UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-QSB

(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, 2004

                        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)

         100 Pine Street
         Suite 2450
         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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                       Yes X                No
                          ---                 ---

As of November 1, 2004, the registrant's common shares closed at $17.40 per
share and the aggregate market value of the registrant's common shares held by
non-affiliates of the registrant was approximately $5,898,600. At that date
approximately 339,000 shares of $.01 par value common stock were held by
non-affiliates of the registrant. The shares are listed on the American Stock
Exchange.

<PAGE>
                                TABLE OF CONTENTS



PART I

     ITEM 1          FINANCIAL STATEMENTS                                   3-5

                     NOTES TO FINANCIAL STATEMENTS                         6-21

     ITEM 2          MANAGEMENT'S DISCUSSION AND ANALYSIS                 22-26

     ITEM 3          CONTROLS AND PROCEDURES                                 27

PART II

     OTHER INFORMATION                                                    27-28

     SIGNATURES                                                              29

     CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT                        30

     CERTIFICATION OF FORM 10-QSB                                         31-32

     EXHIBITS                                                             33-34





                                     PART I
                                     ITEM 1.


                              FINANCIAL STATEMENTS

                                   [Pages 3-5]

<PAGE>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST
                                 Balance Sheets


<TABLE>
<CAPTION>
                                                                             September 30,   December 31,
                                                                                 2004           2003
                                                                                 ----           ----
                                                                             (Unaudited)
<S>                                                                         <C>             <C>
ASSETS
    Cash and cash equivalents                                               $    117,076    $  1,038,010
    Restricted cash                                                               16,335         200,019
    Marketable securities                                                          1,621           9,705
    Accounts receivable                                                          341,272         605,742
    Other assets, net                                                            135,190          14,533
    Due from affiliates                                                           17,910         114,334
    Notes receivable:
       Warehousing facilities to related parties                               2,542,041       2,638,226
       Mortgage notes receivable                                              15,892,951      20,556,488
       Allowance for losses                                                     (140,000)       (206,000)
                                                                            ------------    ------------
          Net notes receivable                                                18,294,992      22,988,714
    Real estate owned                                                          1,085,000         415,000
    Investments in affiliates                                                  1,013,808         923,362
    Origination costs (net)                                                      230,961         303,186
                                                                            ------------    ------------
    Total assets                                                            $ 21,254,165    $ 26,612,605
                                                                            ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
    Liabilities
        Mortgage note holdbacks                                             $     16,335    $    200,019
        Loans payable                                                          6,275,368      11,773,149
        Mortgage payable                                                         826,768         275,904
        Due to affiliate                                                          12,168           5,081
        Other liabilities                                                         71,823         147,790
                                                                            ------------    ------------
    Total liabilities                                                          7,202,462      12,401,943
                                                                            ------------    ------------

    Stockholders' Equity
        Preferred stock, $.01 par value; 430,000 shares authorized;                2,138           2,138
              213,820 shares issued and outstanding at September 30, 2004
              and December 31, 2003
        Additional paid in capital - preferred stock                           5,669,123       5,669,123
              Less treasury stock: 3,176 preferred shares
              at September 30, 2004 and December 31, 2003                        (86,944)        (86,944)

        Common stock, $.01 par value; 1,700,000 shares authorized;                 4,972           4,972
              497,161 shares issued and outstanding at September 30, 2004
              and December 31, 2003
        Additional paid in capital - common stock                              9,388,875       9,388,875
              Less treasury stock: 57,707 and 62,392 common shares
              at September 30, 2004 and December 31, 2003                     (1,026,861)     (1,053,773)
        Accumulated other comprehensive income                                       185           2,902
        Retained earnings                                                        100,215         283,369
                                                                            ------------    ------------
    Total stockholders' equity                                                14,051,703      14,210,662
                                                                            ------------    ------------

    Total liabilities and stockholders' equity                              $ 21,254,165    $ 26,612,605
                                                                            ============    ============
</TABLE>

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

                            Statements of Operations
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended             Nine Months Ended
                                                               September 30,                 September 30,
                                                           2004           2003           2004           2003
                                                           ----           ----           ----           ----
<S>                                                    <C>            <C>            <C>            <C>
REVENUES
      Interest income                                  $   451,318    $   586,964    $ 1,497,896    $ 1,905,909
      Interest income from affiliates                       53,627         90,239        138,064        176,289
      Equity in gain (loss) of affiliate                     9,599       (144,455)        90,446       (121,171)
      Other income                                           1,064          4,289          1,130          8,263
                                                       -----------    -----------    -----------    -----------
           Total revenues                                  515,608        537,037      1,727,536      1,969,290
                                                       -----------    -----------    -----------    -----------

EXPENSES
      Loan servicing fees to related parties               145,363        122,404        378,709        349,121
      Management fees to related parties                    54,360         73,904        182,415        263,831
      Interest expense on loans                             73,203        120,114        202,412        338,131
      Interest expense on loans from related parties          --            2,139           --            3,708
      Provision for loan losses                             45,000         40,000         49,000         78,144
      Taxes                                                  5,000          4,544         15,000         11,344
      Amortization                                          16,394          9,375         31,574         33,325
      General and administrative                            72,562         62,849        231,295        182,902
                                                       -----------    -----------    -----------    -----------
           Total expenses                                  411,882        435,329      1,090,405      1,260,506
                                                       -----------    -----------    -----------    -----------

INCOME BEFORE GAIN (LOSS) ON REAL
      ESTATE OWNED                                         103,726        101,708        637,131        708,784
                                                       -----------    -----------    -----------    -----------
      Operating expenses of real estate owned               (7,976)          --          (13,474)          --
      (Loss) on real estate owned                          (15,000)          --          (50,000)          --
                                                       -----------    -----------    -----------    -----------

NET INCOME                                             $    80,750    $   101,708    $   573,657    $   708,784
                                                       ===========    ===========    ===========    ===========

PREFERRED DIVIDENDS                                    $    79,115    $    77,952    $   232,692    $   238,514
                                                       -----------    -----------    -----------    -----------

NET INCOME AVAILABLE TO COMMON                         $     1,635    $    23,756    $   340,965    $   470,270
                                                       ===========    ===========    ===========    ===========

BASIC EARNINGS PER
      COMMON SHARE                                     $      0.00    $      0.06    $      0.78    $      1.11
                                                       ===========    ===========    ===========    ===========

DILUTED EARNINGS PER
      COMMON SHARE                                     $      0.00    $      0.05    $      0.67    $      0.95
                                                       ===========    ===========    ===========    ===========

DIVIDENDS PAID PER
      PREFERRED SHARE                                  $      0.38    $      0.37    $      1.10    $      1.13
                                                       ===========    ===========    ===========    ===========

DIVIDENDS PAID PER
      COMMON SHARE                                     $      0.30    $      0.45    $      1.20    $      1.35
                                                       ===========    ===========    ===========    ===========

WEIGHTED AVERAGE COMMON
      SHARES - BASIC                                       439,454        422,596        436,251        422,575

WEIGHTED AVERAGE COMMON
      SHARES - DILUTED                                     506,587        500,173        509,917        496,065
</TABLE>

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

                            Statements of Cash Flows
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                           Nine Months Ended
                                                                              September 30,
                                                                          2004             2003
<S>                                                                  <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net Income                                                     $    573,657    $    708,784
      Adjustments to reconcile net income to net cash provided by
      operating activities:
        Provision for loan losses                                          49,000         (70,000)
        Amortization                                                       31,574          33,325
        Loss on real estate owned                                          50,000            --
        Equity in gain of affiliate                                       (90,446)        121,171
        (Increase) decrease in accounts receivable                        264,470         (45,114)
        (Increase) decrease in other assets                              (342,604)        (54,143)
            (adjusted for: amortization and capitalized loan fees)
        Change in due to / due from affiliates                            103,511         303,335
        Increase (decrease) in other liabilities                          (75,967)       (102,371)
                                                                     ------------    ------------
          Net cash provided by operating activities                       563,195         894,987

CASH FLOWS FROM INVESTING ACTIVITIES
      Sale of (Investment in) marketable securities                         8,084            --
      (Increase) decrease in origination costs                             72,225         (31,230)
      (Increase) decrease in warehousing facilities                        96,185      (2,452,963)
      Investments in mortgage notes receivable                         (5,406,681)    (11,718,189)
      Repayments of mortgage notes receivable                          10,070,218      11,498,117
                                                                     ------------    ------------
        Net cash provided by (used in) investing activities             4,840,031      (2,704,265)

