Capital Alliance Income Trust Ltd.,
                         A Real Estate Investment Trust
--------------------------------------------------------------------------------

                                 August 14, 1997



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 June
30, 1997. If you have any questions, please do not hesitate to call.

                              Very truly yours,

                              /s/ Thomas B. Swartz
                              --------------------
                              Thomas B. Swartz
                              Chairman

Enclosures

cc:  Stephen C. Ryan, Esq.

<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 June 30, 1997

                        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 June 30, 1997, there were no shares of common stock outstanding.
<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)
                                                           June 30, 1997 December 31, 1996
                                                           ------------- -----------------
<S>                                                          <C>          <C>       
ASSETS
  Cash and cash equivalents ..............................   $  672,871   $   66,798
  Restricted cash ........................................       80,685       65,109
  Accounts receivable ....................................      259,591      110,006
  Investments ............................................      489,114      200,000
  Mortgage notes receivable ..............................    4,243,018    4,696,238
  Real estate held for sale ..............................      279,206    1,312,520
  Organization costs (net of accumulated amortization
        of $5,375 at June 30, 1997 and $3,216 at
        December 31, 1996) ...............................       16,651       18,459
  Deferred offering costs ................................      367,550      233,131
                                                                -------      -------

  Total assets ...........................................   $6,408,686   $6,702,261
                                                             ==========   ==========


LIABILITIES AND STOCKHOLDER'S EQUITY

  Liabilities
       Mortgage note holdbacks ...........................   $   80,566   $   64,991
       Due to affiliates .................................       46,237       21,294
       Other liabilities .................................      192,420       91,393
       Mortgage notes payable ............................      191,775      578,395
                                                                -------      -------
  Total liabilities ......................................      510,998      756,073
                                                                -------      -------
  Stockholder's Equity
        Preferred stock, $.01 par value (liquidation value
              $9.50 per share), 675,000 shares authorized;
              641,283 and 641,283 shares issued and
              outstanding at June 30, 1997 and
              December 31, 1996, respectively ............        6,413        6,413
        Common stock, $.01 par value, 2 million
              shares authorized; none issued and .........         --           --
        Additional paid in capital (Preferred sto ........    5,891,275    5,939,775
                                                              ---------    ---------
  Total stockholders' equity .............................    5,897,688    5,946,188
                                                              ---------    ---------

  Total liabilities and stockholder's equity .............   $6,408,686   $6,702,261
                                                             ==========   ==========

</TABLE>

                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                            Statements of Operations
                                  (Unaudited)

                                              Three Months Ended      Six Months Ended
                                                    June 30,               June 30,
                                                1997        1996        1997        1996
                                                ----        ----        ----        ----
<S>                                         <C>          <C>         <C>         <C>      
REVENUES
  Interest income .......................   $ 145,269    $ 153,448   $ 328,050   $ 330,566
  Origination income ....................       8,348         --        32,956        --
  Other income ..........................      21,050       17,664      46,917      53,594
      Total revenues ....................     174,667      171,112     407,923     384,160

EXPENSES
  Loan servicing and origination fees and
    other expenses to related part ......      36,897       15,158      66,076      30,183
  Interest expense ......................        (538)        --        39,421        --
  Provision for loan losses .............        --         15,000        --        30,000
  Operating expenses of real estat ......       7,097         --        26,244        --
  General and administrative ............      18,010          989      28,602       3,225
        Total expenses ..................      61,466       31,147     160,343      63,408

NET INCOME ..............................   $ 113,201    $ 139,965   $ 247,580   $ 320,752


NET INCOME PER
  PREFERRED SHARE .......................   $   0.176    $   0.218   $   0.386   $    0.50

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

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

<TABLE>
<CAPTION>
                            Statements of Cash Flows
                                  (Unaudited)
           
                                                                     Combined
                                                     (Successor)  (Predecessors)
                                                            Six Months Ended
                                                                June 30,
                                                           1997          1996
                                                           ----          ----
<S>                                                  <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income .....................................   $   247,580    $   320,752
  Adjustments to reconcile net income
to net cash provided
  by operating activities:
    Amortization .................................         2,160           --
    (Increase) decrease in  accounts receivabl ...      (151,584)       (54,742)
    Accrued interest capitalized to real estat ...       (13,826)          --
    Increase (decrease) in loan loss reserve .....          --           30,000
    Increase (decrease) in due to affiliates .....        24,943        (48,541)
    Increase (decrease) in other liabilities .....       136,085         29,223
                                                         -------         ------
      Net cash provided by (used in) operating ...       245,358        276,692
                                                         -------        -------

