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







                                  May 15, 1998



SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C.  20549

Re:      Capital Alliance Income Trust Ltd., A Real Estate Investment Trust
         SEC File No. 333-11625
         Our File No. 76021.0002

Dear Sir/Madam:

Pursuant  to  Sections  13 and  15(d) of the  Securities  Exchange  Act of 1934,
enclosed  for filing via EDGAR  please  find a Form 10-Q for the  quarter  ended
March 31, 1998. If you have any questions, please do not hesitate to call.

                                                     Very truly yours,

                                                     /s/ Richard J. Wrensen
                                                     ----------------------
                                                     Richard J. Wrensen
                                                     Chief Financial Officer

Enclosures

cc:      Stephen C. Ryan, Esq.



50 California  Street,  Suite 2020 o San Francisco,  CA 94111 o (415) 288-9575 o
fax (415) 288-9590
<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-Q

(Mark One)

         (X)                        Quarterly  Report Under  Section 13 or 15(d)
                                    of the  Securities  Exchange Act of 1934 For
                                    the quarterly period ended March 31, 1998

                        Commission File Number: 333-11625

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

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

         50 California Street
         Suite 2020
         San Francisco, California                   94111
         -------------------------                   -----
      (Address of principal executive office)        (zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes    _X_       No ___       

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

As of April 30, 1998, the aggregate market value of the  registrant's  shares of
Common  Stock,  $.01 par value,  held by non  affiliates of the  registrant  was
approximtely  $7,949,393.  At that date  993,674  shares of  common  stock  were
outstanding  outstanding.  The shares are  approved  for listing on the American
Stock  Exchange upon notice of issuance,  but will not trade  publicly until the
conclusion of the Registrant's current "best efforts" public offering.

<PAGE>



                                     PART I
                                     ITEM 1.


                              FINANCIAL STATEMENTS










                                        2

<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                                 Balance Sheets

                                                                              (Unaudited)          (Audited)
                                                                             March 31, 1998   December 31, 1997
<S>                                                                             <C>           <C>        
ASSETS
      Cash and cash equivalents .............................................   $ 1,197,327   $ 1,748,485
      Restricted cash .......................................................       376,871       205,356
      Warehouse lines of credit to related parties ..........................     1,923,699     2,185,957
      Accounts receivable ...................................................       124,809        95,207
      Investments in affiliates .............................................       650,355       469,150
      Mortgage notes receivable .............................................     7,393,227     4,915,186
      Real estate held for sale .............................................       322,550       322,550
      Organization costs (net of accumulated amortization of $8,652 at
           March 31, 1998 and $7,551 at December 31, 1997) ..................        13,377        14,478
      Deferred offering costs ...............................................       126,434       176,050
                                                                                -----------   -----------

      Total assets ..........................................................   $12,128,649   $10,132,419
                                                                                ===========   ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

      Liabilities
           Mortgage note holdbacks ..........................................   $   376,871   $   205,356
           Due to affiliates ................................................         8,842        82,966
           Other liabilities ................................................        77,374        22,774
           Mortgage notes payable ...........................................             0             0
                                                                                -----------   -----------
      Total liabilities .....................................................       463,087       311,096
                                                                                -----------   -----------

      Stockholders' Equity
           Preferred stock, $.01 par value (liquidation value $9.50 .........         6,413         6,413
               per share); 675,000 shares authorized; 641,283 shares
               issued andoutstanding at March 31, 1998 and
               December 31, 1998 respectively ...............................
            Additional paid in capital -preferred stock .....................     5,868,711     5,868,711

            Common stock, $.01 par value; 5,000,000 .........................         8,273         5,628
                shares authorized ; 827,300 and 562,760 shares issued and
                outstanding at March 31, 1998 and December
                31, 1998 ,respectively
            Additional paid in capital - common stock .......................     5,782,165     3,940,571
                                                                                -----------   -----------

      Total stockholders' equity ............................................    11,665,562     9,821,323
                                                                                -----------   -----------

      Total liabilities and stockholders' equity ............................   $12,128,649   $10,132,419
                                                                                ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                            Statements of Operations
                                  (Unaudited)
                                                              Three Months Ended
                                                                   March 30,
                                                               1998        1997
<S>                                                          <C>        <C>     
REVENUES
     Interest income .....................................   $258,560   $182,781
     Origination income ..................................     25,172     24,608
     Other income ........................................      8,772     25,867
                                                             --------   --------
         Total revenues ..................................    292,504    233,256
                                                             --------   --------