CASH FLOWS FROM FINANCING ACTIVITIES
      Proceeds from bank loans                                          6,155,749       2,616,276
      Repayment of bank loans                                         (11,750,000)           --
      Repayment of mortgage payable                                          --              --
      Purchase of treasury stock                                           (1,833)       (599,085)
      Sale of treasury stock and exercised options                         28,735         339,589
      Preferred dividends paid                                           (232,692)       (238,514)
      Common dividends paid                                              (524,119)       (575,139)
                                                                     ------------    ------------
        Net cash (used in) provided by financing activities            (6,324,160)      1,543,127


NET INCREASE IN CASH AND CASH EQUIVALENTS                                (920,934)       (266,151)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        1,038,010         494,443
                                                                     ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $    117,076    $    228,292
                                                                     ============    ============

SUPPLEMENTAL CASHFLOW INFORMATION:
      Cash paid for interest                                         $    200,382    $    346,905
      Cash paid for taxes                                            $     10,855    $     12,154

NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Foreclosures, net of reserves                                  $    720,000            --
      Assumption of debt on real estate owned                        $    551,922            --
</TABLE>

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

                          Notes to Financial Statements
                                   (Unaudited)
1.   Organization
     ------------

     Capital Alliance Income Trust Ltd., A Real Estate Investment Trust (the
     "Trust"), a Delaware corporation, invests primarily in mortgage loans
     secured by real estate. The Trust was formed December 12, 1995 as a
     mortgage investment trust, which invests primarily in loans secured by
     deeds of trust on one-to-four unit residential properties as the loan's
     primary collateral.

     The Trust acquired an investment in Capital Alliance Funding Corporation
     ("CAFC"), a taxable subsidiary, during the second quarter of 1997. The
     investment in CAFC is accounted for by the equity method and its financial
     statements are not consolidated with those of the Trust. The Trust holds
     100% of the non-voting preferred stock of CAFC with a 99% economic interest
     in CAFC. CAFC acquires loans for sale, secured by deeds of trust on
     one-to-four unit residential property as the loans primary collateral. The
     investment in CAFC is reported in "Investment in affiliate" on the Trust's
     balance sheets and in "Equity in gain (loss) of affiliates" in the Trust's
     statement of operations. CAFC's audited balance sheets and statements of
     operations are summarized in Note 10 of these financial statements.
     References herein to the "Company" refer to the Trust and CAFC,
     collectively.

     Capital Alliance Advisors, Inc. (the "Manager") originates, services and
     sells the Trust's and CAFC's loans.

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

     Basis of presentation. The financial information presented has been
     prepared from the unaudited books and records. The accompanying financial
     statements have been prepared in accordance with the instructions to Form
     10-QSB and do not include all of the information and the footnotes required
     by accounting principles generally accepted in the United States of America
     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.

     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 2003 filed
     pursuant to 15d-2 on Form 10-KSB with the Securities and Exchange
     Commission.

     The unaudited interim financial statements for the nine months ended
     September 30, 2004 and 2003 represent the financial statements of the
     Company.

     Basis of accounting. The Company prepares its interim financial statements
     on the accrual basis of accounting consistent with accounting principles
     generally accepted in the United States of America. The Trust's year-end
     for tax and financial reporting purposes is December 31.

     Use of estimates. The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America requires management to make estimates and assumptions that affect
     the amounts reported in the financial statements and accompanying notes.
     Actual results could differ from those estimates.

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

     Marketable securities. Marketable securities are classified as either
     trading, or available-for-sale. Management has not acquired any securities
     positions classified as trading securities. Trading securities, if
     acquired, would be reported at fair value, and changes in their fair value
     would be reported in the statement of operations.

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

                          Notes to Financial Statements
                                   (Unaudited)

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

     Available-for-sale securities are reported at fair value with unrealized
     gains and losses excluded from earnings and reported in accumulated other
     comprehensive income. Realized gains and losses on sales of both trading
     and available-for-sale securities are determined on an average cost basis
     and are reported in the statement of operations.

     Concentration of credit risk. The Company holds numerous mortgage notes
     receivable. These notes are secured by deeds of trust on residential
     properties located primarily in California, which results in a
     concentration of credit risk. The value of the loan portfolio may be
     affected by changes in the economy or other conditions of the geographical
     area.

     Revenue recognition. Interest income is recorded on the accrual basis of
     accounting in accordance with the terms of the loans. When the payment of
     principal or interest is 90 or more days past due, management reviews the
     likelihood that the loan will be repaid. For these delinquent loans,
     management continues to record interest income. However, if the mortgage's
     collateral is considered insufficient to satisfy the outstanding balance,
     after estimated foreclosure and selling costs, interest is not accrued.

     Allowance for loan losses. Management reviews its allowance for losses
     provision periodically and the Company maintains an allowance for losses on
     mortgage notes receivable at an amount that management believes is
     sufficient to protect against potential losses inherent in the loan
     portfolio. The Company's actual losses may differ from the estimate.
     Mortgage notes receivable deemed uncollectible are written off. The Company
     does not accrue interest income on impaired loans unless the mortgage's
     collateral is considered sufficient to satisfy the outstanding balance
     after deducting estimated foreclosure costs, selling costs, accrued
     interest, and any other priority claim.

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

     Investments. The Trust owns 100% of the non-voting preferred shares and has
     a 99% economic interest in CAFC. As the Trust does not own the voting
     common shares of CAFC or control CAFC, its investment in CAFC is presented
     by the equity method of accounting. Under this method, original equity
     investments are recorded at cost and adjusted by the Trust's share of
     earnings or losses and decreased by dividends received (Note 10).

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

     Impairment policy. Statement of Financial Accounting Standards No. 144,
     "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
     144), was adopted by the Company effective January 1, 2002. SFAS No. 144
     institutes one accounting model for long-lived assets to be disposed of be
     measured at the lower of carrying amount or fair market value less cost to
     sell. There were no impairment losses recognized during the nine month
     period ended September 30, 2004 and 2003.

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

     Income taxes. The Trust intends at all times to qualify as a real estate
     investment trust ("REIT") for federal income tax purposes, under Sections
     856 through 860 of the Internal Revenue Code of 1986, as amended and
     applicable Treasury Regulations. Therefore, the Trust generally will not be
     subject to federal corporate income

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

                          Notes to Financial Statements
                                   (Unaudited)

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

     taxes if the Trust distributes at least 90% of its taxable income to its
     stockholders. To qualify as a REIT, the Trust must elect to be so treated
     and must meet on a continuing basis certain requirements relating to the
     Trust's organization, sources of income, nature of assets, and distribution
     of income to stockholders. The Trust must maintain certain records and
     request certain information from its stockholders designed to disclose
     actual ownership of its stock.

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

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

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

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

     Reclassifications. Certain 2003 amounts may have been reclassified to
     conform to the 2004 presentation. Such reclassifications had no effect on
     previously reported net income or earnings per share.

     Recent accounting pronouncements. During 2003, the Financial Accounting
     Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"),
     "Consolidation of Variable Interest Entities." The objective of this
     interpretation is to provide guidance on how to identify a variable
     interest entity and determine when the assets, liabilities, non-controlling
     interests and results of operation of a variable interest entity need to be
     included in a company's consolidated financial statements. A company that
     holds variable interests in an entity will need to consolidate the entity
     if the company's interest in the variable interest entity is such that the
     company will absorb a majority of the variable interest entity's expected
     losses and / or receive a majority of the entity's expected

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

                          Notes to Financial Statements
                                   (Unaudited)

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

     residual returns. The provisions of this interpretation became effective
     upon issuance. FIN 46 may require consolidation of CAFC into the Trust's
     financial statements during 2004.

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

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

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

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

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

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

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

     The Trust entered into a loan purchase agreement on December 12, 1997 with
     CAFC. Under the terms of the agreement, the Trust advances funds to CAFC to
     acquire mortgage loans secured by real estate. The Trust then acquires all
     of CAFC's right, title and interest in such loans. CAFC is obligated to
     reacquire the loans from the Trust at a preset price. As of September 30,
     2004 and December 31, 2003, the Trust advanced to the CAFC $2,542,041 and
     $2,638,226, respectively. The interest rate on this line of credit varies
     with market conditions and is payable monthly. As of September 30, 2004 and
     2003 the applicable interest rate was 7.5% and 6.0% respectively. During
     the three and nine months ended September 30, 2004 and 2003, the Trust
     earned interest in the amount of $53,627 and $81,969, respectively, and
     $138,064 and $168,019, respectively.