CASH FLOWS FROM INVESTING ACTIVITIES
  (Increase) decrease in restricted cash .........       (15,575)        51,373
  Increase (decrease) in mortgage note holdbac ...        15,575        (51,373)
  Investments in mortgage notes receivable .......    (1,890,093)    (1,612,000)
  Repayments of mortgage notes receivable ........     2,227,758      1,655,301
  Net proceeds from sale of foreclosed propert ...       485,658           --
  Capital costs of foreclosed property ...........       (13,219)          --
                                                         -------        -------     
    Net cash provided by (used in) investing .....       810,104         43,301
                                                         -------         ------

CASH FLOWS FROM FINANCING ACTIVITIES
  Redemption of shares ...........................          --          (68,011)
  Deferred offering costs ........................      (142,530)        (4,121)
  Receipt of subscriptions receivable ............          --          265,511
  Payment of mortgage notes payable ..............        (7,288)          --
  Organizational and offering costs ..............          (354)        (7,940)
  Dividends paid .................................      (299,216)      (378,106)
                                                        --------       -------- 
    Net cash provided by (used in) financing a ...      (449,388)      (192,667)
                                                        --------       -------- 

NET INCREASE (DECREASE) IN CASH ..................       606,074        127,326
CASH AT BEGINNING OF PERIOD ......................        66,797        829,978
                                                          ------        -------

CASH AT END OF PERIOD ............................   $   672,871    $   957,304
                                                     ===========    ===========
</TABLE>
                                


                                        5
                                
                                


<PAGE>

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

     Capital  Alliance  Income Trust Ltd., A Real Estate  Investment  Trust (the
     Trust ), a  Delaware  corporation,  primarily  invests  in  mortgage  loans
     secured  by  real  estate.  The  Trust  was  formed  December  12,  1995 to
     facilitate the combination of the mortgage investment operations of Capital
     Alliance Income Trust I, a Delaware  business trust,  and Capital  Alliance
     Income Trust II, a Delaware  business trust,  (collectively  referred to as
     the  Predecessors  ,  individually  referred  to as  CAIT I and  CAIT  II ,
     respectively).  CAIT I and  CAIT  II were  both  privately-  held  mortgage
     investment  trusts which  invested  primarily in loans  secured by deeds of
     trust on one-to-four  unit  residential  properties.  The Manager,  Capital
     Alliance Advisors,  Inc. (the Manager ) originates,  services and sells the
     Trust's loans.
   
     The effective date of the combination (the Combination ) was midnight April
     30, 1996, at which time the Trust  (Successor)  exchanged 643,730 Preferred
     Shares for all whole  shares of the  Predecessors  outstanding  Class A and
     Class B shares.  Thereafter, all assets and liabilities of the Predecessors
     were transferred to the Trust.
   
     Effective  February 12, 1997,  the Trust  registered its common shares with
     the  Securities and Exchange  Commission  pursuant to the Securities Act of
     1933,  as amended  in  connection  with a best  efforts  offering  of up to
     1,500,000  common  shares at $8.00 per share.  Listing of the shares on the
     American  Stock  Exchange has been approved  subject to official  notice of
     issuance, . The Trust actively commenced marketing its shares in May, 1997.
   
2.   Basis of presentation
     ------------------------

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

     The  preparation of the financial  statements in conformity  with generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.
   
     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 1996 contained
     in the Trust s 1996 Annual Report to Stockholders.

                                       6
<PAGE>

2.   Basis of presentation (continued)
     ---------------------------------

     The unaudited  interim  financial  statements for the six months ended June
     30, 1996 represent the combined  financial  statements of the  Predecessors
     (prior to the merger).  The unaudited interim financial  statements for the
     six months ended June 30, 1997  represent the  financial  statements of the
     Trust (Successor) after the merger described in Note 1.
   