EXPENSES
     Loan servicing and other expenses to related party ..     73,992     29,179
     Interest expense ....................................       --       39,959
     Provision for loan losses ...........................       --         --
     Operating expenses of real estate owned .............      2,890     19,147
     General and administrative ..........................     36,488     10,592
                                                             --------   --------
           Total expenses ................................    113,370     98,877
                                                             --------   --------

NET INCOME ...............................................   $179,134   $134,379
                                                             ========   ========



BASIC EARNINGS PER  COMMON SHARE .........................   $  0.039       --



DILUTED EARNINGS PER  COMMON SHARE .......................   $  0.029       --
</TABLE>



                                        4
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                            Statements of Cash Flows
                                  (Unaudited)


                                                                      Three Months Ended
                                                                           March 31,
                                                                      1998           1997
<S>                                                             <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
     Net Income .............................................   $   179,134    $   134,378
     Adjustments to reconcile net income to net cash provided
     by operating activities:
       Amortization .........................................         1,101          1,080
       (Increase) decrease in  accounts receivable ..........       (29,602)        (4,737)
       Accrued interest capitalized to real estate owned ....          --          (13,826)
       Increase (decrease) in loan loss reserve .............          --             --
       Increase (decrease) in due to affiliates .............       (74,124)        32,258
       Increase (decrease) in other liabilities .............        54,600         (8,196)
                                                                -----------    -----------
         Net cash provided by (used in) operating activities        131,109        140,957
                                                                -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     (Increase) decrease in restricted cash .................      (171,515)       (54,207)
     Increase (decrease) in mortgage note holdbacks .........       171,515         54,207
     (Increase) decrease in warehouse lines of credit .......       262,258           --
     (Increase) in investments ..............................      (181,205)          --
     Investments in mortgage notes receivable ...............    (3,191,883)    (1,345,000)
     Repayments of mortgage notes receivable ................       713,842        963,946
     Net proceeds from sale of foreclosed property ..........          --          485,658
     Capital costs of foreclosed property ...................          --          (11,922)
                                                                -----------    -----------
       Net cash provided by (used in) investing .............    (2,396,988)        92,682
                                                                -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Redemption of shares ...................................          --             --
     Proceeds from issuance of shares .......................     2,116,320           --
     Deferred offering costs ................................       (53,474)
     Payment of mortgage notes payable ......................          --           (6,642)
     Organizational and offering costs ......................      (218,802)          (354)
     Dividends paid .........................................      (182,797)      (150,026)
                                                                -----------    -----------
       Net cash provided by (used in) financing activities ..     1,714,721       (210,496)
                                                                -----------    -----------

NET INCREASE (DECREASE) IN CASH .............................      (551,158)        23,143
CASH AT BEGINNING OF PERIOD .................................     1,748,485         66,798
                                                                -----------    -----------

CASH AT END OF PERIOD .......................................   $ 1,197,327    $    89,941
                                                                ===========    ===========

SUPPLEMENTAL CASHFLOW INFORMATION:
     Interest expense paid ..................................          --             --
     Taxes paid .............................................          --             --
</TABLE>


                                        5
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)


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

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

      Effective  February 12, 1997, the Trust  registered its common shares with
      the Securities and Exchange  Commission  pursuant to the Securities Act of
      1933,  as amended in  connection  with a"best  efforts"  offering of up to
      1,500,000  common  shares at $8.00 per share and  warrants  to purchase an
      additional 150,000 common shares at $5.60 per share.



2.    Basis of presentation
      ---------------------

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

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

      These  financial  statements  should  be  read  in  conjunction  with  the
      financial  statements  and notes  thereto for the year ended  December 31,
      1997 filed pursuant to 15d-2 on Form 10-K with the Securities and Exchange
      Commission.

      The  unaudited  interim  financial  statements  for the three months ended
      March 31, 1997 and March 31, 1998  represent the the financial  statements
      of the Trust.


3.    Summary of significant accounting policies
      ------------------------------------------

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


                                        6
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)


      insured limits.  Restricted  cash represents  segregated cash and is to be
      disbursed  only to mortgage  loan  borrowers  upon  completion  of certain
      improvements to the secured property (see Note 4).

