stock, $.01 par value; 430,000 shares authorized;           2,138           2,138
              213,820 shares issued and outstanding at June 30, 2005
              and December 31, 2004
        Additional paid in capital - preferred stock                      5,597,580       5,669,123
              Less treasury stock: 3,176 preferred shares
              at June 30, 2005 and December 31, 2004                        (86,944)        (86,944)

        Common stock, $.01 par value; 1,700,000 shares authorized;            5,001           5,001
              500,032 shares issued and outstanding at June 30, 2005
              and December 31, 2004
        Additional paid in capital - common stock                         9,370,911       9,414,685
          Less treasury stock: 86,900 and 57,707 common shares
          at June 30, 2005 and December 31, 2004                         (1,417,028)     (1,026,861)
        Accumulated other comprehensive income                                  287             287
        Retained earnings                                                        --         110,334
                                                                       ------------    ------------
    Total stockholders' equity                                           13,458,551      14,075,170
                                                                       ------------    ------------

    Total liabilities and stockholders' equity                         $ 32,114,461    $ 25,769,248
                                                                       ============    ============
</Table>

                See accompanying notes to financial statements.
                                       3
<Page>
                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                            Statements of Operations
                                  (Unaudited)

<Table>
<Caption>
                                                                  Three Months Ended            Six Months Ended
                                                                        June 30,                     June 30,
                                                                  2005           2004           2005           2004
                                                                  ----           ----           ----           ----
<S>                                                           <C>            <C>            <C>            <C>
REVENUES
       Interest income                                        $   579,458    $   466,909    $ 1,088,224    $ 1,046,578
       Interest income from affiliates                                 --         42,815             --         84,437
       Equity in gain (loss) of affiliate                              --         (9,310)            --         80,847
       Other income                                                28,620           (106)        30,481             66
                                                              -----------    -----------    -----------    -----------
           Total revenues                                         608,078        500,308      1,118,705      1,211,928
                                                              -----------    -----------    -----------    -----------

EXPENSES
       Loan servicing fees to related parties                     151,456        120,724        273,439        233,346
       Management fees to related parties                          66,278         51,823        125,958        128,055
       Interest expense on loans                                  246,704         45,877        407,468        129,209
       Provision for loan losses                                   40,000        (20,000)        50,000          4,000
       Taxes                                                        8,775          5,000         17,525         10,000
       Amortization                                                12,175          6,562         20,416         15,180
       General and administrative                                  77,900         57,720        152,257        158,733
                                                              -----------    -----------    -----------    -----------
             Total expenses                                       603,288        267,706      1,047,063        678,523
                                                              -----------    -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS                                   4,790        232,602         71,642        533,405

       Operating (expenses) of real estate owned                  (12,115)        (2,463)       (23,900)        (5,498)
       (Loss) on real estate owned                                (62,084)       (15,000)       (82,084)       (35,000)
       Income from asset held for sale                             29,572             --         11,860             --
                                                              -----------    -----------    -----------    -----------
       Total loss from assets held for sale and real estate
              owned                                               (44,627)       (17,463)       (94,124)       (40,498)

NET INCOME (LOSS)                                             $   (39,837)   $   215,139    $   (22,482)   $   492,907
                                                              ===========    ===========    ===========    ===========

PREFERRED DIVIDENDS                                           $    66,318    $    76,788    $   159,395    $   153,577
                                                              -----------    -----------    -----------    -----------

NET INCOME (LOSS) AVAILABLE TO COMMON                         $  (106,155)   $   138,351    $  (181,877)   $   339,330
                                                              ===========    ===========    ===========    ===========

BASIC EARNINGS PER COMMON SHARE
       BEFORE ASSETS HELD FOR SALE                            $     (0.14)   $      0.35    $     (0.20)   $      0.87
       FROM ASSETS HELD FOR SALE                                    (0.10)         (0.03)         (0.21)         (0.09)
                                                              -----------    -----------    -----------    -----------
       TOTAL EARNINGS PER SHARE                               $     (0.24)   $      0.32    $     (0.41)   $      0.78
                                                              ===========    ===========    ===========    ===========

DILUTED EARNINGS PER COMMON SHARE
       BEFORE ASSETS HELD FOR SALE                            $     (0.14)   $      0.30    $     (0.20)   $      0.74
       FROM ASSETS HELD FOR SALE                                    (0.10)         (0.03)         (0.21)         (0.09)
                                                              -----------    -----------    -----------    -----------
       TOTAL EARNINGS PER SHARE                               $     (0.24)   $      0.27    $     (0.41)   $      0.65
                                                              ===========    ===========    ===========    ===========

DIVIDENDS PAID PER PREFERRED SHARE                            $      0.31    $      0.36    $      0.76    $      0.73
                                                              ===========    ===========    ===========    ===========

DIVIDENDS PAID PER COMMON SHARE                               $        --    $      0.45    $      0.10    $      0.90
                                                              ===========    ===========    ===========    ===========
</Table>

                See accompanying notes to financial statements.

                                       4
<Page>
                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                            Statements of Cash Flows
                                  (Unaudited)
<Table>
<Caption>
                                                                                Six Months Ended
                                                                                     June 30,
                                                                               2005           2004
                                                                               ----           ----
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                                           $   (22,482)   $   492,907
      Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
        Provision for loan losses                                               50,000          4,000
        Amortization                                                            20,416         15,180
        Loss on real estate owned                                               82,084         35,000
        Equity in gain (loss) of affiliate                                          --        (80,847)
        (Increase) decrease in accounts receivable                            (485,448)       205,494
        (Increase) decrease in other assets                                    (62,333)      (331,785)
          (adjusted for: amortization and capitalized loan fees)
        Change in due to / due from affiliates                                (231,095)      (149,359)
        Increase (decrease) in other liabilities                              (205,884)       (58,332)
                                                                           -----------    -----------
          Net cash (used in) provided by operating activities                 (854,742)       132,258

CASH FLOWS FROM INVESTING ACTIVITIES
      Sale of (investment in) marketable securities                            (18,620)         5,367
      Decrease in origination costs                                             28,353         29,299
      Decrease in related party warehousing facilities                          83,012         38,391
      Decrease in real estate owned                                            680,000             --
      Payment of mortgage payable                                             (551,922)            --
      (Income) from asset held for sale                                        (11,860)            --
      Investments in mortgage notes receivable                              (9,491,000)    (2,861,875)
      Payments of mortgage notes receivable                                  6,155,878      9,437,767
                                                                           -----------    -----------
        Net cash (used in) provided by investing activities                 (3,126,159)     6,648,949

CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds from loans payable                                            5,531,018             --
      Payments of loans payable                                                     --     (6,803,149)
      Issuance of common stock                                                      --         (1,058)
      Purchase of treasury stock                                              (390,167)        (1,833)
      Sale of treasury stock and exercised options                                  --         15,178
      Preferred dividends paid                                                (159,395)      (153,577)
      Common dividends paid                                                    (43,774)      (392,249)
                                                                           -----------    -----------
        Net cash provided by (used in) financing activities                  4,937,682     (7,336,688)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           956,781       (555,481)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               155,462      1,038,010
                                                                           -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 $ 1,112,243    $   482,529
                                                                           ===========    ===========

SUPPLEMENTAL CASHFLOW INFORMATION:
      Cash paid for interest                                               $         6    $   149,715
      Cash paid for taxes                                                  $    19,842    $     8,223
</Table>

                 See accompanying notes to financial statments.

                                       5
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

1.   Organization
     ------------

     References to the "Company" refer to Capital Alliance Income Trust Ltd., A
     Real Estate Investment Trust (the "Trust"), a Delaware corporation, and
     Capital Alliance Funding Corporation ("CAFC"), collectively. The Trust was
     formed December 12, 1995 as a mortgage investment trust, which invests
     primarily in loans secured by deeds of trust on one-to-four unit
     residential properties as the loan's primary collateral. The Trust's
     investment in CAFC, a taxable subsidiary, is consolidated. CAFC acquires
     loans for sale, secured by deeds of trust on one-to-four unit residential
     property as the loans primary collateral.

     On November 11, 2004, CAFC's common shareholder notified the Trust of its
     intention to retire 100% of CAFC's preferred stock. The Trust's investment
     in CAFC is entirely comprised of preferred stock. The Trust's preferred
     shares are available for immediate delivery and the transaction is expected
     to be completed within one year of CAFC's common shareholder's
     notification. Management expects the sale of its CAFC's preferred stock
     investment to approximate its fair value.

     For the six months ended June 30, 2005, CAFC is presented on the Trust's
     consolidated balance sheet as "Asset held for sale" and the minority
     interest not owned by the Trust as "Minority interest in subsidiary". For
     the three and six months ended June 30, 2005, CAFC's operating results are
     reported as "Income from asset held for sale" on the Trust's consolidated
     statement of operations. As of December 31, 2004, CAFC is presented on the
     Trust's consolidated balance sheet as "Asset held for sale" and the
     minority interest not owned as "Minority interest in subsidiary" and CAFC's
     operating results are reported as "Income from asset held for sale" (after
     eliminations) on the Trust's consolidated statement of operations. For the
     three and six months ended June 30, 2004, CAFC's operating results are
     presented as "Equity in gain (loss) of affiliates" in the Trust's statement
     of operations. CAFC's comparable period balance sheets and statements of
     operations are summarized in Note 10.