     The operations of the Predecessors have been combined with the Trust due to
     their common  management and directors.  The Combination has been accounted
     for as a purchase.  CAIT I is considered  the acquiring  entity and CAIT II
     the acquired  entity.  The purchase price represents the net assets of CAIT
     II as of April  30,  1996  approximating  $2,771,351.  This  amount  is the
     carrying amount of assets less liabilities  which  approximates fair market
     value.  Therefore,  there is no excess purchase price or goodwill. The fair
     market  value of net assets  acquired  was used to  determine  the purchase
     price  since the value of the Trust s  Preferred  Shares  exchanged  is not
     readily  determinable  and the fair  value of net assets  acquired  is more
     clearly evident.

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


     Cash and cash  equivalents.  Cash and  cash  equivalents  include  cash and
     liquid  investments with an original  maturity of three months or less. The
     Trust  deposits  cash in  financial  institutions  insured  by the  Federal
     Deposit Insurance  Corporation.  At times, the Trust s account balances may
     exceed the insured limits.  Restricted cash 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 holds an interest in 99% of the outstanding Class B
     preferred shares (20,000 shares of non voting stock) of beneficial interest
     of Sierra Capital Acceptance ( Investee ), a Delaware


                                       7
<PAGE>

3.   Summary of significant accounting policies (continued)
     ------------------------------------------------------

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

     On April 15,  1997 the  Trust  formed  its  non-qualified  REIT  subsidiary
     Capital  Alliance  Funding  Corporation  ( CAFC ) to  conduct  its  planned
     Mortgage Conduit Business. On June 27, 1997 the Trust capitalized CAFC with
     real  estate  assets  carried  by the  Trust at a book  value  $304,550  in
     exchange for 2,000 shares of Series A Preferred Stock having a 99% economic
     interest  in CAFC.  The Trust s Manager  invested  $1,000 for 1,000  Common
     Shares of CAFC having a 1% economic  interest  in CAFC.  On June 30,  1997,
     CAFC  declared a dividend  of $5,564 to the Trust.  CAFC has applied to the
     California  Department  of  Corporations  for a Consumer  Finance  Lender s
     License and the  California  Department of Real Estate for a Corporate Real
     Estate Broker s License.  Pending receipt of such licenses, CAFC s mortgage
     banking  activities  are being  conducted  under the  Manager s Real Estate
     Broker s License.

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

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


                                       8
<PAGE>

3.   Summary of significant accounting policies (continued)
     ---------------------------------------------------------

   
     from involuntary  conversions and disposition of foreclosure property) must
     represent less than 30% of the Trust s gross income (including gross income
     from  prohibited  transactions)  for each taxable year.  The Trust,  at the
     close of each quarter of its taxable  year,  must also satisfy  three tests
     relating to the nature of its assets.  First,  at least 75% of the value of
     the Trust s total  assets  must be  represented  by,  among  other  things,
     mortgages on real property, real property,  cash, cash items and government
     securities.  Second,  not more than 25% of the Trust s total  assets may be
     represented by securities  other than those in the 75% asset class.  Third,
     of the  investments  included in the 25% asset class,  the value of any one
     issuer s  securities  owned by the Trust may not  exceed 5% of the value of
     the Trust s total assets and the Trust may not own more than 10% of any one
     issuer s outstanding voting securities.

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

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

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

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

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

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

                                       9
<PAGE>

3.   Summary of significant accounting policies (continued)
     ------------------------------------------------------

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

     Pro-forma earnings per share. Prior to the merger of the Predecessors,  the
     Preferred  Shares  received  100% of the Trust s net income.  The Preferred
     Shares  currently  receive  an annual  preferred  allocation  of income and
     distributions.  After  completion of the current  offering of common shares
     and after meeting such  preference,  100% 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). No common
     shares were outstanding in prior periods.

4.   Mortgage note holdbacks
     -----------------------

     Pursuant to mortgage loan  agreements  between the Trust and certain of its
     borrowers,  a  portion  of the  loan  proceeds  are  held by the  Trust  in
     segregated  accounts to be disbursed only to such borrowers upon completion
     of certain  improvements on the secured  property.  As of June 30, 1997 and
     1996,  mortgage note holdbacks from the consummation of mortgage loans made
     amounted to $80,566 and $64,991, respectively.