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

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

      Investments.  The Trust  previously  held an investment in Sierra  Capital
      Acceptance  ("SCA").  On December 31, 1997 SCA completed a tax free-merger
      with Sierra Capital Funding,  LLC ("SCF"),  a Delaware  Limited  Liability
      Company which originates and sells  residential  mortgages,  by exchanging
      all the  Class A and  Class B  shares  of SCA for the  Sierra  common  and
      preferred  shares of SCF. SCA will  continue  operations  as as a seperate
      operating  division of SCF. The Trust ownes 99% of the  non-voting  Sierra
      Preferred  shares  of  SCF.  SCF-Sierra  Preferred  shares  receive  a 15%
      interest per annum.  Sierra Capital Services,  Inc., a related party, owns
      99% of the Sierra common shares of SCF and maintains  voting control.  The
      SCF-Sierra  common  shareholders  are allocated all net profits and losses
      and are required to  contribute  or loan  additional  capital to cover any
      operating  losses.  SCF is taxed as a partnership.  The Trust accounts for
      its investment in SCF under the equity method.

      On April 11,  1997 the Trust  formed  its  non-qualified  REIT  subsidiary
      Capital  Alliance  Funding  Corporation  ("CAFC") to conduct its  mortgage
      conduit  business.  The Trust  ownes  99% of the  outstanding  Series  "A"
      Preferred  stock (2,000 shares of non-voting  stock) in CAFC.  The Trust's
      Manager ownes 1% of the Common Shares (1,000  shares) of CAFC and has 100%
      voting  control.  The  Trust's  Manager  also  manages  CAFC and  provides
      mortgage  origination  and loan sale and  servicing  for  CAFC.  The Trust
      accounts for its investment in CAFC under the equity method.

      On January 30, 1998 the Trust invested  $225,000 in Equity 123, a seperate
      operating   division  of  SCF,  that  originates  and  sells   residential
      mortgages.   In  exchange  for  the  investment,   the  Trust  received  a
      subordinate debenture that earns 15% per annum. The Trust accounts for the
      income as interest.

      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 will not be subject
      to federal  corporate income taxes, if the Trust  distributes at least 95%
      of its taxable income to its shareholders. 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  Trusts  organization,  sources  of income,
      nature of assets,  and distribution of assets to  shareholders.  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 must satisfy certain gross income requirements and
      certain asset tests at the close of each quarter of its taxable year.


                                        7

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

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)



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

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

      For the  three-month  period ended March 31, 1997, the  distributions  per
      preferred share are allocated 100% as ordinary income and 100% as a return
      of capital  for tax  purposes.  For the year  ended  March 31,  1998,  the
      distributions  per preferred  share are allocated 100% ordinary income and
      the common share  distribution is allocated 88 % ordinary income and a 12%
      return of capital for tax purposes.

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

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

      Deferred  offering  costs.  Deferred  offering  costs relate to an initial
      public  offering of common  stock.  While the offering is underway,  these
      costs will be offset  pro-rata  against the proceeds  from the issuance of
      common stock and as a reduction of stockholder's equity.

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

      Earnings  per share.  The  Preferred  Shares  receive an annual  preferred
      allocation  of income and  distributions.  Prior to the  December  4, 1997
      issuance of Common  Shares,  the  Preferred  Shares  received  100% of the
      Trust's net income.  After  completion  of the current  offering of common
      shares and after meeting such  preference,  at least 95% of any additional
      income  earned  will  be  distributed  to the  Common  Shares,  until  the
      distribution  on the Common Shares  matches that of the  Preferred  Shares
      (see Note 9).

                                       8
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)


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

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


5.    Mortgage notes receivable
      -------------------------

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

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

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


6.    Accounts receivable
      -------------------

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


7.    Mortgage notes payable
      ----------------------

      As of March 31, 1998 the Trust held no mortgage notes payable.