     Capital Alliance Advisors, Inc. (the "Manager") is responsible for
     originating, servicing, and selling the Company's loans.

2.   Summary of significant accounting policies and nature of operations
     -------------------------------------------------------------------

     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 2004 filed
     pursuant to 15d-2 on Form 10-KSB with the Securities and Exchange
     Commission.

     Basis of presentation. The financial information herein is unaudited;
     however, such information reflects all adjustments (consisting of normal,
     recurring adjustments) which are, in the opinion of management, necessary
     for a fair statement of results for the interim period. The results of
     operations for the six months ended June 30, 2005, are not necessarily
     indicative of the results to be expected for the full year. These financial
     statements should be read in conjunction with the Company's audited
     financial statements and the notes thereto included in the Company's Form
     10-K filed for the year ending December 31, 2004.

     Basis of accounting. The Company prepares its financial statements on the
     accrual basis of accounting consistent with accounting principles generally
     accepted in the United States of America. The Company's year-end for tax
     and financial reporting purposes is December 31. FIN 46(R) requires the
     consolidation of CAFC into the Trust's financial statements as of December
     31, 2004. Pursuant to the reporting requirement of FAS 144, CAFC's
     consolidation is reported as "Asset held for sale" and "Minority interest
     in subsidiary" on the Trust's balance sheet and as "Income from asset held
     for sale" on the Trust's statement of operating results. Income from asset
     held for sale is presented (after eliminations) on the Trust's operating
     revenues.

     Use of estimates. The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America requires management to make estimates and assumptions that affect
     the reported 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.

                                       6
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

2.   Summary of significant accounting policies and nature of operations
     -------------------------------------------------------------------
     (continued)
     -----------

     Cash and cash equivalents. Cash and cash equivalents include cash and
     liquid investments with an original maturity of three months or less from
     the date of acquisition. The Company deposits cash in financial
     institutions insured by the Federal Deposit Insurance Corporation. At
     times, the Trust's account balances may exceed the insured limits.

     Marketable securities. Marketable securities are classified as either
     trading, or available-for-sale. Management has not acquired any securities
     classified as trading securities. Trading securities, if acquired, would be
     reported at fair value, and changes in their fair value would be reported
     in the statement of operations. Available-for-sale securities are reported
     at fair value with unrealized gains and losses excluded from earnings and
     reported in accumulated other comprehensive income. Realized gains and
     losses on sales of both trading and available-for-sale securities are
     determined on an average cost basis and are reported in the statement of
     operations.

     Concentration of credit risk. The Company holds numerous mortgage notes
     receivable. These 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.

     Allowance for loan loss reserve. Management reviews its loan loss provision
     periodically and the Company maintains an allowance for losses on mortgage
     notes receivable at an amount that management believes is sufficient to
     protect against potential losses inherent in the loan portfolio. The
     Company's actual losses may differ from the estimate. Notes receivable
     deemed uncollectible are written off. The Company does not accrue interest
     income on impaired loans.

     Real estate owned. Real estate owned results from foreclosure of mortgage
     notes receivable and at time of foreclosure is recorded at the lower of
     carrying amount or fair value of the property minus estimated costs to
     sell. Subsequent to foreclosure, the foreclosed asset value is periodically
     reviewed and is adjusted to fair value. No depreciation is taken on the
     real estate owned. Income and expenses related to real estate owned are
     recorded as rental income, interest expense and operating expenses of real
     estate owned in the statements of operations.

     Origination costs. Origination costs relating to mortgage notes receivable
     are capitalized and amortized over the term of the mortgage notes
     receivable.

     Impairment policy. The impairment of long-lived assets is assessed when
     events or changes in circumstances indicate that the carrying value of such
     assets exceeds the future undiscounted cash flows attributable to such
     assets. If this occurs, an impairment loss measured as the excess of the
     net book value of the assets over their fair value is recorded. The Trust
     has identified CAFC as an "Asset held for sale" within the guidelines
     Statement of Financial Accounting Standards No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets" ("FAS 144") (see "Assets held
     for sale" within Note 2 - below). There were no impairment losses
     recognized during the six-month period ended June 30, 2005 and 2004.

     Fair value of financial instruments. For cash and cash equivalents, the
     carrying amount is a reasonable estimate of fair value. For mortgage notes
     receivable, fair value is estimated by discounting the future cash flows
     using 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.
     For loans payable, fair value is estimated by discounting the future cash
     flows using current interest rates as determined by the Trust's current
     borrowing rates. It was determined that the difference between the carrying
     amount and the fair value of loans payable is immaterial.

     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 if the

                                       7
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

2.   Summary of significant accounting policies and nature of operations
     -------------------------------------------------------------------
     (continued)
     -----------

     Trust distributes at least 90% of its taxable income to its 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 stockholders. The Trust must maintain certain records and request
     certain information from its stockholders designed to disclose actual
     ownership of its stock.

     In addition the Trust must satisfy certain gross income requirements
     annually and certain asset tests at the close of each quarter of its
     taxable year. 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 be taxed as a REIT since inception, no provision for federal income
     taxes has been made in the financial statements.

     State taxes. The state of Delaware imposes a tax on the capitalization of
     the Trust. Each year, the Trust also incurs a franchise tax to the state of
     California.

     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. However, if the mortgage's
     collateral is considered insufficient to satisfy the outstanding balance,
     after estimated foreclosure and selling costs, interest is not accrued.

     Stock options. Statement of Financial Accounting Standards No. 148 ("FAS
     148") "Accounting for Stock-Based Compensation - Transition and Disclosure"
     was issued in December of 2002. This Statement amends Statement of
     Financial Accounting Standards No.123 ("FAS 123"), "Stock-Based
     Compensation," to provide alternative methods of transition for a voluntary
     change to the fair value based method of accounting for stock-based
     compensation. In addition, the Statement amends the disclosure requirements
     of FAS 123 to require prominent disclosures in both annual and interim
     financial statements about the method used on reported results. The
     alternative methods of transition of FAS 148 follows Accounting Principles
     Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
     Employees", in accounting for stock options to employees. The disclosure
     provision of FAS 148 is effective for years ending after December 15, 2002.
     The Company follows APB 25 in accounting for stock options. The disclosure
     provision of FAS 148 is effective for years ending after December 15, 2002
     and has been incorporated into these financial statements and accompanying
     footnotes.

         The 2005 and 2004 calculation of the fair value of the stock-based
     awards to the Manager and its employees is not applicable because no awards
     were issued.

     The Trust accounts for stock options under APB 25. Since the exercise price
     of each option granted has been equal to or higher than the closing market
     price of the Company's Common Shares at the date of grant, no expense is
     recognized. Basic and diluted net loss per share information for all
     periods is presented under the requirement of FAS No. 128, "Earnings per
     Share" ("FAS 128"). Basic earnings per share have been computed using the
     weighted-average number of shares outstanding during the period and
     excludes any dilutive effects of stock options, warrants, and convertible
     securities. Potentially dilutive securities have been excluded from the
     computation of diluted net loss per share, as their inclusion would be
     antidilutive. If the Company had reported net income available to common
     shareholders, the calculation of diluted earnings per share would have
     included approximately an additional 30,858 and 33,913 common shares
     (computed using the treasury stock method) related to the outstanding
     options and warrants not included above for the three and six months ended
     June 30, 2005, respectively.

                                       8
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

2.   Summary of significant accounting policies and nature of operations
     -------------------------------------------------------------------
     (continued)
     -----------

     The pro forma results of reporting the Company's stock option grants using
     the fair value method consistent with FAS 123, is presented for the three
     and six months ended June 30, 2005 and 2004:

<Table>
<Caption>
                                                         Three months ended            Six months ended
                                                             June 30                      June 30
                                                       2005           2004          2005           2004
                                                       ----           ----          ----           ----
<S>                                                <C>            <C>           <C>            <C>
     Net income (loss) available to common stock   $  (106,155)   $   138,351   $  (181,877)   $   339,330
     Less: Stock based expense
          using the fair value method                       --             --            --             --
                                                   -----------    -----------   -----------    -----------
     Pro forma net income (loss) available to
          common stock                             $  (106,155)   $   138,351   $  (181,877)   $   339,330
                                                   ===========    ===========   -----------    ===========
     Net income (loss) per common share:
     Basic:
          As reported                              $     (0.24)   $      0.32   $     (0.41)   $      0.78
          Pro forma                                $     (0.24)   $      0.32   $     (0.41)   $      0.78
     Diluted:
          As reported                              $     (0.24)   $      0.27   $     (0.41)   $      0.65
          Pro forma                                $     (0.24)   $      0.27   $     (0.41)   $      0.65
</Table>

     Reclassifications. Certain 2004 amounts may have been reclassified to
     conform to the 2005 presentation. Such reclassifications had no effect on
     previously reported net income or earnings per share.

