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







                                                     November 3, 1997



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

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

Dear Sir/Madam:

Pursuant  to  Sections  13 and  15(d) of the  Securities  Exchange  Act of 1934,
enclosed  for filing via EDGAR  please  find a Form 10-Q for the  quarter  ended
September 30, 1997. If you have any questions, please do not hesitate to call.

                                                     Very truly yours,

                                                     /s/ Thomas B. Swartz

                                                     Thomas B. Swartz
                                                     Chairman

Enclosures

cc:      Stephen C. Ryan, Esq.



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

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

                                    FORM 10-Q

(Mark One)

(X) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
    1934 For the quarterly period ended September 30, 1997

                        Commission File Number: 333-11625

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

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


--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

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

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

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

                                    Yes   _X_      No  ___

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

As of September 30, 1997, there were no shares of common stock outstanding.
<PAGE>
                                     PART I
                                     ITEM 1.


                              FINANCIAL STATEMENTS



                                        2

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



                                                                     (Unaudited)            (Audited)
                                                                 September 30, 1997     December 31, 1996
<S>                                                                 <C>                   <C>       
ASSETS
      Cash and cash equivalents .................................   $   43,654            $   66,798
      Restricted cash ...........................................      171,959                65,109
      Accounts receivable .......................................      169,522               110,006
      Investments ...............................................      489,114               200,000
      Mortgage notes receivable .................................    4,654,228             4,696,238
      Real estate held for sale .................................      316,030             1,312,520
      Organization costs (net of accumulated amortization
            of $6,456 at September 30, 1997 and $3,216 at
            December 31, 1996) ..................................       15,573                18,459
      Deferred offering costs ...................................      409,190               233,131
                                                                    ----------            ----------

      Total assets ..............................................   $6,269,269            $6,702,261
                                                                    ==========            ==========


LIABILITIES AND STOCKHOLDERS' EQUITY

      Liabilities
           Mortgage note holdbacks ..............................   $  171,840           $   64,991
           Due to affiliates ....................................       46,594               21,294
           Other liabilities ....................................      148,548               91,393
           Mortgage notes payable ...............................         --                578,395
                                                                    ----------           ----------
      Total liabilities .........................................      366,983              756,073
                                                                    ----------           ----------
      Stockholders' Equity
            Preferred stock, $.01 par value (liquidation value
                  $9.50 per share), 675,000 shares authorized;
                  641,283 and 641,283 shares issued and
                  outstanding at September 30, 1997 and
                  December 31, 1996, respectively ...............        6,413                6,413
            Common stock, $.01 par value, 5 million and 2 million
                   shares authorized at September 30, 1997
                   and December 31, 1996, respectively,
                   none issued and outstanding ..................         --                    --
            Additional paid in capital (Preferred stock) ........    5,895,873            5,939,775
                                                                    ----------           ----------
      Total stockholders' equity ................................    5,902,286            5,946,188
                                                                    ----------           ----------

      Total liabilities and stockholders' equity ................   $6,269,269           $6,702,261
                                                                    ==========           ==========
</TABLE>
                See accompanying notes to financial statements.

                                       3
<PAGE>

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


                                                                                      (Combined)
                                                                        (Successor) (Predecessors)(Successor)
                                                                        Nine Months  Four Months  Five Months
                                                  Three Months Ended       Ended       Ended        Ended
                                                     September 30,     September 30,  April 30,   September 30,
                                                   1997        1996         1997        1996         1996

<S>                                            <C>         <C>          <C>         <C>         <C>      
REVENUES
     Interest income .......................   $ 110,844   $ 191,681    $ 438,893   $ 242,136   $ 280,111
     Origination income ....................      39,673        --         72,628        --          --
     Other income ..........................      37,827      (1,397)      84,745      31,573      20,624
                                               ---------   ---------    ---------    --------     -------
         Total revenues ....................     188,343     190,284      596,266     273,709     300,735

EXPENSES
     Loan servicing and origination fees and
       other expenses to related party .....      38,258      15,114      104,334      20,107      25,190
     Interest expense ......................       4,183        --         43,604        --          --
     Provision for loan losses .............        --        23,000         --        20,000      33,000
     Operating expenses of real estate held        7,646        --         33,890        --          --
     General and administrative ............       4,893      21,595       27,103       6,959      17,861
                                               ---------   ---------    ---------   ---------   ---------
           Total expenses ..................      54,980      59,709      208,931      47,066      76,051
                                               ---------   ---------    ---------   ---------   ---------

     Net Income Before Gain on Real
     Estate Held for Sale ..................     133,363     130,575      387,336     226,643     224,684

     Gain on Real Estate Held for Sale .....      23,063        --         16,670        --          --

                                               ---------   ---------   ----------    --------    --------
NET INCOME .................................   $ 156,426   $ 130,575    $ 404,006   $ 226,643   $ 224,684
                                               =========   =========   =========     ========    ========


NET INCOME PER
     PREFERRED SHARE .......................   $   0.244   $   0.203    $   0.630   $   0.350   $   0.350

WEIGHTED AVERAGE PREFERRED
     SHARES OUTSTANDING ....................     641,464     641,804      641,464     646,971     641,804
</TABLE>

                See accompanying notes to financial statements.