     The Trust entered into a loan purchase agreement on January 1, 1998 with
     Calliance Mortgage Trust, which subsequently merged into the Mortgage
     Division of Calliance Realty Fund, LLC ("CRF") on May 30, 2000. Under the
     terms of the agreement, the Trust advances funds to CRF to acquire mortgage
     loans secured by real estate. The Trust then acquires all of CRF's right,
     title and interest in such loans. CRF is obligated to reacquire the loans
     from the Trust at a preset price. As of September 30, 2004 and December 31,
     2003, CRF owed the Trust $0. Annual interest on this line of credit is
     between 7.0% and 12.0% and is payable monthly. The Trust earned interest in
     the amount of $0 during the nine months ended September 30, 2004 and 2003,
     respectively. The Trust also borrows on an unsecured basis from CRF with
     interest payable monthly at an annual rate of between 5.0% and 12.0%. As of
     September 30, 2004 and December 31, 2003, the Trust had no borrowings from
     CRF.

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

     Mortgage notes receivable represent home equity loans primarily secured by
     deeds of trust on one-to-four unit residential real estate. At the time of
     origination, all loans have a combined loan-to-value equal to or less than
     75% of the underlying collateral. The Trust is subject to the risks
     inherent in finance lending including the risk of borrower default and
     bankruptcy. Mortgage notes receivable are stated at the principal
     outstanding. Interest on the mortgages is due monthly and principal is
     usually due as a balloon payment at loan maturity.

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

                          Notes to Financial Statements
                                   (Unaudited)

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

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

                                                  Nine months      Twelve months
                                                     ended             ended
                                                 Sept 30, 2004      Dec 31, 2003
                                                 -------------      ------------
Balance, beginning of period                     $ 20,556,488      $ 19,906,391
Additions during period:
   New mortgage loans                               5,406,681        14,827,987
Deductions during period:
   Collections of principal                        (9,350,218)      (13,504,757)
   Foreclosures, net of reserve                      (720,000)         (439,096)
   Write off of uncollectible loans                      --            (234,037)
                                                 ------------      ------------
Balance, end of period                           $ 15,892,951      $ 20,556,488
                                                 ============      ============


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

     The Trust measures loan impairment based on the fair value of the related
     collateral since all loans subject to this measurement are collateral
     dependent. Management believes a $140,000 and $206,000 allowance for loan
     losses are adequate to protect against potential losses inherent in all
     receivables as of September 30, 2004 and December 31, 2003, respectively.
     The Trust's actual losses may differ from the estimate.

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

                                                    Nine months    Twelve months
                                                       ended            ended
                                                  Sept 30, 2004     Dec 31, 2003
                                                  -------------     ------------
Balance, beginning of period                         $ 206,000        $ 310,000
Provision for loan loss                                 49,000          130,037
Write off of uncollectible loans                      (115,000)        (234,037)
                                                     ---------        ---------
Balance, end of period                               $ 140,000        $ 206,000
                                                     =========        =========





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

                          Notes to Financial Statements
                                   (Unaudited)

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

     On January 1, 2003, the Trust did not own any properties. During 2003 the
     Trust foreclosed on two properties and sold one property to CAFC at its
     estimated fair market value, which resulted in neither a net gain nor a net
     loss. As of January 1, 2004, the Trust owned one property and foreclosed on
     one property during the third quarter. As of September 30, 2004 and
     December 31, 2003, the Trust owned two properties.

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

<TABLE>
<CAPTION>
                                                                       Nine months    Twelve months
                                                                          ended          ended
                                                                      Sept 30, 2004   Dec 31, 2003
                                                                      -------------   ------------
<S>                                                                   <C>            <C>
Balance, beginning of period                                          $   415,000    $      --
Foreclosed mortgage notes, net of reserve (non-cash)                      720,000        439,096
Assumption of senior debt                                                    --          275,904
Accrued interest capitalized (non-cash)                                      --             --
Gain (loss) on sale or writedown (non-cash)                               (50,000)          --
                                                                      -----------    -----------
                                                                        1,085,000        715,000
Less: Proceeds from sale of real estate owned (net of closing costs
of $0 in 2004 and 2003)                                                      --         (300,000)
                                                                      -----------    -----------
Balance, end of period                                                $ 1,085,000    $   415,000
                                                                      ===========    ===========
</TABLE>

10.  Investment in affiliate
     -----------------------

     Capital Alliance Funding Corporation

     CAFC, a non-qualified REIT subsidiary, conducts the Trust's mortgage
     banking business. The Trust owns all of the outstanding Series "A"
     Preferred Stock (2,000 shares of non-voting stock), which constitutes a 99%
     economic interest in CAFC. The Trust's Manager owns all of the Common
     Shares (1,000 shares) of CAFC, which constitutes a 1% economic interest,
     and has 100% voting control. The Trust's Manager manages CAFC and provides
     mortgage origination and sale services for CAFC. The Trust accounts for its
     investment in CAFC under the equity method of accounting. FIN 46 may
     require the consolidation of CAFC into the Trust's financial statements
     during 2004.





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

                          Notes to Financial Statements
                                   (Unaudited)

                      CAPITAL ALLIANCE FUNDING CORPORATION
                                  BALANCE SHEET
                 As of September 30, 2004 and December 31, 2003

<TABLE>
<CAPTION>
                                                              (Unaudited)       (Audited)
                                                             September 30,     December 31,
                                                                 2004             2003
                                                                 ----             ----
<S>                                                          <C>             <C>
ASSETS

    Cash and cash equivalents                                $    477,066    $    166,503
    Restricted cash                                               138,393         260,705
    Accounts receivable                                           132,144         154,206
    Note receivable:
        Mortgage notes receivable                               9,518,489       7,383,040
        Allowance for loan losses                                (123,153)       (100,000)
                                                             ------------    ------------
        Net Receivable                                          9,395,336       7,283,040
    Real estate owned                                              92,500         971,617
    Due from affiliates                                              --            13,012
    Investment in affiliate                                         5,000           5,000
    Other assets                                                   66,629          57,129
                                                             ------------    ------------

    Total assets                                             $ 10,307,068    $  8,911,212
                                                             ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

    Liabilities
        Mortgage note holdbacks                              $    138,393    $    260,705
        Warehousing facilities                                  6,455,732       4,633,846
        Warehousing facilities from related parties             2,576,263       2,638,226
        Due to affiliates                                          50,231           9,736
        Mortgage notes payable                                       --           300,000
        Other liabilities                                          85,714         159,279
                                                             ------------    ------------
    Total liabilities                                           9,306,333       8,001,792
                                                             ------------    ------------

    Stockholders' Equity
       Preferred shares, no par value                                --              --
           2,000 shares authorized, issued and outstanding
       Common shares, no par value                                   --              --
           1,000 shares authorized, issued and outstanding
       Additional paid in capital                               1,990,056       1,990,056
       Accumulated deficit                                       (989,321)     (1,080,636)
                                                             ------------    ------------

    Total stockholders' equity                                  1,000,735         909,420
                                                             ------------    ------------

    Total liabilities and stockholders' equity               $ 10,307,068    $  8,911,212
                                                             ============    ============
</TABLE>

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

                          Notes to Financial Statements
                                   (Unaudited)

                      CAPITAL ALLIANCE FUNDING CORPORATION
                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                        Three Months Ended          Nine Months Ended
                                                           September 30,                September 30,
                                                        2004          2003           2004           2003
                                                        ----          ----           ----           ----
<S>                                                 <C>           <C>            <C>            <C>
REVENUES
   Interest income                                  $   269,883   $   209,088    $   666,641    $   529,317
   Loan origination income                              227,772       210,121        592,786        637,055
   Service release premium                               43,608        25,632        105,417         82,487
   Other income                                           3,058         3,000          3,158          7,545
                                                    -----------   -----------    -----------    -----------
       Total revenues                                   544,321       447,841      1,368,002      1,256,404
                                                    -----------   -----------    -----------    -----------

EXPENSES
   Management fees to related parties                    17,256        22,163         57,562         63,916
   Interest expense on loans                            123,031        56,301        346,309        158,448
   Interest expense on loans from related parties        74,427        81,969        165,376        168,019
   Loan origination costs                                66,635        49,581        158,085        145,341
   Provision for loan losses                             13,153        15,000         23,153         60,000
   Wages and salaries                                   163,892       139,834        441,811        412,185
   General and administrative                            72,271        53,800        208,661        158,265
   Taxes                                                  3,998         5,152         15,043         10,173
                                                    -----------   -----------    -----------    -----------
         Total expenses                                 534,663       423,800      1,416,000      1,176,347
                                                    -----------   -----------    -----------    -----------