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

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

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

                                       10
<PAGE>

5.   Mortgage notes receivable (continued)
     -------------------------------------

     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 June 30,  1997 the Trust held two  mortgage  notes  payable  totaling
     $191,775.  These  notes are  payable to various  banks and secured by first
     deeds of trust on various residential foreclosed properties,  with interest
     accruing at 8.25% to 8.95% per annum and principal and interest payments of
     $1,582 due monthly.  The maturity  dates vary and the balances  outstanding
     are due, with any unpaid interest, on January 1, 2010 through June 1, 2025.
     Management  believes  that the loans  will be paid in full upon the sale of
     the foreclosed properties in 1997.

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

     The Manager, which is owned by several of the Trustees and their affiliate,
     contracted with the Trust to provide administration services and receives a
     fee for these  services  from the Trust.  The  Manager is entitled to a per
     annum Base  Management Fee payable monthly in arrears of an amount equal to
     1% of the Gross Mortgage Assets of the Trust  (computed  monthly) plus 1/2%
     of cash or money-market or equivalent assets and incentive compensation for
     each fiscal quarter,  equal to 25% of the net income of the Trust in excess
     of an  annualized  return on equity for such quarter  equal to the ten year
     U.S.  Treasury  Rate plus 2% provided  that the  payment of such  incentive
     compensation  does not reduce the Trust s  annualized  return on equity for
     such  quarter  to less  than the ten year  U.S.  Treasury  Rate plus 2% and
     amounts payable on account of the Series A Preferred Preference Amount have
     been paid. The Manager is also entitled to  reimbursement  for clerical and
     administrative services at cost based on relative utilization of facilities
     and personnel.  Additionally,  the Manager will receive a Loan  Origination
     and Servicing Fee payable  monthly equal to 2% of the Gross Mortgage Assets
     together with certain miscellaneous fees from borrowers customarily payable
     in  connection  with  origination  and  servicing of mortgages and fees for
     other  services  requested by the Trust.  The Manager bears all expenses of
     services  for which it is  separately  compensated.  During  the six months
     ended
   
     June 30, 1996, the Predecessors paid $29,178 to the Manager under contracts
     with different compensation arrangements.  During the six months ended June
     30, 1997, the Trust paid $55,099 to the Manager.
  

                                       11
<PAGE>

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

     As described  in Note 3, the Trust holds an  investment  in Sierra  Capital
     Acceptance  and  receives a 15%  guaranteed  return per annum.  For the six
     months ended June 30, 1996,  the  Predecessors  received  distributions  of
     $12,500 from this  investment.  For the six months ended June 30, 1997, the
     Trust received distributions of $15,000 from this investment.

9.   Preferred Stock
     ---------------

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

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

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

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

                                       12
<PAGE>

                                     PART I
                                     ITEM 2.

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


                                       13
<PAGE>

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


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

General

     Predecessors: The Combination. The Trust resulted from the consolidation of
CAIT I and CAIT II (the  Combination  ) on April 30, 1996.  The Trust  exchanged
shares of preferred stock for all of the outstanding  whole shares of CAIT I and
CAIT II at April 30, 1996.  Holders of the fractional  shares of CAIT I and CAIT
II received cash in lieu of fractional  shares of preferred  stock of the Trust.
Thereafter, all assets and liabilities of CAIT I and CAIT II were transferred to
the  Trust.  CAIT I and CAIT II were  both  privately-held  mortgage  investment
trusts  which  invested  primarily  in  loans  secured  by  deeds  of  trust  on
residential  property.  The Trust was  incorporated  in Delaware on December 12,
1995. CAIT 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 June  30,  1997,  the  Trust s loan
portfolio included total loans of $4,243,018 of which $401,450 representing 9.0%
of the loans were delinquent.  The balance of delinquent loans which were in the
process of  foreclosure  at June 30, 1997  totaled  $294,450 or 6.9% of the loan
portfolio.  In assessing the collectibility of these delinquent  mortgage loans,
management  estimates  a net gain will be realized  upon sale of the  properties

                                       14
<PAGE>

securing  these loans if it is necessary to foreclose the mortgage  loans due to
the Trust.  Management s estimate is based on an anticipated  sales price of the
property based on the latest  appraised value of the property  discounted at 15%
less  the sum of  pre-existing  liens,  costs of sale,  the face  amount  of the
mortgage loan and accrued interest  receivable.  The Trust generally issues loan
commitments only on a conditional  basis and generally funds such loans promptly
upon  removal  of any  conditions.  Accordingly,  the  Trust  did not  have  any
commitments to fund loans as of June 30, 1996 and June 30, 1997.