8.    Related party transactions
      --------------------------

      The  Manager,  which  is  owned  by  several  of the  Trustees  and  their
      affiliate,  contracted with the Trust to provide  administration  services
      and  receives  a fee for these  services  from the Trust.  The  Manager is
      entitled to a per annum Base  Management Fee payable monthly in arrears of
      an amount equal to 1% of the Gross Mortgage  Assets of the Trust (computed
      monthly)  plus  1/2% of cash or  money-market  or  equivalent  assets  and
      incentive  compensation  for each fiscal quarter,  equal to 25% of the net
      income of the Trust in excess of an  annualized  return on equity for such
      quarter equal to the ten year U.S. Treasury Rate plus 2% provided that the
      payment  of such  incentive  compensation  does  not  reduce  the  Trust's
      annualized  return on equity  for such  quarter  to less than the ten year
      U.S.  Treasury Rate plus 2% and amounts payable on account of the Series A
      Preferred Preference Amount have been paid. The


                                       9
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)


      Manager is also entitled to reimbursement for clerical and  administrative
      services  at  cost  based  on  relative   utilization  of  facilities  and
      personnel.  Additionally,  the Manager will receive a Loan Origination and
      Servicing  Fee payable  monthly equal to 2% of the Gross  Mortgage  Assets
      together  with  certain  miscellaneous  fees  from  borrowers  customarily
      payable in connection with origination and servicing of mortgages and fees
      for other services  requested by the Trust. The Manager bears all expenses
      of  services  for which it is  separately  compensated.  During  the three
      months ended March 31, 1997 and March 31, 1998, the Trust paid $29,179 and
      $73,992 respectively to the Manager.

      As described in Note 3, the Trust holds an  investment  in Sierra  Capital
      Funding and  receives a 15%  guaranteed  return per annum.  For each three
      months ended March 31, 1997, and March 31, 1998 the Trust earned  interest
      of $7,500 from the investment.

      As described  in Note 3, the Trust has a  non-qualified  REIT  subsidiary,
      Capital Alliance Funding  Corporation,  which commenced  operations in the
      third  quarter of 1997.  For the three months  ended March 31,  1987,  the
      Trust was allocated a loss of $43,795 from this investment.

      As described  in Note 3, the trust holds an  investment  in Equity 123 and
      receives a 15% return per annum.  Since January 30, 1998,  the date of the
      investment, to March 31, 1998 the trust has earned interest of $5,625 from
      this investment.


9.    Preferred stock and common stock
      --------------------------------

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

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

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

      The  Preferred  Shares,  at the  option  of the  Board of  Directors,  are
      redeemable by a Shareholder  annually on June 30 for  redemption  requests
      received by May 15 of such year.  The Board of Directors may in their sole
      discretion  deny,  delay,  postpone or consent to any or all  requests for
      redemption.  The  redemption  amount  to be paid  for  redemption  of such
      Preferred  Shares is the  adjusted  net capital  contribution  plus unpaid
      accrued dividends, divided by the aggregate net capital contributions plus

                                       10

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

                          Notes to Financial Statements
               For the three months ended March 31, 1998 and 1997
                                   (Unaudited)


      accrued  but  unpaid  dividends   attributable  to  all  Preferred  Shares
      outstanding,  multiplied by the net asset value of the Trust  attributable
      to the Preferred  Shares which shall be that percentage of the Trust's net
      asset value that the aggregate  adjusted net capital  contributions of all
      Preferred  Shares bears to the adjusted net capital  contributions  of all
      Shares  outstanding.  A  liquidation  charge  is  charged  by the Trust in
      connection  with each  redemption as follows:  1% of redemption  amount in
      1998, and none thereafter.




                                       11
<PAGE>
                                     PART I
                                     ITEM 2.


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


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


General

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

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

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

      Loan Origination and Loan Servicing. Mortgage loan origination consists of
establishing  a  relationship  with a  borrower  or his  broker,  obtaining  and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising  properties that are proposed as the subject of a home
equity  loan,  processing  such  information  and  underwriting  and funding the
mortgage  loan.  Mortgage loan  servicing  consists of collecting  payments from
borrowers,   accounting  for  interest  payments,  holding  escrow  funds  until
fulfillment  of mortgage loan  requirements,  contacting  delinquent  borrowers,
foreclosing  in  the  event  of  unremedied   defaults  and   performing   other
administrative  duties.  Mortgage  loan  origination  and  loan  servicing  were
provided to the Trust by CAAI, its Manager.