INCOME BEFORE GAIN (LOSS) ON REO                    $     9,658   $    24,041    $   (47,998)   $    80,057
                                                    -----------   -----------    -----------    -----------
   Operating expenses of REO                               --         (14,220)       (22,990)       (48,193)
   Gain (Loss) on Real Estate Owned                        --        (155,735)       162,304       (154,262)
                                                    -----------   -----------    -----------    -----------

NET INCOME                                          $     9,658   $  (145,914)   $    91,316    $  (122,398)
                                                    ===========   ===========    ===========    ===========
</TABLE>

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

                          Notes to Financial Statements
                                   (Unaudited)


10.  Investment in affiliates (continued)
     ------------------------------------

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

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

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

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

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

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

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

     A reconciliation of the mortgage notes receivable follows:

                                        Nine months     Twelve months
                                           ended           ended
                                       Sept 30, 2004    Dec 31, 2003
                                       -------------    ------------

     Balance, beginning of period      $  7,383,040       6,092,094
     Additions during period:

        Originations                     40,971,797      31,295,682
     Deductions during period:

        Collections of principal         (1,939,425)     (4,906,286)

        Sales                           (36,896,923)    (24,604,030)

        Foreclosures, net of reserve           --          (476,375)

     Write offs                                --           (18,045)
                                       ------------    ------------
     Balance, end of period            $  9,518,489    $  7,383,040
                                       ============    ============

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

     Allowance for loan losses
     -------------------------

     CAFC measures loan impairment based on the fair value of the related
     collateral since all loans subject to this measurement are collateral
     dependent. Management believes a $123,153 and $100,000 allowance for losses
     is adequate to protect against potential losses inherent in all mortgage
     notes receivables as of September 30, 2004 and December 31, 2003,
     respectively. CAFC's actual losses may differ from the estimate.

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

                          Notes to Financial Statements
                                   (Unaudited)


10.  Investment in affiliates (continued)
     ------------------------------------

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

     A reconciliation of the allowance for losses follows:

                                              Nine months      Twelve months
                                                  ended            ended
                                             Sept 30, 2004      Dec 31, 2003
                                             -------------      ------------
     Balance, beginning of period              $ 100,000        $ 225,000
     Provision for loan loss
                                                  23,153           68,045
     Write off of uncollectible loans
         and write-down of real estate owned    (193,045)
                                                                ---------
     Balance, end of period                    $ 123,153        $ 100,000

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

     As of January 1, 2003 CAFC held four properties with a value of $1,676,261.
     During 2003, CAFC sold four properties for a loss of $152,733, one property
     was acquired by foreclosure and one property was purchased from the Trust
     for $300,000. Net proceeds from the sale were $3,032,646. As of December
     31, 2003, CAFC held two properties with a book value of $971,617. During
     the nine months ending September 30, 2004, CAFC sold one property for a
     gain of $167,304 and incurred a $5,000 write-down on the one remaining
     property. Net proceeds from the sale were $1,085,065.

     A reconciliation of real estate owned follows:

                                      Nine months      Twelve months
                                        ended              ended
                                     Sept 30, 2004     Dec 31, 2003
                                     -------------     ------------

     Balance, beginning of period   $  971,617        $ 1,676,261
     Properties purchased
                                          --              600,000
     Foreclosures
                                          --              476,375
     Assumptions of senior debt
                                          --              769,234
     Additions
                                        48,644            810,126
     Real estate sold
                                      (922,761)        (3,185,379)
     Property written down
                                        (5,000)          (175,000)
                                    -----------       -----------
     Balance, end of period         $   92,500        $   971,617
                                    ===========       ===========

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

     As of September 30, 2004 and December 31, 2003, CAFC had borrowed
     $2,542,041 and $2,638,226, respectively, under a warehouse line of credit
     with the Trust. The borrowings are secured by pledged mortgage loans as
     collateral. Interest on this warehouse line of credit is adjusted monthly
     depending on market rates. As of September 30, 2004 and December 31, 2003,
     the interest rate was 7.5% and 6.0%, respectively. For the three and nine
     month periods ended September 30, 2004 and 2003, CAFC's interest expense
     totaled $53,627 and $135,064, respectively, and $81,969 and $168,019,
     respectively, of which $0 and $27,588 was outstanding as of September 30,
     2004 and 2003, respectively. The facility is cancelable by either party
     upon 30 days written notice.

     As of September 30, 2004, CAFC had borrowed $32,097 under a warehouse line
     of credit with CRF. The borrowings are secured by pledged mortgage loans as
     collateral. Interest on this warehouse line of credit is monthly depending
     on market rates. As of September 30, 2004 and December 31, 2003, the
     interest rate was 7.5% and 6.0%, respectively. For the three and nine month
     periods ended September 30, 2004, CAFC's interest

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

                          Notes to Financial Statements
                                   (Unaudited)

10.  Investment in affiliates (continued)
     ------------------------------------

     Warehousing facilities (continued)
     ----------------------------------

     expense totaled $25,312 and $30,312, respectively, of which $2,124 was
     outstanding as of September 30, 2004. The facility is cancelable by either
     party upon 30 days written notice.

     As of September 30, 2004 and December 31, 2003, CAFC had borrowed
     $4,669,520 and $3,970,782, respectively, under a $6,000,000 funding
     agreement. The agreement provides a 100% advance rate on the notes
     outstanding balance at an interest rate of Prime plus 1.00% with a floor of
     6.00%. As of September 30, 2004 and December 31, 2003, the Prime rate was
     4.75 and 4.0% respectively. Interest is payable monthly with $12,102 and
     $56,608 accrued and payable as of September 30, 2004 and December 31, 2003,
     respectively. The facility is cancelable by either party upon 30 days
     written notice.

     As of September 30, 2004, CAFC has borrowed $1,774,109 under a $3,600,000
     funding agreement. The agreement provides a 95% advance rate on the notes
     outstanding balance at an interest rate of 9.50%. Interest is payable
     monthly with $0 accrued and payable as of September 30, 2004. The facility
     is cancelable by either party upon 30 days written notice. There was no
     amount due on this funding agreement as of December 31, 2003.

     As of June 30, 2004, CAFC obtained a three-year $25,000,000 funding
     agreement. The agreement provides an advance rate of up to 80% on the notes
     outstanding balance at an interest rate floor of 5.00% and a ceiling of the
     Prime rate plus 4.0%. Through a tri-party agreement among CAFC, CRF, and
     the Trust, both CRF and the Trust are able to utilize this funding
     agreement for a fee of 3 basis points per month of the end of the month's
     financed mortgage notes receivable principal balance. All benefits and
     costs of ownerships and financing of the financed loans including the risk
     of principal loss enure to either CRF or the Trust. As of September 30,
     2004, the outstanding balance assigned to CAFC was $0.

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

     The Manager earns an administration fee not greater than 25 basis points on
     home loans funded for the benefit of CAFC and reimbursed for specific
     direct expenses as defined in the First Amended Residential Mortgage Loan
     Services Agreement. For the three and nine month periods ended September
     30, 2004 and 2003, CAFC has expensed $17,256 and $22,163 and $57,562 and
     $63,916, respectively.

     CAFC received an advance of $2,542,041 and $2,638,226 under a warehouse
     line of credit from the Trust, as of September 30, 2004 and December 31,
     2003, respectively. The Trust charges a variable interest rate on this
     warehouse line of credit determined by current market rates. The rate
     charged to CAFC on the line of credit as of September 30, 2004 and December
     31, 2003 was 7.5% and 6.0% respectively. CAFC expensed interest of $53,627
     and $135,064 and $81,969 and $168,019 during the three and nine months
     ended September 30, 2004 and 2003, respectively. The facility is cancelable
     by either party upon 30 days written notice.

     On occasion, CAFC and its affiliates had related party receivables and
     payables arising from ordinary business transactions. As of September 30,
     2004, CAFC had a payable of $32,879 to the Manager, a payable of $17,910 to
     the Trust, and a receivable of $557 from CRF. As of December 31, 2003, CAFC
     had a net receivable of $919 from the Manager and a payable of $9,736 to
     CRF. These accounts are shown on the balance sheet as part of Due to
     affiliates and Due from affiliates, respectively. No interest is charged on
     these accounts.