     Assets held for sale. On November 11, 2004, CAFC's common shareholder
     notified the Trust of its intention to retire 100% of the CAFC Preferred
     Stock owned by the Trust and concurrently issue a new class of CAFC
     Preferred Shares within twelve months. The new Preferred Shares will not be
     issued to the Trust. Therefore, pursuant to FAS 144, the Trust has reported
     CAFC as an asset held for sale. The Trust does not expect to recognize a
     loss on the transaction. During the six months ended June 30, 2004, the
     Trust reported its ownership of CAFC as an investment pursuant to the
     equity method of accounting as the Trust does not own the voting common
     shares of CAFC or control CAFC. (See "Recent accounting pronouncements"
     within Note 2 - below.) CAFC's June 30, 2005 and 2004 financial statements
     are reported in Note 10.

     Recent accounting pronouncements. In December 2004, the FASB issued FASB
     Statement No. 123 (revised 2004) ("FAS 123(R)"), "Share-Based Payment,"
     which is a revision of FASB Statement No. 123 ("FAS 123"), "Accounting for
     Stock-Based Compensation." FAS 123(R) supersedes APB Opinion No. 25,
     "Accounting for Stock Issued to Employees," and amends FASB Statement No.
     95, "Statement of Cash Flows." Generally, the approach in FAS 123(R) is
     similar to the approach described in FAS 123. However, FAS 123(R) requires
     all share-based payments to employees, including grants of employee stock
     options, to be recognized in the income statement based on their fair
     values. Pro forma disclosure is no longer an alternative to financial
     statement recognition. The Company will be required to adopt FAS 123(R)
     beginning on January 1, 2006. The adoption of FAS 123(R) is not expected to
     have a material effect on the Company's financial position and results of
     operations.

3.   Restricted cash and mortgage note holdbacks
     -------------------------------------------

     Pursuant to mortgage loan agreements between the Trust and its borrowers, a
     portion of the proceeds are held by the Trust in segregated accounts to be
     disbursed to borrowers upon completion of improvements on the secured
     property.

                                       9
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

4.   Marketable securities
     ---------------------

     Marketable securities consist of equity securities and are accounted for as
     available-for-sale securities. Unrealized gains and losses are excluded
     from earnings and reported in accumulated other comprehensive income.

5.   Accounts receivable
     -------------------

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

6.   Warehousing facilities to related parties
     -----------------------------------------

     The Trust entered into a loan purchase agreement on December 12, 1997 with
     CAFC. Under the terms of the agreement, the Trust advances funds to CAFC to
     acquire mortgage loans secured by real estate. The Trust then acquires all
     of CAFC's right, title and interest in such loans. CAFC is obligated to
     reacquire the loans from the Trust at a preset price. As of June 30, 2005
     and December 31, 2004, the Trust advanced to CAFC $1,332,475 and
     $1,415,487, respectively. The interest rate on this line of credit varies
     with market conditions and is payable monthly. As of June 30, 2005 and
     2004, the applicable interest rate was 9.25% and 7.00% respectively. During
     the three and six months ended June 30, 2005 and 2004, the Trust earned
     interest in the amount of $29,911 and $42,816 and of $55,747 and $84,437,
     respectively.

7.   Mortgage notes receivable
     -------------------------

     Mortgage notes receivable represent home equity loans primarily secured by
     deeds of trust on one-to-four unit residential real estate. At the time of
     origination, all loans have a combined loan-to-value equal to or less than
     75% of the underlying collateral. 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 usually due as a balloon
     payment at loan maturity.

     A reconciliation of the Trust's mortgage notes receivable follows:

                                           Six months ended  Twelve months ended
                                            June 30, 2005     December 31, 2004
                                            -------------     -----------------

     Balance, beginning of period            $ 19,053,474        $ 20,556,488
     Additions during period:
         New mortgage loans                     9,491,000          13,973,068
     Deductions during period:
         Collections of principal              (6,155,878)        (15,214,076)
         Foreclosures, net of reserve                 ---            (168,078)
         Write off of uncollectible loans             ---             (93,928)
                                             ------------        ------------
     Balance, end of period                  $ 22,388,596        $ 19,053,474
                                             ============        ============


                                       10
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

8.   Allowance for loan losses
     -------------------------

     The Trust measures loan impairment based on the fair value of the related
     collateral since all loans subject to this measurement are collateral
     dependent. Management believes a $255,000 and $175,000 allowance for loan
     losses are adequate to protect against potential losses inherent in all
     receivables as of June 30, 2005 and December 31, 2004, respectively. The
     Trust's actual losses may differ from the estimate.

     A reconciliation of the Trust's allowance for losses follows:

                                           Six months ended  Twelve months ended
                                             June 30, 2005     December 31, 2004
                                             -------------     -----------------

     Balance, beginning of period                $  175,000       $  206,000
     Provision for loan loss                         50,000           84,000
     Write off of uncollectible loans                   ---          (93,928)
     Disposal costs of uncollectible loans              ---          (21,072)
                                                 ----------       ----------
     Balance, end of period                      $  225,000       $  175,000
                                                 ==========       ==========

9.   Real estate owned
     -----------------

     As of December 31, 2004, the Trust owned one property. During the six
     months ended June 30, 2005, the Trust sold the one property. As of June 30,
     2005, the Trust had no property.

     A reconciliation of the real estate owned account shows its cash and
     non-cash activities follows:

<Table>
<Caption>
                                                           Six months ended     Twelve months ended
                                                             June 30, 2005       December 31, 2004
                                                           ----------------     -------------------
<S>                                                             <C>                <C>
     Balance, beginning of period                             $ 680,000            $  415,000
     Foreclosed mortgage notes, net of reserve (non-cash)           ---               168,078
     Assumption of senior debt                                 (551,922)              551,922
     Accrued interest capitalized (non-cash)                        ---              (102,800)
     Gain (loss) on sale or writedown (non-cash)                (82,084)               (2,604)
                                                              ---------            ----------
                                                                 45,944             1,029,596
     Less: Proceeds from sale of real estate owned
     (net of closing costs of $47,038 and $30,418               (45,944)             (349,596)
                                                              ---------            ----------
     in 2005 and 2004, respectively)
     Balance, end of period                                   $     ---            $  680,000
                                                              =========            ==========
</Table>

10.  Asset held for sale
     -------------------

     Capital Alliance Funding Corporation
     ------------------------------------

     On April 11, 1997, the Trust formed a non-qualified REIT subsidiary, CAFC,
     to conduct a mortgage banking business. The Trust owns all of the
     outstanding Series "A" Preferred Stock (2,000 shares of non-voting stock),
     which constitutes a 99% economic interest in CAFC. The Trust's Manager owns
     all of the Common Shares (1,000 shares) of CAFC, which constitutes a 1%
     economic interest, and has 100% voting control. The Trust's Manager also
     manages CAFC and provides mortgage origination and sale services for CAFC.
     During the three months ended March 31, 2004, the Trust accounted for its
     investment in CAFC under the equity method of accounting.

     On November 11, 2004, the Manager notified the Trust of its intention to
     retire 100% of CAFC's preferred stock owned by the Trust and concurrently
     issue a new class of CAFC preferred stock. The new preferred shares will
     not be issued to the Trust. This transaction is expected to close within 12
     months without a loss on sale to the Trust. Therefore, the FIN 46(R)
     consolidation of CAFC into the Trust and the Trust's economic interest in
     CAFC are presented pursuant to FAS 144 as an asset held for sale.

                                       11
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

                      CAPITAL ALLIANCE FUNDING CORPORATION
                                 BALANCE SHEETS
                    As of June 30, 2005 and December 31, 2004

<Table>
<Caption>
                                                                    June 30,      December 31,
                                                                      2005           2004
                                                                      ----           ----
<S>                                                               <C>            <C>
ASSETS

        Cash and cash equivalents                                 $ 1,190,519    $   156,592
        Accounts receivable                                            87,631        134,971
        Mortgage notes receivable                                   5,602,190      4,674,462
        Allowance for loan losses                                     (44,000)       (40,000)
                                                                  -----------    -----------
             Net mortgage notes receivable                          5,558,190      4,634,462
        Due from affiliate                                                236         30,908
        Investment in affiliate                                         5,000          5,000
        Other assets                                                   41,595         19,370
                                                                  -----------    -----------
        Total assets                                              $ 6,883,171    $ 4,981,303
                                                                  ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

        Liabilities
             Warehousing facilities                               $ 4,256,267    $ 2,418,858
             Warehousing facilities from related parties            1,332,475      1,415,487
             Due to affiliates                                        253,876         30,176
             Accrued interest                                          20,936          6,644
             Other liabilities                                         19,339         65,974
                                                                  -----------    -----------
        Total liabilities                                           5,882,893      3,937,139

        Stockholders' equity
             Preferred shares, no par value, 2,000 shares                  --             --
                authorized, 2,000 shares issued and outstanding
             Common shares, no par value, 1,000 shares                     --             --
                authorized, 1,000 shares issued and outstanding
             Additional paid in capital                             1,990,056      1,990,056
             Accumulated deficit                                     (989,778)      (945,892)
                                                                  -----------    -----------
        Total stockholders' equity                                  1,000,278      1,044,164
                                                                  -----------    -----------

        Total liabilities and stockholders' equity                $ 6,883,171    $ 4,981,303
                                                                  ===========    ===========
</Table>