      Commitments  and  Contingencies.  As of March 31,  1998,  the Trust's loan
portfolio  included total loans of $7,393,227 of which $374,000  representing 5%
of the loans were  delinquent.  There were no delinquent loans which were in the
process of  foreclosure  at March 31, 1998. In assessing the  collectibility  of
these  delinquent  mortgage  loans,  management  estimates  a net  gain  will be
realized upon sale of the properties  securing these loans if it is necessary to
foreclose the mortgage loans due to the Trust. Management's estimate is based on
an anticipated  sales price of the property based on the latest  appraised value
of the property  discounted at 10% less the sum of pre-existing  liens, costs of
sale, the face amount of the mortgage

                                       12

<PAGE>
loan  and  accrued  interest   receivable.   The  Trust  generally  issues  loan
commitments only on a conditional  basis and generally funds such loans promptly
upon  removal  of any  conditions.  Accordingly,  the  Trust  did not  have  any
commitments to fund loans as of March 31, 1998 and March 31, 1997.


Results of Operations

      The results of  operations  of the Trust for the three  months ended March
31, 1998 have been  significantly  impacted by the  issuance of common stock and
the  investment  of the common  stock  proceeds  in  additional  mortgage  notes
receivable and warehouse lines of credit. The historical  information  presented
herein is not necessarily indicative of future operations.

      Three months ended March 31, 1998 and 1997. Revenues for the first quarter
increased  to  $292,504  as  compared  to  $233,256  for the same  period in the
previous  year.  The  increased  was  primarily  due to increased  interest from
mortgage notes receivable and warehouse lines of credit.

      Expenses  for the first  quarter 1998  increased  to $113,370  compared to
$98,877  for the same period in the  previous  year.  The  increase in the first
quarter  1998  compared  to  first  quarter  1997  is  primarily  due to  higher
management  fees  and  general  and  administrative   expenses.   The  increased
managemnet fees is primarily due to the Trust's higher asset value..


Inflation

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


 Liquidity and Capital Resources

      The liquidity of the Trust will be based upon the need to fund investments
in mortgage loans. In previous years, the Trust's mortgage investment operations
have been funded by capital  contributions  and the payoff of prior  loans.  The
major  portion of the  proceeds  from  issuance  of common  stock in the Trust's
current  Offering  are being used to fund  investments  in mortgage  loans.  The
Trust's  liquidity  requirements  will also be funded by  periodical  payoffs of
existing loans which are generally  short term in duration,  by the sale of real
estate owned and  additional  capital  from the proceeds of the Trust's  current
Offering.  Management  believes that the Trust's liquidity is sufficient to meet
its  cash  requirements  for  the  next  twelve  months.  Restrictions  on  cash
attributed to holdbacks do not significantly impact the Trust's liquidity.

      Net cash  provided by operating  activities  during the three months ended
March 31, 1998 and 1997 was $131,109 and  $140,957,  respectively.  Net cash for
all periods was  positively  affected by improved  marketing  conditions and the
volume of loan activity in 1997.

      Net cash provided by (used in) investing  activities  for the three months
ended March 31, 1998 and 1997 was  $(2,396,988) and $92,682,  respectively.  The
large decrease in 1998 compared to the prior year is due to the higher volume of
mortgage loans issued .

      Net cash  (used in)  provided  by  financing  activities  during the three
months  ended  March  31,  1998  and  1997  was   $1,714,721   and   $(210,496),
respectively. The increase in the three months ended March 31, 1998 is primarily
due to the issuance of common stock.


                                       13
<PAGE>
     The Trust will use the net  proceeds  of its  current  public  offering  to
provide  additional  funding  for  the  Trust's  Mortgage  Investment  Business.
Additionally,  CAFC has a  $3,000,000  warehouse  line of credit from  Warehouse
Lending  Corporation of America,  guaranteed by the Trust.  Management  believes
that cash flow from  operations and the net proceeds of the public  offering and
of loans  that are paid off plus the  establishment  of the  warehouse  lines of
credit  for the  Mortgage  Conduit  Business  will  be  sufficient  to meet  the
liquidity needs of the Trust's businesses for the next twelve months.

                                       14
<PAGE>
                                     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

     During the three  months  ended March 31, 1998 the number of common  shares
     issued and outstanding increased from 562,760 to 827,300 shares.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

ITEM 5 OTHER INFORMATION

     Not applicable.

ITEM 6 REPORTS ON FORM 8-K

     (a) Form 8-K
     The  Registrant  has not filed any  reports on Form 8-K during the  quarter
     ended March 31, 1998.


                                       15
<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 thereunto duly authorized.


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



Dated:   May 14, 1998          By:  /s/ Richard J. Wrensen
                                    ----------------------
                                    Richard J. Wrensen, Chief Financial Officer




                                       16