     During the first nine months of 2004 and 2003, CAFC sold $5,406,681 and
     $11,718,189, respectively, in loans to the Trust, at par value.

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

                          Notes to Financial Statements
                                   (Unaudited)


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

     As of September 30, 2004 and December 31, 2003, the Trust had borrowed $0
     and $9,000,000, respectively, under a line of credit term facility, up to a
     maximum of $7,000,000 and $10,000,000, respectively, with specific mortgage
     notes receivable pledged as collateral against the advances. The credit
     facility matured August 31, 2004 and was retired.

     As of December 31, 2003, the Trust had borrowed $2,750,000 under a second
     warehouse line of credit. The Trust received advances under the agreement
     up to a maximum of $4,000,000, with specific mortgage notes receivable
     pledged as collateral against the advances. Annual interest was the
     applicable prime rate (4.00% as of December 31, 2003) plus 0.50% and was
     payable monthly. The facility matured March 31, 2004 and was retired.

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

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

     The Trust foreclosed on a property in 2004 and assumed a mortgage note
     payable in the amount of $551,922 with an annual interest rate of 10%.
     Principal and interest payments of $5,520 are due monthly. During 2003, the
     Trust foreclosed on a property and assumed a mortgage note payable in the
     amount of $275,904 with an annual interest rate of 8.0%. Principal and
     interest payments of $2,102 are due monthly. The principal balance as of
     September 30, 2004 and December 31, 2003 was $274,846 and $275,904,
     respectively.

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

     The Trust has financed a portion of its treasury stock repurchases by
     borrowing on margin from an investment bank. The amount borrowed on margin
     accrues fees at the broker call rate (3.25% as of September 30, 2004 and
     2.50% as of December 31, 2003) plus 1.50%. Margin debt is callable at the
     discretion of the investment bank. As of September 30, 2004 and December
     31, 2003, the Trust owed $119,619 and $23,149, respectively, in margin
     debt.

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

     The Manager receives a management fee equal to one-twelfth (1/12) of 1%
     annually of the book value of mortgages, mortgage-related investments and
     real property ("Gross Mortgage Assets") of the Trust plus one-twelfth
     (1/12) of one-half percent (1/2%) of the book value of the non-mortgage
     assets of the Trust computed at the end of each month. The management fee
     also includes reimbursement for the direct costs of overseeing the
     administration and disposition of real estate owned by the Trust and the
     Company. The management fees paid by the Trust to the Manager were $51,360
     and $157,931 and $68,404 and $195,076 for the three and nine month period
     ended September 30, 2004 and 2003, respectively. Within the financial
     statements, the management fees are included in the Management fees to
     related parties.

     The Manager also earns a REO management fee for managing and servicing the
     properties that the Company has obtained through foreclosure of mortgage
     notes held. The fee for these services is $500 per month for each property.
     The Trust paid the Manager $3,000 and $10,000 and $5,500 and $17,500 in REO
     management fees for the three and nine month period ended September 30,
     2004 and 2003, respectively. Within the financial statements, REO
     management fees are included in the Management fees to related parties.

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

                          Notes to Financial Statements
                                   (Unaudited)


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

     The Manager's incentive compensation for each fiscal quarter, equals 25% of
     the net income of the Trust in excess of an annualized return on common
     equity for such quarter equal to the ten year U.S. Treasury Rate plus
     2.00%, provided that the payment of such incentive compensation does not
     reduce the Trust's annualized return on common equity for such quarter to
     less than the ten-year U.S. Treasury Rate after the preferred dividend has
     been paid. The incentive compensation for the three and nine month period
     ended September 30, 2004 and 2003 was $0 and $14,484 and $0 and $0,
     respectively. Within the financial statements, incentive compensation
     awards are included in the Management fees to related parties.

     The Manager receives a loan origination and servicing fee equal to
     one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
     computed at the end of each month. During 2003, the Trust capitalized 35.0%
     of this fee as loan origination costs and amortized them over the average
     life of the portfolio. The remaining 65.0% of the fee is expensed as the
     portion attributed for servicing. As of September 30, 2004, the Trust
     capitalized 32.5% of this fee as origination costs and amortized them over
     the average life of the portfolio. The remaining 67.5% of the fee was
     expensed as the portion attributed for servicing. For the three and nine
     month period ended September 30, 2004 and 2003, the Trust expensed loan
     origination and servicing fees of $145,362 and $378,709 and $122,404 and
     $349,121, respectively.

     On occasion, the Trust and its affiliates had related receivables and
     payables arising from ordinary business transactions. As of September 30,
     2004, the Trust had a receivable of $17,910 from CAFC and a payable of
     $12,168 from the Manager. As of December 31, 2003, the Trust had a
     receivable of $22,457 from CAFC, a receivable of $91,716 from the Manager
     and a payable of $5,080 to CRF. No interest is charged on these
     inter-company accounts.

     As described in Note 6, as of September 30, 2004 and December 31, 2003, the
     Trust advanced to the CAFC $2,542,041 and $2,638,226, respectively. The
     interest rate on this line of credit varies with market conditions and is
     payable monthly. As of September 30, 2004 and 2003 the applicable interest
     rate was 7.5% and 6.0% respectively. During the three and nine months ended
     September 30, 2004 and 2003, the Trust earned interest in the amount of
     $53,627 and $81,969 and $138,064 and $168,019, respectively, of which $0
     and $27,586 was outstanding as of September 30, 2004 and 2003,
     respectively.

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

     The Preferred Shareholders are entitled to a dividend preference in an
     amount equal to an annualized return on the adjusted net capital
     contribution of Preferred Shares at each dividend record date during such
     year (or, if the Directors do not set a record date, as of the first day of
     the month). The annualized return is the lesser of: (a) 10.25%, (b) 1.50 %
     over the Prime Rate (determined on a not less than quarterly basis) or (c)
     the rate set by the Board of Directors. The preferred dividend preference
     is non-cumulative.

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

     Preferred Shareholders are entitled to receive all liquidating
     distributions until they have received an amount equal to their aggregate
     adjusted net capital contribution. Thereafter, Common Shareholders are
     entitled to all liquidation distributions until the aggregate adjusted net
     capital contributions of all Common Shares has been reduced to zero. Any
     subsequent liquidating distributions will be allocated among Common
     Shareholders and Preferred Shareholders pro rata.

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

                          Notes to Financial Statements
                                   (Unaudited)


14.  Preferred, common and treasury stock (continued)
     ------------------------------------------------

     The Preferred Shares are redeemable by a shareholder, subject to the
     consent of the Board of Directors, annually on June 30 for redemption
     requests received by May 15 of such year. The Board of Directors may in its
     sole discretion deny, delay, postpone or consent to any or all requests for
     redemption. The redemption amount to be paid for redemption of such
     Preferred Shares is the adjusted net capital contribution plus unpaid
     accrued dividends, divided by the aggregate net capital contributions plus
     accrued but unpaid dividends attributable to all Preferred Shares
     outstanding, multiplied by the net asset value of the Trust attributable to
     the Preferred Shares which shall be that percentage of the Trust's net
     asset value that the aggregate adjusted net capital contributions of all
     Preferred Shares bears to the adjusted net capital contributions of all
     Shares outstanding.

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

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

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

     The activity in the Plan for the nine months ended September 30, 2004 and
     the twelve months ended December 31, 2003 follows:

                                             Options            Weighted average
                                             -------             exercise price
                                                                 --------------
Outstanding at January 1, 2003                220,551                   $10.37
               Granted                            ---                      ---
               Exercised                      (36,851)                    9.22
               Forfeited                          ---                      ---
                                             --------                  -------
Outstanding at December 31, 2003              183,700                  $ 10.60
                                             --------                  -------
               Granted                            ---                      ---
               Exercised                       (7,234)                    9.01
               Forfeited                          ---                      ---
                                             --------                  -------
Outstanding at September 30, 2004             176,466                  $ 10.64
                                              =======                  =======
Outstanding options exercisable as of
               January 1, 2003                220,551                  $ 10.37
               December 31, 2003              183,700                    10.60
               September 30, 2004             176,466                    10.64


     As of January 1, 2003, all the Plan's stock options have been granted and
     the unexercised stock options are 100% vested.

