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







                                                     August 14, 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 June
30, 1998. 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.



            50 California Street, Suite 2020, San Francisco, CA 94111
                       (415) 288-9575 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 June 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 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 July 31, 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  $10,125,526.  At that date 1,265,690  shares of common stock were
outstanding.  The shares are approved for listing on the American Stock Exchange
upon notice of issuance, but will not trade publicly until the conclusion of the
Registrant's current "best efforts" public offering.

<PAGE>
                                     PART I
                                     ITEM 1.


                              FINANCIAL STATEMENTS



                                        2

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

                                                                              (Unaudited)       (Audited)
                                                                             June 30, 1998  December 31, 1997
                                                                             -------------  -----------------
<S>                                                                           <C>             <C>         
ASSETS     
      Cash and cash equivalents ...........................................   $    127,616    $  1,748,485
      Restricted cash .....................................................        231,792         205,356
      Warehouse lines of credit to related parties ........................      4,213,750       2,185,957
      Accounts receivable .................................................        189,410          95,207
      Investments in affiliates ...........................................        633,647         469,150
      Mortgage notes receivable ...........................................      8,005,735       4,915,186
      Real estate held for sale ...........................................        675,525         322,550
      Organization costs (net of accumulated amortization of $9,753 at
              June 30, 1998 and $7,551 at December 31, 1997) ..............         12,276          14,478
      Deferred offering costs .............................................         59,949         176,050
                                                                              ------------    ------------

      Total assets ........................................................   $ 14,149,700    $ 10,132,419
                                                                              ============    ============


LIABILITIES AND STOCKHOLDERS' EQUITY

      Liabilities
           Mortgage note holdbacks ........................................   $    231,792    $    205,356
           Due to affiliates ..............................................        (91,895)         82,966
           Other liabilities ..............................................         75,981          22,774
           Mortgage notes payable .........................................        258,671               0
                                                                              ------------    ------------
      Total liabilities ...................................................        474,549         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 June 30, 1998 and
                      December 31, 1998 respectively ......................
            Additional paid in capital -preferred stock ...................      5,868,711       5,868,711
            Less 47,761 preferred shares held in treasury .................       (448,953)           --

            Common stock, $.01 par value; 5,000,000 .......................         11,808           5,628
                    shares authorized ; 1,180,800 and 562,760 shares
                    issued and outstanding at June 30, 1998 and
                    December 31, 1998 , respectively
            Additional paid in capital - common stock .....................      8,237,172       3,940,571
                                                                              ------------    ------------

      Total stockholders' equity ..........................................     13,675,151       9,821,323
                                                                              ------------    ------------

      Total liabilities and stockholders' equity ..........................   $ 14,149,700    $ 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    Six Months Ended
                                         June 30,            June 30,
                                     1998       1997      1998        1997
                                     ----       ----      ----        ----
<S>                               <C>        <C>        <C>        <C>     
REVENUES
    Interest income ...........   $325,428   $182,781   $583,988   $328,050
    Origination income ........     35,869     24,608     61,041     32,956
    Other income ..............      3,150     25,867     11,922     46,917
                                  --------   --------   --------   --------
        Total revenues ........    364,447    233,256    656,951    407,923
                                  --------   --------   --------   --------

EXPENSES
    Loan servicing and other
      expenses to related party     89,155     29,179    163,147     66,076
    Interest expense ..........        683     39,959        638     39,421
    Provision for loan losses .       --         --         --         --
    Operating expenses of
      real estate owned .......      2,961     19,147      5,851     26,244
    General and administrative      32,570     10,592     69,103     28,602
                                  --------   --------   --------   --------
          Total expenses ......    125,369     98,877    238,739    160,343
                                  --------   --------   --------   --------

NET INCOME ....................   $239,078   $134,379   $418,212   $247,580
                                  ========   ========   ========   ========





BASIC EARNINGS PER
    COMMON SHARE ..............   $  0.086       --     $  0.130       --


DILUTED EARNINGS PER
    COMMON SHARE ..............   $  0.067       --     $  0.087       --
</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)