                                       12
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

                      CAPITAL ALLIANCE FUNDING CORPORATION
                            STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                          Three Months Ended         Six Months Ended
                                                               June 30                   June 30
                                                          2005          2004        2005         2004
                                                          ----          ----        ----         ----
<S>                                                     <C>          <C>          <C>          <C>
REVENUES

        Interest income                                 $ 123,440    $ 199,001    $ 222,948    $ 396,758
        Loan origination income                           167,876      203,882      348,543      365,014
        Service release premium                           123,093       36,114      163,644       61,809
        Other income                                       25,632          100       41,118          100
                                                        ---------    ---------    ---------    ---------
             Total revenues                               440,041      439,097      776,253      823,681

EXPENSES

        Management fees to related party                   32,576       21,665       59,349       34,207
        Interest expense on warehousing facilities         71,203      102,580      120,861      223,278
        Interest expense on related party warehouse        29,911       49,045       55,747       90,949
        facility
        Loan origination costs                             47,562       28,206       86,701       59,873
        Provision for loan losses                          (3,891)       8,500        4,000       10,000
        Wages and salaries                                152,966      141,241      296,008      287,937
        Taxes                                               2,716       71,591        4,839      164,042
        General and administrative                        106,897        2,784      192,635       11,045
                                                        ---------    ---------    ---------    ---------
             Total expenses                               439,940      425,612      820,140      881,331
                                                        ---------    ---------    ---------    ---------

INCOME (LOSS) BEFORE GAIN (LOSS) ON REAL ESTATE OWNED   $     101    $  13,485    $ (43,887)   $ (57,650)
                                                        ---------    ---------    ---------    ---------
          Operating expenses of real estate owned              --      (22,890)          --      (22,990)
           Gain on sale of real estate owned                   --           --           --      162,304
                                                        ---------    ---------    ---------    ---------

NET INCOME (LOSS)                                       $     101    $  (9,405)   $ (43,887)   $  81,664
                                                        =========    =========    ---------    =========
</Table>


                                       13
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

10.  Asset held for sale (continued)
     -------------------------------

     The following are selected footnote disclosures from CAFC's financial
     statements:

     Basis of presentation
     ---------------------

     The accounting and financial reporting policies of CAFC conform to
     accounting principles generally accepted in the United States of America
     and with the policies adopted by the Trust. CAFC's selected financial
     information has been prepared on the accrual basis of accounting and
     consistent with the periods reported by the Trust.

     Accounts receivable
     -------------------

     Accounts receivable consists primarily of accrued interest on mortgage
     notes receivable and amounts due from borrowers for items such as property
     taxes, insurance, and interest on a first deed mortgage that were paid by
     CAFC on behalf of the property securing the mortgage notes.

     Mortgage notes receivable
     -------------------------

     Mortgage notes receivable are stated at the principal outstanding. Interest
     on the loans is due monthly. The loans are secured by first and junior
     deeds of trust on commercial and residential properties. CAFC is subject to
     the risks inherent in finance lending including the risk of borrower
     default and bankruptcy.

     A reconciliation of the mortgage notes receivable follows:


                                        Six months ended    Twelve months ended
                                          June 30, 2005      December 31, 2004
                                        ---------------     -------------------

     Balance, beginning of period         $  4,674,462          $ 7,383,040
     Additions during period:
         Originations                       35,973,656           52,426,211
         Transferred from Trust                    ---            2,014,649
     Deductions during period:
         Repayments                         (1,762,663)          (3,801,481)
         Sales                             (33,283,265)         (53,324,127)
         Foreclosures                              ---                  ---
         Write offs                                ---              (23,830)
                                           -----------          -----------
     Balance, end of period               $  5,602,190          $ 4,674,462
                                           ===========          ===========

     Some of the mortgage loans originated and purchased by CAFC are held for
     sale to the Trust. The remaining originations and purchases are designated
     for sale to independent third parties. The Trust's purchase price is the
     mortgage loans outstanding balance (par value) plus any accrued interest.
     Loans designated for sale to a third party are pre-approved for purchase by
     the third party, before the loan is acquired by CAFC. Sales to third
     parties are usually greater than CAFC's total acquisition cost.

     Loan loss reserve
     -----------------

     CAFC measures loan impairment based on the fair value of the related
     collateral since all loans subject to this measurement are collateral
     dependent. Management believes a $44,000 and $40,000 allowance for losses
     is adequate to protect against potential losses inherent in all receivables
     as of June 30, 2005 and December 31, 2004, respectively. CAFC's actual
     losses may differ from the estimate.

                                       14
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

10.  Asset held for sale (continued)
     -------------------------------

     Allowance for loan losses (continued)
     -------------------------------------

     A reconciliation of the allowance for losses follows:

                                           Six months ended  Twelve months ended
                                             June 30, 2005    December 31, 2004
                                             -------------    -----------------

     Balance, beginning of period              $  40,000          $ 100,000
     Provision for loan loss                       4,000            (36,170)
     Write off of uncollectible balances             ---            (23,830)
                                               ---------          ---------
     Balance, end of period                    $  44,000          $  40,000
                                               =========          =========

     Real estate owned
     -----------------

     As of January 1, 2004, CAFC held two properties with a book value of
     $971,617. During 2004, CAFC sold two properties for a gain of $171,206. No
     new properties were acquired by purchase or foreclosure. Net proceeds from
     the sale were $1,142,823. As of December 31, 2004, CAFC held zero
     properties as real estate owned. During the six months ending June 30,
     2005, no properties were acquired.

     A reconciliation of real estate owned follows:

                                       Six months ended     Twelve months ended
                                         June 30, 2005       December 31, 2004
                                       ----------------     -------------------

     Balance, beginning of period         $    ---              $   971,617
     Properties purchased                      ---                      ---
     Foreclosures                              ---                      ---
     Assumptions of senior debt                ---                      ---
     Additions                                 ---                   43,644
     Real estate sold                          ---               (1,015,261)
     Property written down                     ---                      ---
                                          --------              -----------
     Balance, end of period               $    ---              $       ---
                                          ========              ===========

     Warehousing facilities
     ----------------------

     As of June 30, 2005 and December 31, 2004, CAFC had borrowed $687,825 and
     $976,400 respectively under a $6,000,000 funding agreement. The agreement
     provides a 100% advance rate on the notes outstanding balance at an
     interest rate of Prime plus 1.50% with a floor of 6.00%. As of June 30,
     2005 and December 31, 2004, the Prime rate was 6.25% and 5.25%,
     respectively. Interest is payable monthly with $17,854 and $2,358 accrued
     and payable as of June 30, 2005 and December 31, 2004, respectively. The
     facility is cancelable by either party upon 30 days written notice.

     As of June 30, 2005 and December 31, 2004, CAFC had borrowed $0 and $0,
     respectively, under a $5,000,000 funding agreement. The agreement provides
     a 100% advance rate on the notes outstanding balance at an interest rate of
     Prime with a floor of 5.25%. As of June 30, 2005 and December 31, 2004, the
     Prime rate was 6.25% and 5.25%, respectively. Interest is payable monthly.
     As June 30, 2005 and December 31, 2004, the there was no outstanding
     balance or accrued interest. The facility is cancelable by either party
     upon 30 days written notice.

                                       15
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

10.  Asset held for sale (continued)
     -------------------------------

     As of June 30, 2005 and December 31, 2004, CAFC had borrowed $667,825 and
     $1,442,458 under a funding agreement. The agreement provides a 95% advance
     rate on the notes outstanding balance at a 9.5% interest rate. Interest is
     payable monthly with $3,082 and $4,286 accrued and payable as of June 30,
     2005 and December 31, 2004, respectively. The facility is cancelable by
     either party upon 30 days written notice.

     On June 30, 2004, CAFC entered into a $25,000,000 warehouse facility. Per
     the Tri-Party Financing and Indemnification Agreement dated August 26, 2004
     between CAFC, the Trust, and Calliance Realty Fund, LLC, the warehouse
     facility is shared by the Trust and Calliance Realty Fund, LLC, both
     related entities (collectively "Related Entities") to CAFC. The facility is
     in CAFC's name, however, CAFC is not held liable for the borrowings of the
     Related Entities. As of June 30, 2005, the facility had a balance of
     $21,019,118 and CAFC was liable for $0.

     The above warehouse facilities revolve monthly and are paid off as the
     mortgage loans held are sold or repaid by the loan's borrower.

     Related party transactions
     --------------------------

     The Manager earns an administration fee up to 25 basis points on home loans
     funded for the benefit of CAFC and reimbursed for specific direct expenses
     as defined in the First Amended Residential Mortgage Loan Services
     Agreement. As of June 30, 2005 and 2004, CAFC has expensed $59,349 and
     $18,642, respectively.

     CAFC received an advance of $1,332,475 and $1,415,487 under a warehouse
     line of credit from the Trust, as of June 30, 2005 and December 31, 2004,
     respectively. The Trust charges a variable interest rate on this warehouse
     line of credit determined by current market rates. The rate charged to CAFC
     on the line of credit as of June 30, 2005 and December 31, 2004 was the
     Prime Rate plus 3.00%. CAFC expensed interest of $55,747 and $41,622 as of
     June 30, 2005 and 2004, respectively. The facility is cancelable by either
     party upon 30 days written notice.