Results of Operations

   
     The results of operations of the Trust for all periods through December 31,
1996  were  prepared  based  upon  the  combined  historical  operations  of the
Predecessors  through April 30, 1996 and of the Trust for subsequent periods. In
the comparison that follows references to the year ended December 31, 1996 refer
to the four months ended April 30, 1996 (predecessor) and the eight months ended
December 31, 1996 (Successor) added together. The operations of the Predecessors
have been combined due to the common  management and  directors.  The historical
information presented herein is not necessarily indicative of future operations.

     Three months and Six months ended June 30, 1997 and 1996.  Revenues for the
second  quarter 1997  increased to $174,667 as compared to $171,112 for the same
period in the previous  year.  Revenues for the six months of 1997  increased to
$407,923  as compared to $384,160  the same  period of the  previous  year.  The
revenue  increase in both the three and six month  period was  primarily  due to
loan points received in 1997 compared to none in the same period in the previous
year when such points were retained by the Manager under different  compensation
arrangements.

     Expenses  for the second  quarter  1997  increased  to $61,466  compared to
$31,147  for the same period in the  previous  year.  For the six month  period,
expenses increased to $160,343 compared to $63,407 for the Predecessors from the
previous year. The increase in both periods is primarily due to loan  servicing,
origination  fees and management fees resulting from the increase in the Trust s
Asset  Value  from  the  Combination  in  April  30,  1996  and  from  different
compensation  arrangements  with the Manager  prior to the  commencement  of the
Trust s current  offering.  In  addition,  general and  administrative  expenses
increased due to professional  fees and state franchise taxes resulting from the
Combination.

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 will be used to fund future  investments  in mortgage loans by
the Trust s Mortgage  Investment  Business.  The Trust s liquidity  requirements


                                       15
<PAGE>

will also be funded by periodical  payoffs of existing loans which are generally
short term in duration,  by the sale of  foreclosed  properties  and  additional
capital from the proceeds of the Trust s current Offering.  Management  believes
that the Trust s liquidity is sufficient to meet its cash  requirements  for the
next twelve months regardless of whether the Minimum  Subscription  Level in the
Trust s  current  Offering  is  achieved.  Restrictions  on cash  attributed  to
holdbacks do not significantly impact the Trust s liquidity.

     Net cash provided by operating  activities during the six months ended June
30, 1997 and 1996 was  $245,348  and  $276,692,  respectively.  Net cash for all
periods was positively affected by improved marketing  conditions and the volume
of loan activity in 1997.

     Net cash used in  investing  activities  for the six months  ended June 30,
1997 and 1996 was $810,104  and $43,301  respectively.  During 1997,  repayments
exceeded  funding of mortgage notes receivable due to some large loans repaid in
second  quarter  1997  compared  to the same  period in the  previous  year.  In
addition, the increase in cash was due to one real estate owned property sold in
early 1997.

     Net cash (used in ) provided by financing  activities during the six months
ended June 30, 1997 and 1996 was $(449,388) and  $(192,667),  respectively.  The
increase in 1997 is primarily  due to the offering  costs related to the Trust s
current Offering.

     The Trust will use the net  proceeds  of its  current  public  offering  to
provide additional funding for the Trust s Mortgage Investment Business.  During
June,  1997,  CAFC  obtained the  commitment of a $1,000,000  warehouse  line of
credit from Warehouse  Lending  Corporation of America which is currently  being
documented  and which will be  guaranteed by the Trust.  The Trust  additionally
plans to enter into a warehouse  line of credit  agreement with the Trust for up
to $4,000,000.  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 regardless of whether the Minimum  Subscription  Level (i.e.,
$4,000,000) for the public offering is achieved.  It is anticipated that the two
warehouse lines of credit will be finalized in the third quarter of 1997.

                                       16
<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

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

ITEM 3    DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          The  Trust  held its 1997  annual  meeting  on  August  6,  1997.  The
          outstanding  Series A Preferred Shares  constitute the class of voting
          stock  outstanding  and are not  registered  under Section 12. Messrs.
          Thomas B.  Swartz and  Harvey  Blomberg  were  elected to new terms as
          Class I Directors.  Messrs. Dennis R. Konczal, Douglas A. Thompson and
          Stanley C. Brooks continue as Class II and III Directors.