                                       19
<PAGE>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)


15.  Common stock options (continued)
     --------------------------------

     The following table summarizes information with respect to stock options
     outstanding at September 30, 2004:

<TABLE>
<CAPTION>
                                                        Options outstanding
                               ------------------ -------------------------------- ----------------------
Range of exercise prices       Number of shares      Weighted-average remaining      Weighted- average
                                                      contractual life (years)        exercise price
                               ------------------ -------------------------------- ----------------------

          <S>                       <C>                       <C>                          <C>
          $9.00 - $9.06             112,716                    6.84                        $  9.03
          $13.50                     63,750                    5.25                          13.50
                                     ------                    ----                        -------
                                    176,466                    6.27                          10.64
                                    =======                    ====                        =======
</TABLE>

     The Trust accounts for stock options under APB No. 25. Since the exercise
     price of each option granted has been equal to or higher than the closing
     market price of the Company's Common Shares at the date of grant, no
     expense is recognized. The pro forma results of reporting the Company's
     stock option grants using the fair value method consistent with SFAS No.
     123, is presented below for the three and nine month period ended September
     30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                           Three months ended              Nine months ended
                                                              September 30                   September 30
                                                          2004            2003           2004            2003
                                                          ----            ----           ----            ----
<S>                                                     <C>            <C>             <C>            <C>
     Net income available to common stock               $ 1,635        $ 23,756        $ 340,965      $ 470,270
     Less: Stock based expense
          using the fair value method                       ---             ---              ---            ---
                                                        -------        --------        ---------      ---------

     Pro forma net income available to common stock     $ 1,635        $ 23,756        $ 340,695      $ 470,270
                                                        =======        ========        =========      =========

     Net income per common share:
     Basic:
          As reported                                     $0.00          $0.06           $0.78          $1.11
          Pro forma                                       $0.00          $0.06           $0.78          $1.11
     Diluted:
          As reported                                     $0.00          $0.05           $0.67          $0.95
          Pro forma                                       $0.00          $0.05           $0.67          $0.95
</TABLE>

     Since no options were granted or vested during 2004 or 2003, the reported
     operating results are identical to the pro forma amounts.

                                       20
<PAGE>
                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                                   (Unaudited)


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

     The following table represents a reconciliation of the numerators and
     denominators of the basic and diluted earnings per common share for the
     nine month period ended September 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                  Three months ended        Nine months ended
                                                     September 30              September 30
                                                   2004         2003         2004         2003
                                                ------------------------------------------------
<S>                                             <C>          <C>          <C>          <C>
Numerator:
Net income                                      $  80,750    $ 101,708    $ 573,657    $ 708,784
Preferred dividends attributable to income        (79,115)     (77,952)    (232,692)    (238,514)
                                                ---------    ---------    ---------    ---------
Numerator for basic and diluted Earnings per
share income available to common stockholders   $   1,635    $  23,756    $ 340,965    $ 470,270
                                                =========    =========    =========    =========
Denominator:
    Basic weighted average shares                 439,454      422,596      437,251      422,575
    Dilutive effect of options                     67,133       77,577       72,666       73,490
                                                ---------    ---------    ---------    ---------
    Diluted weighted average shares               506,587      500,173      509,917      496,065
                                                =========    =========    =========    =========
Basic earnings per common share                 $    0.00    $    0.06    $    0.78    $    1.11
                                                =========    =========    =========    =========
Diluted earnings per common share               $    0.00    $    0.05    $    0.67    $    0.95
                                                =========    =========    =========    =========
</TABLE>



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]




                                       21
<PAGE>
                                     PART I
                                     ITEM 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                                PLAN OF OPERATION

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

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

Management's discussion and analysis of the results of operations for the three
and nine months ended September 30, 2004 and 2003 follows:

CRITICAL ACCOUNTING POLICIES

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

The Company believes the following are critical accounting policies that require
the most significant estimates and assumptions that are particularly susceptible
to a significant change in the preparation of the Company's financial
statements.

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

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

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

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

                                       22
<PAGE>
terms of these options were changed, variable accounting might need to be used,
and the Trust might then need to begin recognizing compensation expense for the
options.

Equity method of accounting. The Trust's 99% economic interest in CAFC is
presented in the Trust's financial statements according to the equity method of
accounting. This presentation requires the Trust to report the CAFC interest as
an investment. Included in the footnotes to the Trust's financial statements are
CAFC's Balance Sheet as of September 30, 2004 and December 31, 2003 and the
Statement of Operations for the nine months ended September 30, 2004 and 2003.
If required, consolidation of CAFC's financial information into the Trust may
materially change the Trust's financial statement balances, but would not affect
the Trust's net income or the earnings per common share calculations. FASB
Interpretation No. 46 may require consolidation during 2004.

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

OVERVIEW

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

Operating Strategy.
-------------------

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

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

Loan Origination and Loan Servicing. Mortgage loan origination consists of
establishing a relationship with a borrower or his broker, obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising properties that are proposed as the collateral for a
home equity loan, processing such information and underwriting and funding the
mortgage loan. Mortgage loan servicing consists of collecting payments from
borrowers, accounting for interest payments, holding borrowed proceeds in escrow
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 are provided
to the Trust by CAAI, its Manager.

Commitments and Contingencies. As of September 30, 2004, the Trust's loan
portfolio included 57 loans totaling $15,892,951 of which 5 loans totaling
$1,620,928 representing 10% of the loan portfolio were delinquent over two
payments. In assessing the collectibility of these delinquent mortgage loans,
management has established a loan loss reserve of $140,000, if it is necessary
to foreclose upon the mortgage loans.

As of September 30, 2003, the Trust's loan portfolio included 96 loans totaling
$20,126,463 of which 9 loans totaling $1,681,915 representing 8% of the loan
portfolio were delinquent over two months. One delinquent loan, totaling
$178,326, was brought current by October 31, 2003. After adjusting the September
30, 2003 delinquent balances for this payment, the delinquencies in excess of
two months are eight loans totaling $1,503,589 or 7% of the loan portfolio. In
assessing the collectability of these delinquent mortgage loans, management has
established a loan loss reserve of $240,000, if it is necessary to foreclose
upon the mortgage loans.

                                       23
<PAGE>
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, 2004
and September 30, 2003.

<TABLE>
<CAPTION>
      Maximum Other
       Commercial                 Total                     Amount of Commitment Expiration Per Period
     Commitments (a)             Amounts        ----------------------------------------------------------------
 as of September 30, 2004       Committed         Less than       1 - 3 years          4 - 5           After 5
                                                   1 year                              years            years
------------------------------ --------------- ---------------- ----------------- ---------------- -------------
<S>                              <C>              <C>              <C>                   <C>              <C>
Lines of Credit (b)              $6,275,368       $119,618         $6,155,749            0                0
Standby Repurchase                  (c)               0                0                 0                0
Obligations
Guarantees (d)                       0                0                0                 0                0
Total Commercial Commitments     $6,275,368       $119,618         $6,155,749            0                0
</TABLE>

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

(b)      Maximum potential liability. Actual amounts outstanding as of September
         30, 2004 due in less than 1 year was $119,618.

(c)      The Company's mortgage conduit business has an unquantified ongoing
         liability with respect to normal warranties and representations which
         includes fraud in the origination process or early default on loans
         sold into the secondary mortgage market.

(d)      The Trust's guarantee of CAFC's borrowings.

RESULTS OF OPERATIONS

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

Three and nine months ended September 30, 2004 and 2003. Revenues for the third
quarter decreased to $516,607 as compared to $537,037 for the same period in the
prior year. The decrease in revenue, during the third quarter of 2004 was due to
less interest income earned from CAFC of $36,612. CAIT's smaller portfolio
provided less interest revenue of $135,646. An increase in the Equity in gain
from CAFC of $154,054 partially offset the period's reduced revenues.

Expenses for the third quarter 2004 decreased to $411,882 as compared to
$435,329 for the same period in the prior year. The decrease in expenses during
the three months ended September 30, 2004 were primarily due to a reduction in
management fees of $19,544 and interest expenses of $46,910.

Revenues for the nine months ended September 30, 2004 decreased to $1,727,536 as
compared to $1,969,290 for the same period in the prior year. The decrease in
revenues during the period was due to lower interest income of $408,013, a
direct result of CAIT's smaller portfolio. An increase in the Equity in gain
from CAFC of $211,617 partially offset the period's reduced revenues.

Expenses for the nine months ended September 30, 2003 decreased to $1,090,405 as
compared to $1,260,506 for the same period in the prior year. The decrease in
expenses during the period was primarily due to a reduction in interest expenses
of $139,427, in the provision for loan losses of $29,144, and management fees of
$81,416. General and administrative expenses increased $48,393.

