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







                                                     November 3, 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
September 30, 1998. If you have any questions, please do not hesitate to call.

                                       Very truly yours,

                                       /s/ Richard J. Wrensen

                                       Richard J. Wrensen
                                       Senior Vice President and
                                       Chief Financial Officer





Enclosures

cc:      Stephen C. Ryan, Esq.



          50 California Street, Suite 2020 o San Francisco, CA 94111 
                       (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 September 30, 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 
incorporation or organization)                            Identification Number)

         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 October 29, 1998, the aggregate market value of the registrant's shares of
Common  Stock,  $.01 par value,  held by non  affiliates of the  registrant  was
approximately  $7,794,890.  At that date 1,484,741  shares were  outstanding and
listed on the American Stock Exchange

<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)
                                                                          September 30, 1998  December 31, 1997
                                                                          ------------------  -----------------
<S>                                                                           <C>             <C>         
ASSETS
      Cash and cash equivalents ...........................................   $    799,733    $  1,748,485
      Restricted cash .....................................................        492,362         205,356
      Warehouse lines of credit to related parties ........................      4,448,996       2,185,957
      Accounts receivable .................................................        187,276          95,207
      Investments in affiliates ...........................................        665,946         469,150
      Net mortgage notes receivable (net of a loss reserve of $14,000
             at September 30, 1998 and $0 at December 31, 1997) ...........      9,709,308       4,915,186
      Real estate held for sale ...........................................        749,525         322,550
      Organization costs (net of accumulated amortization of $10,854 at
              September  30, 1998 and $7,551 at December 31, 1997) ........         11,175          14,478
      Deferred offering costs .............................................           --           176,050
                                                                              ------------    ------------

      Total assets ........................................................   $ 17,064,321    $ 10,132,419
                                                                              ============    ============


LIABILITIES AND STOCKHOLDERS' EQUITY

      Liabilities
           Mortgage note holdbacks ........................................   $    492,362    $    205,356
           Due to affiliates ..............................................        219,404          82,966
           Other liabilities ..............................................         73,518          22,774
           Mortgage notes payable .........................................        253,329               0
                                                                              ------------    ------------
      Total liabilities ...................................................      1,038,613         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 and outstanding at September 30, 1998 and
                      December 31, 1997 respectively ......................
            Additional paid in capital -preferred stock ...................      5,868,711       5,868,711
            Less 25,526 preferred shares held in treasury .................       (238,944)           --

            Common stock, $.01 par value; 5,000,000 .......................         14,847           5,628
                    shares authorized ; 1,484,741 and 562,760 shares
                    issued and outstanding at September 30, 1998 and
                    December 31, 1997 , respectively
            Additional paid in capital - common stock .....................     10,374,682       3,940,571
                                                                              ------------    ------------

      Total stockholders' equity ..........................................     16,025,709       9,821,323
                                                                              ------------    ------------

      Total liabilities and stockholders' equity ..........................   $ 17,064,321    $ 10,132,419
                                                                              ============    ============

</TABLE>
                See accompanying notes to financial statements.

                                       3
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                            Statements of Operations
                                   (Unaudited)

                                        Three Months Ended        Nine Months Ended
                                          September 30,             September 30,
                                       1998         1997         1998         1997
                                       ----         ----         ----         ----
REVENUES
<S>                               <C>          <C>          <C>          <C>       
    Interest income ...........   $  399,270   $  110,844   $  983,259   $  438,893
    Origination income ........       86,262       39,673      147,301       72,628
    Other income ..............        9,587       37,827       21,510       84,745
                                  ----------   ----------   ----------   ----------
        Total revenues ........      495,119      188,344    1,152,070      596,266
                                  ----------   ----------   ----------   ----------

EXPENSES
    Loan servicing and other
      expenses to related party      114,355       38,258      277,502      104,334
    Interest expense ..........       17,173        4,183       17,811       43,604
    Provision for loan losses .       14,000         --         14,000         --
    Operating expenses of
      real estate owned .......       14,761        7,646       31,325       33,890
    General and administrative        18,783        4,893       77,173       27,103
                                  ----------   ----------   ----------   ----------
          Total expenses ......      179,072       54,980      417,811      208,931
                                  ----------   ----------   ----------   ----------

Net Income Before Gain on
    Real Estate Held for Sale .      316,047      133,364      734,259      387,335

Gain / (Loss) on Real Estate
    Held for Sale .............         --         23,063         --         16,670

                                  ==========   ==========   ==========   ==========
NET INCOME ....................   $  316,047   $  156,427   $  734,259   $  404,005
                                  ==========   ==========   ==========   ==========


BASIC EARNINGS PER
    COMMON SHARE ..............   $    0.130         --     $    0.270         --


DILUTED EARNINGS PER
    COMMON SHARE ..............   $    0.106         --     $    0.176         --

</TABLE>
                See accompanying notes to financial statements.