     On occasion, CAFC and its affiliates had related party receivables and
     payables arising from ordinary business transactions. As of June 30, 2005,
     CAFC had a receivable of $236 from the Manager and a receivable of $0 from
     CRF. As of December 31, 2004, CAFC had a receivable of $30,908 from the
     Manager and a payable of $30,176 to the Trust. These accounts are shown on
     the balance sheet as part of Due to affiliates and Due from affiliates,
     respectively. No interest is charged on these accounts.

     During the first six months of 2005 and 2004, CAFC sold $9,491,000 and
     $2,861,875, respectively, in loans to the Trust, at par value.

11.  Loans payable
     -------------

     As of June 30, 2004, CAFC obtained a three-year $25,000,000 funding
     agreement. The agreement provides an advance rate of up to 80% on the notes
     outstanding balance at an interest rate floor of 5.00% and a ceiling of the
     Prime Rate plus 4.0%. Through a tri-party agreement among CAFC, CRF, and
     the Trust, both CRF and the Trust are able to utilize this funding
     agreement for a fee of 3 basis points per month of the end of the month's
     financed mortgage notes receivable principal balance. All benefits and
     costs of ownerships and financing of the financed loans including the risk
     of principal loss inure to either CRF or the Trust. As of June 30, 2005,
     the outstanding balance assigned to the Trust was $13,778,559.

     The Trust has financed a portion of its treasury stock repurchases in 2004
     by borrowing on margin from an investment bank. The amount borrowed on
     margin accrues fees at a rate that has historically approximated the broker
     call rate (5.25% as of June 30,2005 and 4.0% as of December 31, 2004) plus
     1.50%. Margin debt is callable at the discretion of the investment bank and
     subject to their assessment of the value of the collateral. As of June 30,
     2005 and December 31, 2004, the Trust owed $0 in margin debt.

     The above lines of credit revolve monthly and are paid off as the mortgage
     notes receivable held are sold.

                                       16
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

12.  Mortgage payable
     ----------------

     The Trust foreclosed on a property in 2004 and assumed a mortgage note
     payable in the amount of $551,922 with an annual interest rate of 10% with
     a monthly principal and interest payment of $5,520. The property was sold
     during the second quarter of 2005. The principal balance as of June 30,
     2005 and December 31, 2004 was $0 and $551,922, respectively.

13.  Related party transactions
     --------------------------

     The Manager, which is owned by several of the directors and their
     affiliates, contracted with the Trust to provide management and advisory
     services and receives fees for these services from the Trust. The Manager
     is also entitled to reimbursement by the Company for direct expenses and
     administrative services at cost and for clerical and administrative
     services based on relative utilization of facilities and personnel.

     The Manager receives a management fee equal to one-twelfth (1/12) of 1%
     annually of the book value of mortgages, mortgage-related investments and
     real property ("Gross Mortgage Assets") of the Trust plus one-twelfth
     (1/12) of one-half percent (1/2%) of the book value of the non-mortgage
     assets of the Trust computed at the end of each month. The management fee
     also includes reimbursement for the direct costs of overseeing the
     administration and disposition of real estate owned by the Trust and the
     Company. The Trust paid the Manager $65,278 and $48,823 and $123,458 and
     $106,571, in management fees for the three and six month period ended June
     30, 2005 and 2004, respectively. Within the financial statements, the
     management fees are included in the Management fees to related parties.

     The Manager also earns a REO management fee for managing and servicing the
     properties that the Company has obtained through foreclosure of mortgage
     notes held. The fee for these services is $500 per month for each property.
     The Trust paid the Manager $1,000 and $3,000 and $2,500 and $7,000 in REO
     management fees for the three and six month period ended June 30, 2005 and
     2004, respectively. Within the financial statements, REO management fees
     are included in the Management fees to related parties.

     The Manager's incentive compensation for each fiscal quarter, equals 25% of
     the net income of the Trust in excess of an annualized return on common
     equity for such quarter equal to the ten year U.S. Treasury Rate plus
     2.00%, provided that the payment of such incentive compensation does not
     reduce the Trust's annualized return on common equity for such quarter to
     less than the ten year U.S. Treasury Rate after the preferred dividend has
     been paid. The incentive compensation for the three and six month period
     ended June 30, 2005 and 2004 was $0 and $0 and $0 and $14,484,
     respectively. Within the financial statements, incentive compensation
     awards are included in the Management fees to related parties.

     The Manager receives a loan origination and servicing fee equal to
     one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
     computed at the end of each month. During 2004, the Trust capitalized 32.5%
     of this fee as loan origination costs and amortized them over the average
     life of the portfolio. The remaining 67.5% of the fee is expensed as the
     portion attributed for servicing. As of June 30, 2005, the Trust
     capitalized 32.5% of this fee as origination costs and amortized them over
     the average life of the portfolio. The remaining 67.5% of the fee was
     expensed as the portion attributed for servicing. For the three and six
     month period ended June 30, 2005 and 2004, the Trust expensed loan
     origination and servicing fees of $151,456 and $120,724 and $273,439 and
     $233,346, respectively.

     On occasion, the Trust and its affiliates had related receivables and
     payables arising from ordinary business transactions. As of June 30, 2005,
     the Trust had a net payable of $11,905 to the Manager, a receivable of
     $253,876 from CAFC and a receivable of $12,294 from CRF. As of December 31,
     2004, the Trust had a receivable of $23,170 from the Manager and $0 was due
     to CAFC and CRF. No interest is charged on these inter-company accounts.

     As described in Note 6, as of June 30, 2005 and December 31, 2004, the
     Trust advanced to the CAFC $1,332,475 and $1,415,487, respectively. During
     the three and six months ended June 30, 2005 and 2004, the Trust earned

                                       17
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

13.  Related party transactions (continued)
     --------------------------------------

     interest in the amount of $29,911 and $42,816 and $55,747 and $84,437,
     respectively, of which $0 was outstanding as of June 30, 2005 and December
     31, 2004.

14.  Preferred, common and treasury stock
     ------------------------------------

     The Preferred Shareholders are entitled to a dividend preference in an
     amount equal to an annualized return on the adjusted 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). The annualized return is the lesser of: (a) 10.25%, (b) 1.50 %
     over the Prime Rate (determined on a not less than quarterly basis) or (c)
     the rate set by the Board of Directors. The preferred dividend preference
     is non-cumulative.

     After declaring dividends for a given year to the Preferred Shareholders in
     the amount of the dividend preference, no further dividends may be declared
     on the Preferred Shares for the subject year, until the dividends declared
     on each Common Share for that year equals the dividend preference for each
     Preferred Share for such year. Any additional dividends generally will be
     allocated such that the amounts of dividends per share to the Preferred
     Shareholders and Common Shareholders for the subject year are equal. The
     Preferred Shareholder's additional dividends, if any, are non-cumulative.

     Preferred Shareholders are entitled to receive all liquidating
     distributions until they have received an amount equal to their aggregate
     adjusted net capital contribution. Thereafter, Common Shareholders 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 Common
     Shareholders and Preferred Shareholders pro rata.

     The Preferred Shares are redeemable by a shareholder, subject to the
     consent of the Board of Directors, annually on June 30 for redemption
     requests received by May 15 of such year. The Board of Directors may in its
     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.

     The Trust has the power to redeem or prohibit the transfer of a sufficient
     number of Common and/or Preferred Shares or the exercise of warrants and/or
     options and to prohibit the transfer of shares to persons that would result
     in a violation of the Trust's shareholding requirements. The Bylaws provide
     that only with the explicit approval of the Trust's Board of Directors may
     a shareholder own more than 9.8% of the total outstanding shares.

15.  Common stock options
     --------------------

     The 1998 Incentive Stock Option Plan ("Plan") adopted by the Board of
     Directors and approved by stockholders, provided non-qualified Common Stock
     options for the purchase of 247,500 Common Shares of the Trust. Officers
     and employees of the Manager, and Directors of the board are the eligible
     recipients of the options. The options have a term of 10 years with a first
     exercise date generally two (2) to six (6) months after the date of the
     grant. Under the terms of the Plan, the exercise price of each option will
     not be less than 100% of the Common Shares closing stock price on the date
     of grant.

                                       18
<Page>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)

15. Common stock options (continued)

     The activity in the Plan for the six months ended June 30, 2005 and the
     twelve months ended December 31, 2004 follows:

                                                              Weighted average
                                                  Options      exercise price
                                                  -------      --------------

     Outstanding at January 1, 2004               183,700        $   10.60
                    Granted                            --               --
                    Exercised                     (10,105)            9.40
                    Forfeited                          --               --
                                                 --------        ---------
     Outstanding at December 31, 2004             173,595        $   10.67
                                                 --------        ---------
                    Granted                            --               --
                    Exercised                          --               --
                    Forfeited                          --               --
                                                 --------        ---------
     Outstanding at June 30, 2005                 173,595        $   10.67
                                                 ========        =========
     Outstanding options exercisable as of
                    January 1, 2004               183,700        $   10.60
                    December 31, 2004             173,595            10.67
                    June 30, 2005                 173,595            10.67

     All the Plan's stock options have been granted and the unexercised stock
     options are 100% vested.