                                       24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

As of September 1, 2004, the Trust's $7,000,000 line of credit was retired.
Management has been in extensive negotiations with other lenders that will
replace this facility. Management believes that the cash flow from the payment
of mortgage notes receivable, CAFC's existing bank loan facilities, and
additional lines of credit anticipated to be acquired during 2004 will be
sufficient to meet the liquidity needs of the Trust's businesses for the next
twelve months.

As of June 30, 2004, CAFC obtained a three year $25,000,000 funding agreement.
Pursuant to a tri-party agreement among CAFC, CRF, and the Trust the Trust can
utilize this funding agreement. All benefits and costs of ownership and
financing of the Trust's financed loans will inure to the Trust. This
arrangement replaces the retired line of credit noted above.

Nine months ended September 30, 2004 and 2003. As of January 1, 2004 and 2003,
the Trust had $1,038,010 and $494,443 of cash and cash equivalents,
respectively. During the nine month period, cash and cash equivalents decreased
by $920,934 and $266,151, respectively. After taking into effect the various
transactions discussed below, cash and cash equivalents at September 30, 2004
and 2003 were $117,076 and $228,292.

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

Net cash provided by operating activities during the nine months ended September
30, 2004 and 2003 was $563,195 and $894,987, respectively. During the first nine
months of 2004, net income provided $573,657, a decrease in accounts receivable
provided $264,470, a net increase in due from affiliates provided $103,511 and a
net increase in other assets used $342,604. During the first nine months of
2003, net income provided $708,784, a net increase in due from affiliates
provided $303,335 and a net decrease in other assets used $102,371.

Net cash provided by and (used in) investing activities for the nine months
ended September 30, 2004 and 2003 was $4,840,031 and ($2,704,265), respectively.
During the first nine months of 2004, a net reduction in mortgage notes
receivable provided $4,663,537. During the first nine months of 2003, a net
increase in mortgage notes receivable used $220,072 and an increase in
warehousing facilities to related parties used $2,452,963.

Net cash (used in) and provided by financing activities during the nine months
ended September 30, 2004 and 2003 was ($6,324,160) and $1,543,127, respectively.
During the first nine months of 2004, decreased borrowings used cash of
$11,750,000, dividends reduced cash by $756,811 and treasury stock sales
increased cash by $28,735. During the first nine months of 2003 increased
borrowings provided cash of $2,616,276, while dividends and net treasury stock
purchases reduced cash by $813,653 and $259,496, respectively.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Interest risk. Interest rate risk is highly sensitive to many factors, including
governmental, monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the control of the Trust.
Changes in the general level of the U.S. Treasury yield curve can have
significant effects on the market value of the Trust's portfolio. The majority
of the Trust's assets are fixed-rate loans with a spread to U.S. Treasuries. The
Trust's loans are valued on the September 30, 2004 balance sheet of the lower of
cost or market.

As U.S. Treasury securities are priced to a lower yield and/or the spread to
U.S. Treasuries used to price the Trust's assets are decreased, the market value
of the Trust's portfolio may increase. Conversely, as U.S. Treasury securities

                                       25
<PAGE>
are priced to a higher yield and/or the spread to U.S. Treasuries used to price
the Trust's assets is increased, the market value of the Trust's portfolio may
decline. Changes in the level of the U.S. Treasury yield curve can also affect,
among other things, the prepayment assumptions used to value certain of the
Trust's loans. In addition, changes in the general level of the LIBOR money
market rates can affect the Trust's net interest income. The majority of the
Trust's liabilities are floating rate based on a spread over the average one
month LIBOR. A portion of the Trust's liabilities is also based on a spread over
the daily Prime Rate. As the level of LIBOR and/or the Prime Rate increases or
decreases, the Trust's interest expense will move in the same direction.

On account of the relatively short adjusted weighted average maturity of the
Trust's portfolio (38 months), a variety of financial instruments available to
limit the effects of interest rate fluctuations on its operations have not been
utilized. The use of these types of derivatives (such as interest rate swaps,
caps, floors and other interest rate exchange contracts) to hedge
interest-earnings assets and/or interest-bearing liabilities carry risks,
including the risk that the net losses on a hedge position may exceed the amount
invested in such instruments.

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

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

The Trust manages credit risk through the underwriting process, limiting loans
at the time of funding to 75% of the collateral's appraised value, establishing
loss assumptions and carefully monitoring loan performance. Nevertheless, the
Trust assumes that a certain portion of its loans will default and adjusts the
allowance for loan losses based on that assumption. For purposes of
illustration, a doubling of the assumed losses in the Trust's portfolio would
reduce third quarter 2004 GAAP income available to common shareholders by
$140,000.

Asset and liability management. Asset and liability management is concerned with
the timing and magnitude of the maturity of assets and liabilities. In general,
management's strategy is to approximately match the term of the Trust's
liabilities to the portfolio's adjusted weighted average maturity (38 months).

The majority of the Trust's assets pay a fixed coupon and the income from such
assets are relatively unaffected by interest rate changes. The Trust's
borrowings are currently under a variable rate line of credit that resets
monthly. Given this relationship between assets and liabilities, the Trust's
interest rate sensitivity gap is highly negative. This implies that a period of
falling short term interest rates will tend to increase the Trust's net interest
income, while a period of rising short term rates will tend to reduce the
Trust's net interest income.


--------------------------------------------------------------------------------
                              One Year - Historical
                     Interest Rate Adjustment in Basis Points
--------------------------------------------------------------------------------
   Borrowings         <200 bp>        <100 bp>          100 bp          200 bp
------------------ --------------- ---------------- --------------- ------------
   Annual Net            6%              3%              <3%>            <8%>
     Income
------------------ --------------- ---------------- --------------- ------------


                                       26
<PAGE>
                                     PART I
                                     ITEM 3.

                             CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls and Procedures. The principal executive
and financial officers of the Trust have reviewed and evaluated the
effectiveness of the design and operation of the Trust's disclosure controls and
procedures within the 90 days preceding the date of this report and have
determined (i) that such controls and procedures are operating properly and
adequately to ensure that material information relating to the Trust's
operations and required to be disclosed in this report is being made known to
them by the responsible persons involved in the Trust's operations; and (ii)
that there are neither significant deficiencies in the design and operation of
such controls and procedures that could affect the Trust's ability to record,
process, summarize and report financial data nor is there any fraud that
involves management or other employees who have a significant role in the
Trust's internal controls. The results of such review and evaluation have been
disclosed to the Trust's auditors and the Trust's audit committee.

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

                                     PART II

                                OTHER INFORMATION

ITEM 1     LEGAL PROCEEDINGS

       The trust is not involved in any legal proceedings at this time.

ITEM 2     CHANGES IN SECURITIES

       During the third quarterly period ending September 30, 2004, 700 common
       shares held as treasury shares were sold.

ITEM 3     DEFAULTS UPON SENIOR SECURITIES

       Not applicable.

ITEM 4     SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 Thomas B. Swartz, CAIT's Chairman and CEO announced that CAIT's postponed
Annual Meeting of Shareholders was held on July 27, 2004 at CAIT's offices in
San Francisco; that Director Stanley C. Brooks, Chairman of Brookstreet
Securities Corporation of Irvine, California and Dennis R. Konczal, President of
CAIT, were reelected for three year terms as directors of CAIT; and that the
Board's selection of Novogradac & Company LLP, San Francisco, as Independent
Auditors for CAIT for the year 2004 was approved.


ITEM 5     OTHER INFORMATION

     Press Release, Exhibit "A" attached hereto and incorporated herein, dated
     July 30, 2004 announcing 3rd Quarter 2004 Common Share Dividend and 2nd
     Quarter 2004 Net Income.

     Press Release, Exhibit "B" attached hereto and incorporated herein, dated
     September 2, 2004 announcing CAFC's $25,000,000 funding agreement, in which
     CAIT may also participate as arranged by CAFC.



                                       27
<PAGE>
ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K

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

         Exhibit No.
         3.1    Charter Certificate of Incorporation and Amendment No. 1(1)
         3.2    Bylaws of the Registrant(1)
         3.3    Certificate of Amendment of Certificate of Incorporation(6)
         4.1    Form of Stock Certificate of Common Shares of the Registrant(2)
         10.1   Form of Management Agreement between the Registrant and Capital
                Alliance Advisors, Inc.(1)
         10.2   Form of Indemnity Agreement between the Registrant and its
                Directors and Officers(1)
         10.3   Form of Loan Origination and Loan Servicing Agreement between
                the Registrant and Capital Alliance Advisors, Inc.(1)
         23.4   Consent of Landels Ripley & Diamond, LLP(5)
         23.5   Consent of Novogradac & Company LLP(5)
         24.1   Power of Attorney of Thomas B. Swartz(1)
         24.2   Power of Attorney of Dennis R. Konczal(1)
         24.4   Power of Attorney of Stanley C. Brooks(1)
         24.5   Power of Attorney of Harvey Blomberg(1)
         24.7   Power of Attorney of Richard J. Wrensen(7)
         24.8   Power of Attorney of Donald R. Looper(8)

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

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

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

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

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

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

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

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

         No reports on Form 8-K were filed for the period ending September 30,
         2004.