                                        4

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


                                                                                 Combined        
                                                                 (Successor)   (Predecessors)   (Successor)
                                                                 Nine Months    Four Months     Five Months
                                                                    Ended          Ended           Ended
                                                                 September 30,    April 30,     September 30,
                                                                      1997          1996            1996
<S>                                                             <C>            <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
     Net Income .............................................   $   404,005    $   226,643    $   224,684
     Adjustments to reconcile net income to net cash provided
     by operating activities:
       Amortization .........................................         3,240            187           --
       (Increase) decrease in  accounts receivable ..........       (55,483)       (43,733)      (146,120)
       Increase (decrease) in loan loss reserve .............          --           20,000         33,000
       Increase (decrease) in due to affiliates .............        25,300         10,476          5,713
       Increase (decrease) in other liabilities .............        57,155         (3,227)        35,052
                                                                -----------    -----------    -----------
         Net cash provided by (used in) operating activities        434,217        210,346        152,329
                                                                -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     (Increase) decrease in restricted cash .................      (106,850)       (92,046)       131,998
     Increase (decrease) in mortgage note holdbacks .........       106,850         92,045       (132,053)
     Investments in mortgage notes receivable ...............    (3,664,006)    (1,022,056)    (1,747,144)
     Repayments of mortgage notes receivable ................     3,295,791      1,066,231      1,210,179
     Net proceeds from sale of real estate held .............       597,398           --             --
     Capital costs of  real estate held .....................       (16,807)          --             --
     Increase in organization costs .........................          --             --           (9,238)
                                                                -----------    -----------    -----------
       Net cash provided by (used in) investing .............       212,376         44,174       (546,258)
                                                                -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Redemption of shares ...................................          --          (44,825)       (23,250)
     Deferred offering costs ................................      (213,933)          --          (89,536)
     Receipt of subscriptions receivable ....................          --          265,511           --
     Payment of mortgage notes payable ......................        (7,542)          --             --
     Organizational and offering costs ......................          (354)        (5,625)        (2,314)
     Dividends paid .........................................      (447,908)      (262,288)      (259,809)
                                                                 -----------   -----------    -----------
       Net cash provided by (used in) financing activities ..      (669,737)       (47,227)      (374,909)
                                                                -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH .............................       (23,144)       207,293       (768,838)
CASH AT BEGINNING OF PERIOD .................................        66,797        829,978      1,037,271
                                                                -----------    -----------    -----------

CASH AT END OF PERIOD .......................................   $    43,653    $ 1,037,271    $   268,433
                                                                ===========    ===========    ===========

NON-CASH INVESTING AND FINANCING ACTIVITIES
     Real estate acquired through foreclosure                   $      --      $      --      $ 1,065,193
     Increase in mortgage payable                               $      --      $      --      $   725,267
</TABLE>

                                                                  
                See accompanying notes to financial statements.

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)


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

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

      The effective date of the  combination  (the  "Combination")  was midnight
      April 30,  1996,  at which time the Trust  (Successor)  exchanged  643,730
      Preferred  Shares for all whole  shares of the  Predecessors'  outstanding
      Class "A" and Class "B" shares.  Thereafter, all assets and liabilities of
      the Predecessors were transferred to the Trust.

      Effective  February 12, 1997, the Trust  registered its common shares with
      the Securities and Exchange  Commission  pursuant to the Securities Act of
      1933, as amended in  connection  with a "best  efforts"  offering of up to
      1,500,000  common shares at $8.00 per share.  Listing of the shares on the
      American  Stock Exchange has been approved  subject to official  notice of
      issuance. The Trust  actively commenced marketing its shares in May, 1997.
      
      On April 15,  1997 the Trust  formed  its  non-qualified  REIT  subsidiary
      Capital  Alliance  Funding  Corporation  ("CAFC")  to conduct  its planned
      Mortgage  Conduit  Business.  On June 27, 1997 the Trust  capitalized CAFC
      with real estate assets  carried by the Trust at a book value  $304,550 in
      exchange  for 2,000  shares of Series  "A"  Preferred  Stock  having a 99%
      economic  interest in CAFC. The Trust's Manager  invested $1,000 for 1,000
      Common  Shares of CAFC having a 1% economic  interest in CAFC. On June 30,
      1997 and  September  30,  1997,  CAFC  declared  dividends  of $5,564  and
      $14,400,  respectively,  to the Trust.  CAFC has applied to the California
      Department of Corporations for a Consumer Finance Lender's License and the
      California  Department of Real Estate for a Corporate Real Estate Broker's
      License.  Pending  receipt  of  such  licenses,  CAFC's  mortgage  banking
      activities are being  conducted  under the Manager's Real Estate  Broker's
      License.  The Trust's  Manager also  manages  CAFC and  provides  mortgage
      origination and sale services for CAFC.