          The  other  matters  voted on at the  meeting  also  included  (1) the
          approval of an amendment of the Trust s Certificate  of  Incorporation
          to  increase  the Trust s  authorized  capital  to  5,675,000  shares,
          5,000,000  of which are  common  stock,  $.01 par value,  and  675,000
          shares  of  Series A  Preferred  Stock,  $.01 par  value;  and (2) the
          approval of  Novogradac  & Company LLP as auditors  for 1997.  402,195
          shares voted in favor of both propositions with no negative votes.

ITEM 5    OTHER INFORMATION

          Not applicable.

ITEM 6    EXHIBITS AND REPORTS ON FORM 8-K

          (a) Exhibits
              Exhibit No. 3.1.1. Certificate of Amendment to Certificate of 
               Incorporation, effective July 31, 1997.

          (b) Form 8-K
              The Registrant has not filed any reports on Form 8-K during the 
               quarter ended June 30, 1997.

                                       17
<PAGE>

                                Exhibit 3.1.1.
                                --------------

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                       CAPITALALLIANCE INCOME TRUST LTD.,

                         A Real Estate Investment Trust,
                             a Delaware Corporation

     Thomas B. Swartz and Linda St. John certify that:

     1.  They  are  the  duly  elected  and  acting   Chairman  and   Secretary,
respectively, of the corporation named above (the Corporation );

     2. The  Certificate  of  Incorporation  of the  Corporation  is  amended by
amending Section 4.1 of Article IV thereof to read as follows:

     
     "4.1  Capitalization.  This  Corporation  is authorized to issue  5,675,000
     Shares and shall have two classes of Shares designated respectively "Common
     Stock" and  "Preferred  Stock," and  referred to either as Common  Stock or
     Common Shares and Preferred Stock or Preferred  Shares,  respectively.  The
     number of shares of Common Stock is 5,000,000, with a par value of $.01 per
     Share.  Preferred  Shares  may be  issued  from time to time in one or more
     series.  The first series of  Preferred  Stock shall (a) be  designated  as
     "Series A  Preferred";  (b)  consist of 675,000  Shares with a par value of
     $.01 per Share; (c) be entitled to dividends as provided in Section 4.3(b);
     and (e) be entitled to all other rights, preferences and privileges, and be
     subject to all such restrictions,  as are in this Article IV granted to, or
     imposed  upon,  the Shares of Series A Preferred  Stock in Section  4.3(d).
     Except as to Series A Preferred  Stock,  the Board of  Directors  is hereby
     authorized,  except  as to  matters  fixed as to  Preferred  Shares in this
     Article IV: (a) to determine or alter the rights,  preferences,  privileges
     and restrictions granted to or imposed upon any wholly unissued series and,
     within the  limitations  or  restrictions  stated in any  resolution of the
     Board of Directors  originally fixing the number of Shares constituting any
     series;  (b) to increase or decrease (but not below the number of Shares of
     any such series then outstanding),  the number of Shares of any such series
     after  the  issue  of  Shares  of that  series;  and (c) to  determine  the
     designation of any series and to fix the number of Shares of any series."

     3. The above  amendment  has been approved by the Board of Directors of the
Corporation;

     4.  The  above   amendment  was  approved  by  the  required  vote  of  the
shareholders  of the  corporation in accordance with Section 242 of the Delaware
General Corporation Law; the total number of outstanding shares entitled to vote
with respect to the amendment  was 462,328  Series A Preferred  Shares;  and the
number of shares voting in favor of the  amendment  equaled or exceeded the vote
required,  such  required  vote being a majority  of the  outstanding  shares of
Series A Preferred Stock.

     We further  declare  under penalty of perjury that the matters set forth in
this certificate are true and correct and that the execution of this certificate
is our act and deed and the act and deed of the Corporation.

Executed at San Francisco, California
on August 1, 1997
         
                              /s/ Thomas B. Swartz
                              --------------------
                              Thomas B. Swartz, Chairman

                              
                              /s/ Linda St. John
                              ------------------
                              Linda St. John, Secretary

                                       18
<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:    August 14, 1997     By:  /s/ Thomas B. Swartz               
                              ---------------------------------
                              Thomas B. Swartz, Chief Executive Officer



Dated:    August 14, 1997     By:  /s/ Jeannette Hagey                
                              ---------------------------------
                              Jeannette Hagey, Chief Financial Officer