                                                                     Six Months Ended
                                                                          June 30,
                                                                      1998           1997
                                                                      ----           ----
<S>                                                             <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
     Net Income .............................................   $   418,212    $   247,580
     Adjustments to reconcile net income to net cash provided
     by operating activities:
       Amortization .........................................         2,202          2,160
       (Increase) decrease in  accounts receivable ..........       (94,203)      (151,584)
       Accrued interest capitalized to real estate owned ....          --          (13,826)
       Increase (decrease) in loan loss reserve .............          --             --
       Increase (decrease) in due to affiliates .............      (174,861)        24,943
       Increase (decrease) in other liabilities .............        53,207        136,085
                                                                -----------    -----------
         Net cash provided by (used in) operating activities        204,557        245,358
                                                                -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     (Increase) decrease in restricted cash .................       (26,436)       (15,575)
     Increase (decrease) in mortgage note holdbacks .........        26,436         15,575
     (Increase) decrease in warehouse lines of credit .......    (2,027,833)          --
     (Increase) in investments ..............................      (164,493)          --
     Investments in mortgage notes receivable ...............    (6,038,500)    (1,890,093)
     Repayments of mortgage notes receivable ................     2,947,951      2,227,758
     Net proceeds from sale of foreclosed property ..........          --          485,658
     Capital costs of foreclosed property ...................          --          (13,219)
                                                                -----------    -----------
       Net cash provided by (used in) investing .............    (5,282,875)       810,104
                                                                -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Redemption of shares ...................................      (448,953)          --
     Proceeds from issuance of shares .......................     4,944,320           --
     Payment of mortgage notes payable ......................          --           (7,288)
     Organizational and offering costs ......................      (583,308)      (142,884)
     Dividends paid .........................................      (454,610)      (299,216)
                                                                -----------    -----------
       Net cash provided by (used in) financing activities ..     3,457,449       (449,388)
                                                                -----------    -----------

NET INCREASE (DECREASE) IN CASH .............................    (1,620,869)       606,074
CASH AT BEGINNING OF PERIOD .................................     1,748,485         66,798
                                                                -----------    -----------

CASH AT END OF PERIOD .......................................   $   127,616    $   672,872
                                                                ===========    ===========

SUPPLEMENTAL CASHFLOW INFORMATION:
     Interest expense paid ..................................   $       683           --
     Taxes paid .............................................   $    13,371           --
</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 six months ended June 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.

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 six months ended June
      30, 1997 and June 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 six months ended June 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 continues to record interest income and establishes a loan loss
      reserve as  necessary  to  protect  against  losses in the loan  portfolio
      including accrued interest.

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

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

      On April 11,  1997 the Trust  formed its  non-qualified  REIT  subsidiary,
      Capital Alliance  Funding  Corporation  ("CAFC"),  to conduct its mortgage
      conduit  business.  The Trust  owns  100% of the  outstanding  Series  "A"
      Preferred  Stock (2,000 shares of non-voting  stock) in 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 1-2-3,  which is
      evidenced by a  subordinated  debenture  that earns 15% per annum.  Equity
      1-2-3 is a separate  operating  division of SCF that  originates and sells
      residential  mortgages  on a retail  basis.  The  Trust  accounts  for the
      investment income from Equity 1-2-3 as interest.

      Income  taxes.  The Trust intends at all times to qualify as a real estate
      investment trust ("REIT") for federal income tax purposes , under Sections
      856  through  860 of the  Internal  revenue  Code of 1986,  as amended 

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

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


     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  Trust's  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  six-month  period  ended  June 30,  1997,  the  distributions  per
     preferred share are allocated 83% as ordinary income and 17% as a return of
     capital for tax purposes. For the six month period ended June 30, 1998, the
     distributions  per preferred  share are allocated 100% ordinary  income and
     the common share  distribution  is allocated 76% ordinary  income and a 24%
     return of capital for tax purposes.

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

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

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

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

     are  recorded  as  interest  income,   interest  expense  and  general  and
     administrative expenses on the Statements of Operations.

     Earnings  per share.  The  Preferred  Shares  receive  an annual  preferred
     allocation  of income  and  distributions.  Prior to the  December  4, 1997
     issuance of Common Shares, the Preferred Shares received 

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

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


     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 June 30, 1997 and
      June 30, 1998,  mortgage note holdbacks from the  consummation of mortgage
      loans made amounted to $ 80,566 and $231,792, 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 June 30, 1998 the Trust held a mortgage notes payable of $258,671.


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%,

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

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

     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,
     1997 and June 30, 1998, the Trust respectfully paid $66,076 and $163,147 to
     the Manager.

     As described  in Note 3, the Trust holds an  investment  in Sierra  Capital
     Funding and receives a 15% guaranteed return per annum. For each six months
     ended June 30, 1997, and June 30, 1998 the Trust earned interest of $15,000
     from the investment.

     As  described  in Note 3, the Trust has a  non-qualified  REIT  subsidiary,
     Capital Alliance  Funding  Corporation,  which commenced  operations in the
     third  quarter of 1997.  For the six months ended June 30, 1987,  the Trust
     was allocated a loss of $60,052 from this investment.

     As described in Note 3, the Trust holds an  investment  in Equity 1-2-3 and
     receives  a 15%  guaranteed  return per annum.  Since the  investment  date
     through  June 30, 1998 the Trust has earned  interest of $14,062  from this
     investment.