     The following table summarizes information with respect to stock options
     outstanding at June 30, 2005:

<Table>
<Caption>
                                                   Options outstanding
                                    -----------------------------------------------------------
                                                    Weighted-average
                                    Number of      remaining contractual      Weighted- average
     Range of exercise prices         shares            life (years)            exercise price
                                    -----------------------------------------------------------
<S>                                   <C>                <C>                    <C>
     $9.00 - $9.06                    109,845             5.10                  $   9.03
     $13.50                            63,750             3.76                     13.50
                                      -------           ------                  --------
                                      173,595             4.61                  $  10.67
                                      =======           ======                  ========
</Table>


16.  Earnings per share
     ------------------

     The following table represents a reconciliation of the numerators and
     denominators of the basic and diluted earnings per common share for the
     three and six months ended June 30, 2005 and 2004:

<Table>
<Caption>
                                                     Three months ended          Six months ended
                                                           June 30                   June 30
                                                      2005         2004         2005         2004
                                                      ----         ----         ----         ----
<S>                                                <C>          <C>          <C>          <C>
    Numerator:
    Net income (loss)                              $ (39,837)   $ 215,139    $ (22,482)   $ 492,907
    Preferred dividends                              (66,318)     (76,788)    (159,395)    (153,577)
                                                   ---------    ---------    ---------    ---------
    Numerator for basic and diluted earnings per
    share income (loss) available to common        $(106,155)   $ 138,351    $(181,877)   $ 339,330
                                                   =========    =========    =========    =========
    Denominator:
        Basic weighted average shares                419,915      436,831      429,129      436,150

        Dilutive effect of options                      --         70,509         --         75,228
                                                   ---------    ---------    ---------    ---------
        Diluted weighted average shares              419,915      507,340      429,129      511,378
                                                   =========    =========    =========    =========
    Basic earnings per common share                $   (0.24)   $    0.32    $   (0.41)   $    0.78
                                                   =========    =========    =========    =========
    Diluted earnings per common share              $   (0.24)   $    0.27    $   (0.41)   $    0.65
                                                   =========    =========    =========    =========
</Table>
                                       19
<Page>
                                     PART I
                                     ITEM 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                                PLAN OF OPERATION

The financial statements of Capital Alliance Income Trust Ltd., A Real Estate
Investment Trust (the Trust") dated herein were prepared from the unaudited
books and ledgers of the Trust.

Certain statements contained herein are not based on historical information and
certain statements contained in future filings by the Trust with the SEC, in the
Trust's press releases or in the Trust's public and stockholder communications
may not be based on historical facts and are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may be identified by reference to a future period or
periods, or by the use of forward-looking terms such as "may", "will", "expect",
"anticipate", or similar terms. Actual results could materially differ from
those in the forward-looking statements due to a variety of factors.

Management's discussion and analysis of the results of operations for the three
and six months ended June 30, 2005 and 2004 follows:

OVERVIEW

In May of 1997, the Trust registered its common shares with the Securities and
Exchange Commission under the Securities Act of 1933. On September 30, 1998, the
initial public offering of Common Shares was completed. Since October 1, 1998,
the common shares have been listed on the American Stock Exchange with the
exchange symbol of "CAA".

From 1997 through 2003, the Trust's financial statement reported CAFC by the
equity method of accounting. The equity method of accounting records an equity
investment at cost and adjusts it by the investment's share of earnings or
losses and decreases it by dividends received.

For year end 2004, the Trust implemented reporting CAFC pursuant to the
requirement of Financial Accounting Standards Board Interpretation No.46 ("FIN
46(R)"). The interpretation requires the consolidation of variable interest
entities such as CAFC and the Trust's Mortgage Investment and Warehouse Lending
Businesses to report the Company's results.

Prior to year end 2004, Management identified CAFC as an asset held for sale
within the meaning of Financial Accounting Standard No.144 ("FAS 144"). On
November 11, 2004, CAFC's common shareholder notified the Trust of its intention
to retire 100% of CAFC's preferred stock. The Trust's investment in CAFC is
entirely comprised of preferred stock. The Trust's preferred shares are
available for immediate delivery and the transaction is expected to be completed
within one year of CAFC's common shareholder's notification. Management expects
the sale of the Trust's CAFC preferred stock to approximate its fair value.

Since the pending transfer of the Trust's interest in CAFC satisfies the
disposal criteria of FAS 144, the Trust's interest in CAFC's net income is
presented as a non-revenue line item in the Trust's June 30, 2005 consolidated
statement of operations and CAFC's assets are reported in the Trust's December
31, 2004 and June 30, 2005 consolidated balance sheet as an asset held for sale.

Management believes the retirement of the Trust's preferred share investment in
CAFC will provide numerous benefits. These benefits include: restoring the Trust
to its original intent as an investor in non-conforming mortgages; reducing a
source of volatility in the Trust's reported net income; reducing the cost of
annual audits and quarterly reviews; reducing the costs of Sarbanes Oxley
compliance; reducing the number of related party transactions; simplifying the
process of cost allocation; and accelerating the compilation and reporting of
operating results. The costs of disposing of the Trust's investment in CAFC
include: the loss of CAFC's potential profitability; less control over the
mortgage investment supply chain; and restrictions of the Trust's access to
CAFC's funding agreement. During the six months ended June 30, 2005 and the
twelve months ended December 31, 2004, 2003, 2002, 2001, and 2000, CAFC has
generated net income or (net loss) of $(43,887), $134,745, ($162,763),
($25,901), $385,006, ($494,452), respectively, or a cumulative (net loss) of
($207,252) during the last five and one half years. CAFC has never paid a
dividend.

                                       20
<Page>
The recent interest rate environment has profoundly reduced the profitability of
CAIT. The rise in short term rates and the "conundrum" of stable or declining
longer term rates has increased the cost of carrying a mortgage portfolio and
decreased the yield on new mortgage investments. Additionally, the
non-conforming residential mortgage market has continued to attract better
financed competitors willing to offer higher LTV loans or more competitive
pricing. These developments have further reduced CAIT's investment yield. In the
twelve months since June 30, 2004, CAIT's weighted average portfolio yield has
declined 1.59% from 12.47% to 10.88%. Management is addressing this
deterioration in yield and spread by emphasizing our ability to timely close
transactions in order to deflect price competition and by seeking more
competitive portfolio financing.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States of America. The
Company's significant accounting policies are described in the notes to the
consolidated financial statements. Certain accounting policies require
management to make significant estimates and assumptions, which have a material
impact on the carrying value of certain assets and liabilities, and the Company
considers these to be critical accounting policies. The estimates and
assumptions used are based on historical experience and other factors, which
management believes to be reasonable under the circumstances. Actual results
could differ significantly from these estimates and assumptions, which could
have a material impact on the carrying value of assets and liabilities at the
balance sheet dates and results of operations for the reporting periods.

The following are critical accounting policies that require the most significant
estimates and assumptions that are particularly susceptible to a significant
change in the preparation of the financial statements and are not presented in
their relative order of importance.

Revenue recognition. Interest income accrues as it is earned. Loans may be
placed on a nonaccrual status when any portion of the principal or interest is
three scheduled payments past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. Nonaccrual status loans are
returned to an accrual status when principal and interest become current and are
anticipated to be fully collectible.

Allowance for loan losses. A provision for loan losses in based on management's
evaluation of an amount that is adequate to absorb losses inherent in the
existing loan portfolio. The evaluation, which includes a review of all loans on
which full collection may not be reasonably assumed, considers among other
matters, general economic conditions, the fair market value or the estimated net
realizable value of the underlying collateral, past loan loss experience, trends
in loan delinquency and other factors that warrant recognition in providing for
an adequate loan loss allowance to absorb inherent losses.

Real estate owned. Real estate owned represents property acquired in foreclosure
of mortgage notes receivable. The real estate is carried at the lower of the
value of the mortgage note receivable less selling costs on the real estate or
fair market value. Certain estimates and assumptions are required in determining
the cost to sell or in estimating the fair market value of the real estate.

Stock option. The Trust has issued stock options to certain employees of the
Manager and to its Directors. The stock options issued are accounted for using
the intrinsic-value method. Because the options were issued with exercise prices
no less than the market price of the Trust's common stock on the dates of grant
and because other key terms are fixed, use of the intrinsic-value method results
in the Trust not recognizing compensation expense for these options. If the
terms of these options were changed, variable accounting might need to be used,
and the Trust might then need to begin recognizing compensation expense for the
options.

Assets held for sale. CAFC is identified as an asset held for sale and disposal
of this asset is expected within the twelve month period permitted by FAS 144.
On November 11, 2004, the Manager notified the Trust of its intention to retire
100% of the CAFC preferred stock owned by the Trust and concurrently issue a new
class of CAFC preferred to CAFC's sole common shareholder. The Trust does not
expect to recognize any loss on the transaction.

Management has discussed the Company's critical accounting policies and the
development, selection and disclosure of the estimates and alternatives with the
Audit Committee of the Board of Directors and obtained their approval prior to
filing this report with the Securities and Exchange Commission.

                                       21
<Page>
Operating Strategy.
-------------------

The Trust invests as a portfolio lender primarily in non-conforming mortgage
loans on one-to-four unit residential properties primarily secured by first and
second deeds of trust. Management believes that this segment of the mortgage
market is inadequately served and that there is a large demand for
non-conforming mortgage loans with a complete spectrum of credit grades.