                                       4
<PAGE>

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

                                                                         Nine Months Ended
                                                                           September 30,
                                                                       1998           1997
                                                                       ----           ----
<S>                                                              <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
      Net Income .............................................   $   734,259    $   404,005
      Adjustments to reconcile net income to net cash provided
      by operating activities:
        Amortization .........................................         3,303          3,240
        (Increase) decrease in  accounts receivable ..........       (92,069)       (55,483)
        Increase (decrease) in loan loss reserve .............        14,000           --
        Increase (decrease) in due to affiliates .............       136,438         25,300
        Increase (decrease) in other liabilities .............        50,744         57,155
                                                                 -----------    -----------
          Net cash provided by (used in) operating activities        846,675        434,217
                                                                 -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
      (Increase) decrease in restricted cash .................      (287,006)      (106,850)
      Increase (decrease) in mortgage note holdbacks .........       287,006        106,850
      (Increase) decrease in warehouse lines of credit .......    (2,263,039)          --
      (Increase) in investments ..............................      (196,796)          --
      Investments in mortgage notes receivable ...............    (8,670,450)    (3,664,006)
      Repayments of mortgage notes receivable ................     3,862,328      3,295,791
      Net proceeds from sale of real estate held .............      (426,975)       597,398
      Capital costs of real estate held ......................          --          (16,807)
                                                                 -----------    -----------
        Net cash provided by (used in) investing .............    (7,694,932)       212,376
                                                                 -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
      Redemption of shares ...................................      (238,944)          --
      Proceeds from issuance of shares .......................     6,479,545           --
      Payment of mortgage notes payable ......................       253,329         (7,542)
      Organizational and offering costs ......................       176,050       (214,287)
      Dividends paid .........................................      (770,475)      (447,908)
                                                                 -----------    -----------
        Net cash provided by (used in) financing activities ..     5,899,505       (669,737)
                                                                 -----------    -----------

NET INCREASE (DECREASE) IN CASH ..............................      (948,752)       (23,144)
CASH AT BEGINNING OF PERIOD ..................................     1,748,485         66,797
                                                                 -----------    -----------

CASH AT END OF PERIOD ........................................   $   799,733    $    43,653
                                                                 ===========    ===========

SUPPLEMENTAL CASHFLOW INFORMATION:
      Interest expense paid ..................................   $    17,811         43,604
      Taxes paid .............................................   $    23,942           --

</TABLE>


                See accompanying notes to financial statements.

                                       5

<PAGE>

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

                          Notes to Financial Statements
              For the nine months ended September 30, 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.  The  offering was
      completed on September  30, 1998 with the sale of 1,484,741  common shares
      for $11,877,928. The common shares commenced trading on the American Stock
      Exchange ("CAA") on October 1, 1998.




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 nine months  ended
      September  30, 1997 and  September  30, 1998  represent  the the financial
      statements of the Trust.

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1998 and 1997
                                   (Unaudited)



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 may continue to record interest  income.  A loan loss reserve is
     provided 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 a  separate  operating
     division  of SCF.  The Trust owns 99% of the  non-voting  Sierra  preferred
     shares of SCF. SCF-Sierra  Preferred shares receive 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 the  investment  income as
     interest.

     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  owns  100% of the  outstanding  Series  "A"
     Preferred  stock (2,000  shares of non-voting  stock) in CAFC,  which has a
     preferential  right to  receive  99% of all  distributions  by  CAFC..  The
     Trust's  Manager owns 100% 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 sale and services 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 separate
     operating  division  of SCF that  originates  on a retail  basis  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
     investment 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,

                                       7
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
              For the nine months ended September 30, 1998 and 1997
                                   (Unaudited)


      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 satisfy  certain  gross  income  requirements  and
      certain asset tests at the close of each quarter of its taxable year.

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

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

      For the nine month period ended September 30, 1997, the  distributions per
      preferred  share are allocated 90% as ordinary  income and 10% as a return
      of capital for tax purposes. For the nine month period ended September 30,
      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 other  income,  interest  expense  and general and
      administrative expenses on the Statements of Operations.


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

                          Notes to Financial Statements
              For the nine months ended September 30, 1998 and 1997
                                   (Unaudited)


      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).



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.  As of September 30, 1997
      and September 30, 1998,  mortgage note holdbacks from the  consummation of
      mortgage loans made amounted to $205,356 and $492,362, respectively.


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

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

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

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


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  September  30,  1998 the Trust  held a  mortgage  notes  payable of
      $253,329.

                                        9

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1998 and 1997
                                   (Unaudited)


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 nine months
     ended  September 30, 1997 and September  30, 1998,  the Trust  respectively
     paid $104,334 and $277,502 to the Manager.