                                       28
<PAGE>
                                   SIGNATURES


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


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


Dated: November 1, 2004                 By: /s/ Thomas B. Swartz
                                            --------------------
                                            Thomas B. Swartz,
                                            Chairman and Chief Executive Officer


Dated: November 1, 2004                 By: /s/ Richard J. Wrensen
                                            ----------------------
                                            Richard J. Wrensen,
                                            Chief Financial Officer
                                            Executive Vice President




                                       29
<PAGE>
                                  CERTIFICATION


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

         In connection with the Quarterly Report of Capital Alliance Income
         Trust Ltd. (the "Company") on Form 10-QSB for the period ending
         September 30, 2004 as filed with the Securities and Exchange Commission
         on the date hereof (the "Report"), I, Thomas B. Swartz, Chief Executive
         Officer of the Company, Richard J. Wrensen, Chief Financial Officer of
         the Company, and I, Dennis R, Konczal, President and Chief Operating
         Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
         adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



Date: November 1, 2004


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



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



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





                                       30
<PAGE>
                                  CERTIFICATION
               OF FORM 10Q OF CAPITAL ALLIANCE INCOME TRUST LTD.,
                     A REAL ESTATE INVESTMENT TRUST FOR THE
                        PERIOD ENDING SEPTEMBER 30, 2004


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

The undersigned each individually certifies that:

1.       I have reviewed this Form 10QSB, dated September 30, 2004 of Capital
         Alliance Income Trust, Ltd., A Real Estate Investment Trust:

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

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

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

          o    designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, is made known to
               us by others within those entities, particularly during the
               period in which this report in being prepared;

          o    evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date); and

          o    presented in this report our conclusions about the effectiveness
               of the disclosure controls and procedures based on our evaluation
               as of the Evaluation Date;

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

          o    all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          o    any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

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

                            [SIGNATURES ON NEXT PAGE]



                                       31
<PAGE>
Date: November 1, 2004


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



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



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




                                       32
<PAGE>
                                   EXHIBIT "A"
Press Release

                       CAPITAL ALLIANCE INCOME TRUST LTD.
                THIRD QUARTER DIVIDEND, SECOND QUARTER OPERATING
               RESULTS AND RESULTS OF ANNUAL SHAREHOLDERS MEETING

SAN FRANCISCO - (BUSINESS WIRE) - July 30, 2004 - Capital Alliance Income Trust
Ltd. ("CAIT") (AMEX: CAA-news) announced that its Board has declared CAIT's
third quarter Common Share dividend at the rate of $0.30 per Common share. The
dividend is payable on August 16, 2004 to shareholders of record on August 9,
2004.

Richard J. Wrensen, CAIT's Executive Vice-President and Chief Financial Officer,
stated that CAIT would file its Form 10-QSB during the week of August 2, 2004.
CAIT's Form 10-QSB for the second quarter will be available through CAIT's
website which is listed below.

For the three months ended June 30, 2004, CAIT's net income was $215,139 ($0.32
basic and $0.27 diluted) and for the six months ended June 30, 2004 net income
was $492,907 ($0.78 basic and $0.66 diluted per share) as compared to net income
of $312,929 ($0.55 basic and $0.47 diluted per share) and $607,077 ($1.06 basic
and $0.90 diluted per share), respectively for like periods in 2003. Revenues
were $500,308 for the three months ended June 30, 2004 and $1,211,928 for the
six months ended June 30, 2004 as compared to $731,620 and $1,432,253 for the
same periods in 2003

Thomas B. Swartz, CAIT's Chairman and CEO announced that CAIT's postponed Annual
Meeting of Shareholders was held on July 27, 2004 at CAIT's offices in San
Francisco; that Director Stanley C. Brooks, Chairman of Brookstreet Securities
Corporation of Irvine, California and Dennis R. Konczal, President of CAIT, were
reelected for three year terms as directors of CAIT; and that the Board's
selection of Novogradac & Company LLP, San Francisco, as Independent Auditors
for CAIT for the year 2004 was approved.

CAIT is a specialty residential lender, which originates and invests in
conforming and high-yielding, non-conforming residential mortgage loans on
one-to-four-unit-residential properties located primarily in California and
other western states. It also originates loans for sale to investors, on a
whole-loan basis for cash through its mortgage banking subsidiary, Capital
Alliance Funding Corporation. All loans with a combined loan-to-value ratio of
greater than 75% of the collateral's appraised value at the time of funding are
pre-sold into the secondary market. Only residential loans with a combined
loan-to-value of 75% or less are retained in CAIT's portfolio of mortgage
investments.

This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. CAIT's actual results and liquidity can differ materially
from those anticipated in these forward-looking statements because of changes in
the level and composition of CAIT's investments and unforeseen factors. As
discussed in CAIT's filings with the Securities and Exchange Commission, these
factors may include, but are not limited to, changes in general economic
conditions, the availability of suitable investments, fluctuations in and market
expectations for fluctuations in interest rates and levels of mortgage
prepayments, deterioration in credit quality and ratings, the effectiveness of
risk management strategies, the impact of leverage, the liquidity of secondary
markets and credit markets, increases in costs and other general competitive
factors.

Contact:          Capital Alliance Income Trust Ltd., San Francisco
                  Richard J. Wrensen, EVP & CFO - 415/288-9575
                  rwrensen@calliance.com
                  www.calliance.com

                                       33
<PAGE>
                                   Exhibit "B"
Press Release

                      GATEWAY BANK FSB AND CAPITAL ALLIANCE
                   ANNOUNCE AN EXPANDED FINANCIAL RELATIONSHIP


SAN LEANDRO and SAN FRANCISCO, CA - (BUSINESS WIRE) - September 2, 2004 -
Gateway Bank FSB ("Gateway") and Capital Alliance Funding Corporation ("CAFC"),
the mortgage banking affiliate of Capital Alliance Income Trust Ltd. ("CAIT")
(AMEX:CAA-News) and Calliance Realty Fund, LLC ("CRF"), jointly announce the
execution of a $25 million `Quick$ale'(R) term facility between the two
companies. This new facility is in addition to an existing $6 million Quick$ale
warehouse facility between them.

Poppi Metaxas, President and Chief Executive Officer of Gateway Bank FSB, noted
that the new facility is an expansion of an existing business relationship
between the two companies that has been developing since 2002. "Gateway remains
a community-based thrift institution," Metaxas said, "and we are aware that
there are sometimes unaddressed credit needs. Our relationship with Capital
Alliance shows that we can serve these needs better by spreading risk and return
across an organization like Capital Alliance, the bank and the investment
community."

Dennis R. Konczal, Capital Alliance's President, stated that this new facility
will significantly enhance liquidity and will allow for the continued expansion
and diversification of Capital Alliance's residential mortgage banking and
mortgage investment business lines.

Capital Alliance Funding Corporation is a mortgage banking company which
originates all types of residential loans on properties located primarily in
California and other western states. These loans are either sold to secondary
market investors on a whole-loan basis or sold to its affiliated companies, CAIT
or CRF.

This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. CAIT's actual results and liquidity can differ materially
from those anticipated in these forward-looking statements because of changes in
the level and composition of CAIT's investments and unforeseen factors. As
discussed in CAIT's filings with the Securities and Exchange Commission, these
factors may include, but are not limited to, changes in general economic
conditions, the availability of suitable investments, fluctuations in and market
expectations for fluctuations in interest rates and levels of mortgage
prepayments, deterioration in credit quality and ratings, the effectiveness of
risk management strategies, the impact of leverage, the liquidity of secondary
markets and credit markets, increases in costs and other general competitive
factors.

Contact:          Gateway Bank FSB
                  Poppi Metaxas, President and CEO, 510/297-4701
                  poppim@gatewayfsb.com

                  Capital Alliance
                  Richard J. Wrensen, Executive Vice-President, 415/288-9575
                  rwrensen@calliance.com
                  www.calliance.com

                                       34