CAFC's operating strategy is to originate, through mortgage loan brokers and a
correspondent network, conforming and non-conforming home equity loans to be
sold to the Trust and to be sold in the secondary mortgage market for cash.
Although the loans currently made are concentrated in California, CAFC plans to
originate and/or purchase loans on both an individual and bulk basis throughout
the western United States. Loans will then be sold into the secondary market for
a premium or to the Trust at fair market value, when they meet the Trust's
underwriting standards (which include a combined loan-to-value ratio that does
not exceed 75% of the underlying collateral).

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 collateral for a
home equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, making required advances, accounting for principal and interest
payments, holding borrowed proceeds in escrow until fulfillment of mortgage loan
requirements, contacting delinquent borrowers, supervising foreclosures and
property dispositions in the event of unremedied defaults and performing other
administrative duties. All or a portion of the aforementioned servicing
responsibilities may be subcontracted by the Manager.

Commitments and Contingencies. As of June 30, 2005, the Trust's loan portfolio
included 57 loans totaling $22,388,596 of which nine loans totaling $3,406,303
representing 15% of the loan portfolio were delinquent over two payments. After
adjusting the June 30, 2005 delinquent balances for payments received through
July 31, 2005, five loans totaling $2,237,713 or 10% of the loan portfolio were
delinquencies in excess of two payments. In assessing the collectibility of
these delinquent mortgage loans, management has established a loan loss reserve
of $225,000, if it is necessary to foreclose upon the mortgage loans.

As of June 30, 2004, the Trust's loan portfolio included 59 loans totaling
$13,980,596 of which 9 loans totaling $2,395,919 representing 17% of the loan
portfolio were delinquent over two payments. In assessing the collectibility of
these delinquent mortgage loans, management has established a loan loss reserve
of $210,000, if it is necessary to foreclose upon the mortgage loans.

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 did not have any commitments to fund loans as of June 30, 2005 and
June 30, 2004.

<Table>
<Caption>
     Maximum Other
      Commercial            Total
   Commitments (a)         Amounts
as of June 30, 2005       Committed                Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------------------------------------
                                           Less than       1 - 3 years          4 - 5           After 5
                                            1 year                              years            years
---------------------- --------------- ---------------- ----------------- ---------------- ---------------
<S>                       <C>                  <C>         <C>                    <C>              <C>
Lines of Credit (b)       $13,778,559          0           $13,778,559            0                0
---------------------- --------------- ---------------- ----------------- ---------------- ---------------
Standby Repurchase           (c)               0                0                 0                0
Obligations
---------------------- --------------- ---------------- ----------------- ---------------- ---------------
Total Commercial
Commitments              $13,778,559           0           $13,778,559            0                0
---------------------- --------------- ---------------- ----------------- ---------------- ---------------
</Table>

(a)  Commercial commitments are funding commitments that could potentially
     require registrant performance in the event of demands by third parties or
     contingent events, such as under lines of credit extended or under
     guarantees of debt.

(b)  The Mortgage Investment Business outstanding obligations as of June 30,
     2005 due in 1-3 years were $13,778,559.

                                       22
<Page>
(c)  The Mortgage Conduit Business has an unquantified ongoing liability with
     respect to normal warranties and representations which includes fraud in
     the origination process or early default on loans sold into the secondary
     mortgage market.

RESULTS OF OPERATIONS

The historical information presented herein is not necessarily indicative of
future operations.

Three and six months ended June 30, 2005 and 2004. Revenues for the second
quarter increased to $608,078 as compared to $500,308 for the same period in the
prior year. The increase in revenue, during the second three months of 2005 was
due CAIT's larger portfolio which provided more interest revenue of $112,549 and
origination income provided $28,726 of more revenue.

Expenses for the second quarter 2005 increased to $603,288 as compared to
$267,706 for the same period in the prior year. The increase in expenses during
the second months of 2005 was largely due to greater interest expenses of
$200,827, a larger loan loss reserve of $60,000, increased loan servicing and
origination expenses of $30,732, and higher general and administrative costs of
$20,180.

Revenues for the six months ended June 30, 2005 decreased to $1,118,705 as
compared to $1,211,928 for the same period in the prior year. The decrease in
revenue, during the first six months of 2005 was due to a reduction of $84,437
in interest income from affiliate and a reduction in equity in gain of affiliate
of $80,847, as CAFC is being reported as an asset held for sale. CAIT's larger
portfolio provided more interest revenue of $41,646 and origination income
provided $30,415 of more revenue.

Expenses for the six months ended June 30, 2005 increased to $1,047,063 as
compared to $678,523 for the same period in the prior year. The increase in
expenses during the first six months of 2005 was primarily due to increased
interest expenses of $278,259, a larger loan loss reserve of $46,000, and
increased loan servicing and origination expenses of $40,093.

LIQUIDITY AND CAPITAL RESOURCES

During 2004, CAFC obtained a three year $25,000,000 funding facility. Pursuant
to a tri-party agreement among CAFC, CRF, and the Trust, the Trust can use this
funding facility. All benefits and costs of ownership and financing of the
Trust's loans will inure to the Trust.

Management believes that the cash flow from the payment of mortgage notes
receivable, existing bank loan facilities, and additional lines of credit
anticipated to be acquired during 2005 will be sufficient to meet the liquidity
needs of the Trust's businesses for the next twelve months.

Six months ended June 30, 2005 and 2004. As of January 1, 2005 and 2004, the
Trust had $155,462 and $1,038,010 of cash and cash equivalents, respectively.
During the six month period ended June 30, 2005, cash and cash equivalents
increased by $956,781. During the six month period ended June 30, 2004, cash and
cash equivalents decreased by $555,481, respectively. After taking into effect
the various transactions discussed below, cash and cash equivalents at June 30,
2005 and 2004 were $1,112,243 and $482,529.

The following summarizes the changes in net cash provided by operating
activities, net cash used for investing activities, and net cash provided by
financing activities.

Net cash used in and provided by operating activities during the six months
ended June 30, 2005 and 2004 was $854,742 and $132,258, respectively. During the
first six months of 2005, net income used $22,482, an increase in due from
affiliates used $231,095, a decrease in other liabilities used $205,884 and an
increase in accounts receivable used $485,448. During the first six months of
2004, net income provided $492,907, a decrease in accounts receivable provided
$205,494, a net increase in due from affiliates used $149,359 and a net increase
in other assets used $331,785.

Net cash used in and provided by investing activities for the six months ended
June 30, 2005 and 2004 was $3,126,159 and $6,648,949, respectively. During the
first six months of 2005, a net increase in mortgage notes receivable used
$3,345,122. During the first six months of 2004, a net reduction in mortgage
notes receivable provided $6,575,892.

                                       23
<Page>
Net cash provided by and used in financing activities during the six months
ended June 30, 2005 and 2004 was $4,937,682 and $7,336,688, respectively. During
the first six months of 2005, borrowings provided cash of $5,531,018, while
dividends and treasury stock purchases reduced cash by $203,169 and $390,167,
respectively. During the first six months of 2004, repayments of borrowings used
cash of $6,803,149, dividends reduced cash by $545,826 and treasury stock sales
increased cash by $15,178.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk. Market risk is the exposure to loss resulting from changes in
interest rates, credit spreads, foreign exchange rates, commodity prices, and
equity prices. The primary market risks to which the Trust is exposed are
interest rate risk and credit risk.

Interest risk. Interest rate risk is highly sensitive to many factors, including
governmental, monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the control of the Trust.
Changes in the general level of the U.S. Treasury yield curve can have
significant effects on the market value of the Trust's portfolio. The majority
of the Trust's assets are fixed-rate loans with a spread to U.S. Treasuries. The
Trust's loans are valued on the June 30, 2005 balance sheet of the lower of cost
or market.

As U.S. Treasury securities are priced to a lower yield and/or the spread to
U.S. Treasuries used to price the Trust's assets are decreased, the market value
of the Trust's portfolio may increase. Conversely, as U.S. Treasury securities
are priced to a higher yield and/or the spread to U.S. Treasuries used to price
the Trust's assets is increased, the market value of the Trust's portfolio may
decline. Changes in the level of the U.S. Treasury yield curve can also affect,
among other things, the prepayment assumptions used to value certain of the
Trust's loans. In addition, changes in the general level of the United States
Prime Rate can affect the Trust's net interest income. The majority of the
Trust's liabilities are floating rate based on a spread over the daily Prime
Rate. As the Prime Rate increases or decreases, the Company's interest expense
will move in the same direction.

On account of the relatively short adjusted weighted average maturity of the
Trust's portfolio (36 months), a variety of financial instruments available to
limit the effects of interest rate fluctuations on its operations have not been
utilized. The use of these types of derivatives (such as interest rate swaps,
caps, floors and other interest rate exchange contracts) to hedge
interest-earnings assets and/or interest-bearing liabilities carry risks,
including the risk that the net losses on a hedge position may exceed the amount
invested in such instruments. As the level of variable rate mortgage financing
of the portfolio increases or the weighted average maturity of the portfolio
increases, the Trust may utilize a variety of financial instruments to limit the
effects of interest rate fluctuations.