     As described  in Note 3, the Trust holds an  investment  in Sierra  Capital
     Acceptance,  a  division  of Sierra  Capital  Funding,  and  receives a 15%
     guaranteed return per annum. For each nine months ended September 30, 1997,
     and  September  30, 1998 the Trust  earned  interest  of $22,500  from this
     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 nine months ended  September 30, 1998,  the
     Trust  was  allocated  a loss of  $28,203  from  this  investment.  Capital
     Alliance Funding  Corporation is managed by Capital Alliance Advisors Inc.,
     which is owned by several of the Trust's trustees.

     As  described  in Note 3, the Trust  holds an  investment  in Equity 123, a
     division of Sierra Capital Funding and receives a 15% guaranteed return per
     annum.  Since the investment date through  September 30, 1998 the Trust has
     earned interest of $22,500 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

                                       10
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
              For the nine months ended September 30, 1998 and 1997
                                   (Unaudited)


      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:  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 OPERATION






                                       12

<PAGE>
                     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 or C
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 or C 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 September 30, 1998, the Trust's loan
portfolio included total loans of $9,723,308 of which $634,214 representing 6.5%
of the loans were  delinquent  (over 60 days).  There were two delinquent  loans
which were in the process of foreclosure at September 30, 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  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 September 30, 1998 and September 30, 1997.

                                       13
<PAGE>
Results of Operations

      The results of operations of the Trust for nine months ended September 30,
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 and nine months ended  September 30, 1998 and 1997.  Revenues
for the third quarter increased to $495,119 as compared to $188,344 for the same
period in the previous  year.  Revenues for the nine months of 1998 increased to
$1,152,070 as compared to $596,266 for the same period of the previous year. The
1998 interest income and origination  income  increased for the quarter and nine
months, compared to the same period in the previous year. The 1998 other income,
however,  was lower for both the quarter and the nine month period,  compared to
the same period in the previous year.

      Expenses  for the third  quarter 1998  increased  to $197,072  compared to
$54,980 for the same period in the  previous  year.  For the nine month  period,
expenses  increased to $417,811  compared to $208,931 for the previous year. The
increase in the third  quarter 1998  compared to third quarter 1997 is primarily
due to the greater  management  and  servicing  fees of  administering  a larger
mortgage portfolio.  The increase in the nine months of 1998 compared to 1997 is
similarly explained.

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 just
completed  Offering will be used to fund future investments in mortgage loans by
the Trust's Mortgage  Investment  Business.  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  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.  Restrictions  on  cash  attributed  to  holdbacks  do not
significantly impact the Trust's liquidity.

      Net cash  provided by  operating  activities  during the nine months ended
September  30, 1998 and 1997 was $846,675 and $434,217,  respectively.  Net cash
for all periods was positively  affected by the improved volume of loan activity
in 1998.

      Net cash  provided by (used in) investing  activities  for the nine months
ended September 30, 1998 and 1997 was $(7,694,932)  and $212,376,  respectively.
The change in 1998  compared  to the prior  year is due to the larger  volume of
mortgage loans and expanded demand for warehouse lines of credit.

      Net cash (used in) provided by financing activities during the nine months
ended September 30, 1998 and 1997 was $5,899,505 and  $(669,737),  respectively.
The change in 1998 is primarily due to issuance of common  shares.  The decrease
in 1997 is primarily due to the offering costs related and dividend payments.

      The Trust will use the net  proceeds  of its  current  public  offering to
provide  additional  funding  for  the  Trust's  Mortgage  Investment  Business.
Management  believes that cash flow from  operations and the net proceeds of the
public  offering and of loans that are paid off 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  September 30, 1998 the number of common
          shares outstanding increased from 1,180,800 to 1,484,741.  On June 29,
          1998 the Trust acquired 47,761  preferred shares as treasury stock and
          during the three month period ended  September  30, 1998 resold 22,235
          preferred shares.

ITEM 3    DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          The Trust held its postponed 1998 annual meeting on July 17, 1998.

          Messrs.  Dennis R.  Konczal and Stanley C. Brooks were  elected to new
          terms as Class II  directors.  Messrs.  Thomas B.  Swartz  and  Harvey
          Bloomberg continue as Class I directors. Douglas A. Thompson continues
          as a Class III director.

          Novogradac  & Company LLP was  approved as  independent  auditors  for
          1998.  389,076  shares  voted in favor  ot their  appointment,  10,000
          shares against and 7,025 shares abstained.

          The Trust's  incentive stock option plan was approved.  301,884 shares
          voted in favor of the plan,  70,817  shares  against and 34,400 shares
          abstained.

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 September September 30, 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:   November 3, 1998            By: /s/ Richard J. Wrensen  
                                        ------------------------
                                         Richard J. Wrensen
                                         Senior Vice President and
                                         Chief Financial Officer





                                       16