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

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

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

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

                                       10

<PAGE>


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

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



      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/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,  1998,  the Trust's  loan
portfolio included total loans of $8,005,735 of which $513,616 representing 6.4%
of the loans were  delinquent.  There were no delinquent loans which were in the
process of  foreclosure  at June 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 June 30,  1998 and
June 30, 1997.

                                       13
<PAGE>
Results of Operations

      The results of  operations of the Trust for six months ended June 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 six months ended June 30, 1998 and 1997. Revenues for the
second quarter increased to $364,447 as compared to $233,256 for the same period
in the previous year.  Revenues for the six months of 1998 increased to $656,951
as compared  to $407,923  for the same  period of the  previous  year.  The 1998
interest income and origination income increased for the quarter and six months,
compared  to the same  period  in the  previous  year.  The 1998  other  income,
however,  was lower for both the quarter and the six month  period,  compared to
the same period in the previous year.

      Expenses  for the second  quarter 1998  increased to $125,369  compared to
$98,877  for the same period in the  previous  year.  For the six month  period,
expenses  increased to $238,739  compared to $160,343 for the previous year. The
increase in the second quarter 1998 compared to second quarter 1997 is primarily
due to the greater  management  and  servicing  fees of  administering  a larger
mortgage  portfolio.  The increase in the six 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
current  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 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, 1998 and 1997 was  $204,557  and  $245,358,  respectively.  Net cash for all
periods was positively affected by improved marketing  conditions and the volume
of loan activity in 1997.

      Net cash  provided by (used in)  investing  activities  for the six months
ended June 30, 1998 and 1997 was  $(5,282,875) and $810,104,  respectively.  The
large increase 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 six months
ended June 30, 1998 and 1997 was $3,457,449 and  $(449,388),  respectively.  The
increase 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.

                                       14
<PAGE>
      The Trust will use the net  proceeds  of its  current  public  offering to
provide  additional  funding  for  the  Trust's  Mortgage  Investment  Business.
Additionally,  CAFC has a  $3,000,000  warehouse  line of credit from  Warehouse
Lending  Corporation of America,  guaranteed by the Trust.  Management  believes
that cash flow from  operations and the net proceeds of the public  offering and
of loans  that are paid off plus the  establishment  of the  warehouse  lines of
credit  for the  Mortgage  Conduit  Business  will  be  sufficient  to meet  the
liquidity needs of the Trust's businesses for the next twelve months.


                                       15

<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 June 30, 1998 the number of common
              shares  outstanding  increased from 827,300 to 1,180,800.  On June
              29, 1998 the Trust acquired  47,761  preferred  shares as treasury
              stock

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

              Not applicable.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              The Trust's 1998 Annual Meeting, originally scheduled for June 24,
              1998,  was  postponed and was held on July 10, 1998. At the annual
              meeting,  Directors  Dennis R.  Konczal and Stanley C. Brooks were
              reelected as Class II Directors for a three-year  term.  Directors
              Thomas B. Swartz,  Harvey Blomberg and Douglas A. Thompson,  whose
              terms continue for two, two and one years, respectively,  continue
              as Directors.

              At the  annual  meeting,  the  adoption  by the  Trust's  Board of
              Directors of the Capital Alliance Income Trust Ltd. 1998 Incentive
              Stock  Option  Plan was duly  approved  by the  shareholders  with
              664,602  shares  voting in favor of such  approval,  87,208 voting
              against and 67,430  abstaining.  The  maximum  number of shares of
              Common Stock that may be subject to Options granted as of the date
              of the closing of the Trust's initial public offering ("IPO") (the
              "IPO Closing Date") is 10% of the number of shares of Common Stock
              issued  and  outstanding  on the IPO  Closing  Date.  The  maximum
              aggregate  number of shares  of  Common  Stock  that may be issued
              pursuant to the exercise of Options granted during the term of the
              Option Plan is 247,500.

              The purpose of the Option Plan is to attract,  retain and motivate
              key employees,  officers and directors of the Manager,  as well as
              unaffiliated  directors of the Trust,  by  providing  them with an
              equity participation in the Trust. In addition, the Board believes
              that the adoption of the plan will align the  Manager's  employees
              and  officers  interests  with those of the Trust's  shareholders.
              Accordingly,  since the Trust has no  employees,  the Option  Plan
              provides for the grant of non-statutory incentive stock options to
              the employees,  officers, and directors of the Trust's Manager, to
              other  providers  of  services  to the Trust,  and to the  Trust's
              unaffiliated directors.

              The  shareholders  also  ratified the  selection  of  Novogradac &
              Company LLP as independent  public  accountants for the Trust with
              790,182  shares voting in favor of such  approval,  26,391 against
              and 19,058 abstaining.

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 June 30, 1998.

                                       16
<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 13, 1998            By:     /s/ Richard J. Wrensen
                                            ----------------------
                                            Richard J. Wrensen, 
                                            Chief Financial Officer



                                       17