Credit risk. Credit risk is the exposure to loss from loan defaults and
foreclosures. Default and foreclosure rates are subject to a wide variety of
factors, including, but not limited to, property values, supply/demand factors,
construction trends, consumer behavior, regional economics, interest rates, the
strength of the American economy and other factors beyond the control of the
Trust.

All loans are subject to a certain probability of default and foreclosure. An
increase in default rates will reduce the book value of the Trust's assets and
the Trust's earnings and cash flow available to fund operations and pay
dividends.

The Trust manages credit risk through the underwriting process, limiting loans
at the time of funding to 75% of the collateral's appraised value, establishing
loss assumptions and carefully monitoring loan performance. Nevertheless, the
Trust assumes that a certain portion of its loans will default and adjusts the
allowance for loan losses based on that assumption. For purposes of
illustration, a doubling of the allowance for losses in the Trust's portfolio
would reduce second quarter 2005 GAAP income available to common shareholders by
$255,000.

Asset and liability management. Asset and liability management is concerned with
the timing and magnitude of the maturity of assets and liabilities. In general,
management's strategy is to approximately match the term of the Trust's
liabilities to the portfolio's adjusted weighted average maturity (36 months).
CAFC's assets and liabilities are significantly shorter. The majority of CAFC's
assets is presold at origination for delivery within 60 days and is financed
with a repurchase facility that provides up to 60 days of financing.

The majority of the Trust's assets pay a fixed coupon and the income from such
assets are relatively unaffected by interest rate changes. The Trust's
borrowings are currently under a variable rate line of credit that resets
monthly. Given this relationship between assets and liabilities, the Trust's
interest rate sensitivity gap is highly negative. This implies that

                                       24
<Page>
a period of falling short term interest rates will tend to increase the Trust's
net interest income, while a period of rising short term rates will tend to
reduce the Trust's net interest income.

CAFC's assets are a fluctuating mix of fixed and variable rate mortgages. At
origination, the disposition of these loans is identified and their secondary
market sales pricing is usually predetermined. Given this relationship, CAFC's
interest rate sensitivity is neutral if secondary market purchase commitments
are honored.

                                     PART I
                                     ITEM 3.

                             CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls and Procedures. The Chief Executive
Officer, the President and Chief Operating Officer, and the Executive
Vice-President and Chief Financial Officer of the Trust have, based on their
evaluation of the Trust's disclosure controls and procedures within 90 days of
the filing date of this annual report, evaluated the effectiveness of such
controls and procedures. Based on such evaluations, they have concluded that the
Trust's disclosure controls and procedures have effectively operated to ensure
that all material information relating to the Trust and its operations and
financial condition has been made known to them by other officers and employees
within the Trust and its Manager on a timely basis.

(B) Changes in Internal Controls. There have been no significant changes in the
Trust's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation. Accordingly, no
corrective actions with regard to such controls or procedures have been
required.

                                     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

       14,900 common shares were purchased for treasury stock during the three
       month period ended June 30, 2005.

ITEM 3     DEFAULTS UPON SENIOR SECURITIES

       None.

ITEM 4     SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

       The annual proxy was submitted to a vote of security holders during the
       quarterly period ended June 30, 2005. The annual meeting was conducted on
       July 20, 2005. All proxy items were approved. The shareholders vote will
       be included in the third quarter filing.

ITEM 5     OTHER INFORMATION

       None.

ITEM 6     EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits
         --------

         Exhibit No.
         3.1     Charter Certificate of Incorporation and Amendment No. 1(1)
         3.2     Bylaws of the Registrant(1)
         3.3     Certificate of Amendment of Certificate of Incorporation(5)

                                       25
<Page>
         4.1     Form of Stock Certificate of Common Shares of the Registrant(2)
         10.1    Form of Management Agreement between the Registrant and Capital
                 Alliance Advisors, Inc.(1)
         10.2    Form of Indemnity Agreement between the Registrant and its
                 Directors and Officers(1)
         10.3    Form of Loan Origination and Loan Servicing Agreement between
                 the Registrant and Capital Alliance Advisors, Inc.(1)
         23.4    Consent of Landels Ripley & Diamond, LLP(4)
         23.5    Consent of Novogradac & Company LLP(4)
         24.1    Power of Attorney of Thomas B. Swartz(1)
         24.2    Power of Attorney of Dennis R. Konczal(1)
         24.4    Power of Attorney of Stanley C. Brooks(1)
         24.5    Power of Attorney of Harvey Blomberg(1)
         24.7    Power of Attorney of Richard J. Wrensen(6)
         24.8    Power of Attorney of Donald R. Looper(7)

(1)      These exhibits were previously contained in Registrant's Registration
         Statement filed on Form S-11 with the Commission on September 9, 1996,
         and are incorporated by reference herein.

(2)      These exhibits were previously contained in Amendment No. 1 to the
         Registrant's Registration Statement filed on Form S-11 with the
         Commission on January 15, 1997, and are incorporated by reference
         herein.

(3)      This exhibit was previously contained in Amendment No. 2 to the
         Registrant's Registration Statement filed on Form S-11 with the
         Commission on February 6, 1997 and is incorporated by reference herein.

(4)      These exhibits were previously contained in Post-Effective Amendment
         No. 3 to the Registrant's Registration Statement filed on Form S-11
         with the Commission on December 10, 1997, and are incorporated by
         reference herein.

 (5)     These exhibits were previously contained in Form 10-Q for the period
         ending June 30, 1997 filed with the Commission on August 14, 1997, and
         are incorporated by reference herein.

(6)      This exhibit was previously contained in Form 10-K for the period
         ending December 31, 1998 filed with the Commission on April 10, 1999,
         and is incorporated by reference herein.

(7)      This exhibit was previously contained in From 10-KSB for the period
         ending December 31, 2002 filed with the Commission on April 15, 2003,
         and is incorporated by reference herein.

(b)      Reports on Form 8-K.
         --------------------

         Form 8-K was filed on:

          o    April 5, 2005 due to the press release of March 31, 2005
               regarding the operating results for the three and twelve months
               ended December 31, 2004;
          o    May 23, 2005 due to the press release of May 23, 2005, regarding
               the operating results of the three months ended March 31, 2005;
          o    May 27, 2005 due to the withdrawal of the Company's Auditors
               effective May 23, 2005. Concurrent with this filing, a press
               release was issued on May 27, 2005;
          o    June 7, 2005 due to the press release of June 3, 2005 regarding
               the may preferred share dividend payable June 15, 2005.

                                       26
<Page>
                                   SIGNATURES


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


                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A Real Estate Investment Trust


Dated: August 19, 2005

                          /s/ Thomas B. Swartz
                          -----------------------
                          Thomas B. Swartz
                          Chairman and Chief Executive Officer

                          /s/ Richard J. Wrensen
                          -----------------------
                          Richard J. Wrensen
                          Chief Financial Officer and Executive Vice President






                                       27
<Page>
                                  CERTIFICATION


          CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
                   TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Capital Alliance Income
         Trust Ltd. (the "Company") on Form 10-QSB for the period ending June
         30, 2005 as filed with the Securities and Exchange Commission on the
         date hereof (the "Report"), I, Thomas B. Swartz, Chief Executive
         Officer of the Company, Richard J. Wrensen, Chief Financial Officer of
         the Company, and I, Dennis R, Konczal, President and Chief Operating
         Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
         adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

               (1) The Report fully compiles with the requirements of section
               13(a) or 15(d) of the Securities Exchange Act of 1934; and

               (2) The information contained in the Report fairly presents, in
               all material respects, the financial condition and result of
               operations of the Company.



Date: August 19, 2005

                            /s/ Thomas B. Swartz
                            ----------------------
                            Thomas B. Swartz
                            Chairman and Chief Executive Officer

                            /s/ Richard J. Wrensen
                            ----------------------
                            Richard J. Wrensen
                            Chief Financial Officer and Executive Vice President

                            /s/ Dennis R. Konczal
                            ----------------------
                            Dennis R. Konczal
                            President and Chief Operating Officer



                                       28
<Page>
                                  CERTIFICATION
               OF FORM 10Q OF CAPITAL ALLIANCE INCOME TRUST LTD.,
                     A REAL ESTATE INVESTMENT TRUST FOR THE
                           PERIOD ENDING JUNE 30, 2005

Under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

The undersigned each individually certifies that:

1.   I have reviewed this Form 10QSB, dated August 19, 2005 of Capital Alliance
     Income Trust, Ltd., A Real Estate Investment Trust:

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

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

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

     o    designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, is made known to us
          by others within those entities, particularly during the period in
          which this report in being prepared;
     o    evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date); and
     o    presented in this report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of
          the Evaluation Date;

5.   The registrant's other certifying officers have disclosed, based on our
     most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors:

     o    all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and
     o    any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

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

Date: August 19, 2005
                           /s/ Thomas B. Swartz
                           ----------------------
                           Thomas B. Swartz
                           Chairman and Chief Executive Officer

                           /s/ Richard J. Wrensen
                           ----------------------
                           Richard J. Wrensen
                           Chief Financial Officer and Executive Vice President

                           /s/ Dennis R. Konczal
                           ----------------------
                           Dennis R. Konczal
                           President and Chief Operating Officer


                                       29