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

      The accompanying  financial  statements  include the accounts of the Trust
      and the Predecessors.  The financial  information presented as of any date
      other  than  December  31 has been  prepared  from the books  and  records
      without audit. The accompanying financial statements have been prepared in

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)


     accordance with the instructions to Form 10-Q and do not include all of the
     information  and the footnotes  required by generally  accepted  accounting
     principles  for  complete  statements.  In the opinion of  management,  all
     adjustments, consisting only of normal recurring adjustments, necessary for
     a fair presentation of such financial statements, have been included.

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

     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 1996 contained
     in the Trust's 1996 Special Financial Report pursuant to 15d-2 on Form 10-K
     of the Securities and Exchange Commission.

     The  unaudited  interim  financial  statements  for the nine  months  ended
     September  30, 1996  represent  the combined  financial  statements  of the
     Predecessors  for the four  months  ended  April  30,  1996  and  financial
     statements of the Trust for the five months ended  September 30, 1996.  The
     unaudited interim financial  statements for the nine months ended September
     30, 1997 represent the financial  statements of the Trust (Successor) after
     the merger described in Note 1.

     The operations of the Predecessors have been combined with the Trust due to
     their common  management and directors.  The Combination has been accounted
     for as a purchase.  CAIT I is considered  the acquiring  entity and CAIT II
     the acquired  entity.  The purchase price represents the net assets of CAIT
     II as of April  30,  1996  approximating  $2,771,351.  This  amount  is the
     carrying amount of assets less liabilities  which  approximates fair market
     value.  Therefore,  there is no excess purchase price or goodwill. The fair
     market  value of net assets  acquired  was used to  determine  the purchase
     price  since the value of the Trust's  Preferred  Shares  exchanged  is not
     readily  determinable  and the fair  value of net assets  acquired  is more
     clearly evident.

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

     Cash and cash  equivalents.  Cash and  cash  equivalents  include  cash and
     liquid  investments with an original  maturity of three months or less. The
     Trust  deposits  cash in  financial  institutions  insured  by the  Federal
     Deposit Insurance  Corporation.  At times, the Trust's account balances may
     exceed the insured limits.  Restricted cash represents  segregated cash and
     is to be disbursed  only to mortgage  loan  borrowers  upon  completion  of
     certain improvements to the secured property (see Note 4).

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

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)

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

      Investments.  The Trust  holds  all of the  outstanding  preferred  shares
      (22,500 shares of non voting stock) and a 99% economic interest in Capital
      Alliance  Funding  Corporation  ("CAFC"),  a  Delaware  corporation  which
      originates  and  sells  residential   mortgage  loans.   Capital  Alliance
      Advisors,  Inc., the Trust's Manager, and a related party, owns all of the
      common  shares and a 1%  economic  interest in CAFC and  maintains  voting
      control. The preferred shares are entitled to a preference equal to 99% of
      Distributions  paid in any  month  or  other  period.  CAFC is  taxed as a
      corporation. The Trust accounts for its investment under the equity method
      and  accrues  earnings  as  described  above  in  accordance  with  CAFC's
      certificate of  incorporation.  Earnings from this investment are recorded
      as income on the Statements of Operations.

      The Trust holds an interest  in 99% of the  outstanding  Class B preferred
      shares  (20,000  shares of non voting  stock) of  beneficial  interest  of
      Sierra  Capital  Acceptance  ("SCA"),  a  Delaware  business  trust  which
      originates and sells residential  mortgage loans. Sierra Capital Services,
      Inc., a related party, owns 99% of the Class A common shares of beneficial
      interest  of the  Investee  and  maintains  voting  control.  The  Class B
      preferred shares are entitled to guaranteed payments equal to a 15% return
      per annum.  All net profits and losses are allocated to the Class A common
      shares.  Class A common  shareholders  are required to  contribute or loan
      additional  capital  to  cover  any  operating  losses.  SCA is taxed as a
      partnership.  The Trust  accounts  for its  investment  under  the  equity
      method.  Earnings from this  investment are recorded as interest income on
      the Statements of Operations.

      Income taxes.  The Trust in its 1996 federal  income tax return elected to
      be  taxed  as and  intends  at  all  times  to  qualify  as a real  estate
      investment trust ("REIT") for federal income tax purposes, under Sections
      856  through  860 of the  Internal  Revenue  Code of 1986,  as amended and
      applicable Treasury Regulations.  Therefore,  the Trust generally will not
      be subject to federal  corporate  income  taxes on its net income  that is
      currently  distributed  to  stockholders.  To qualify as a REIT, the Trust
      must elect to be so treated and must meet on a  continuing  basis  certain
      requirements  relating  to the  Trust's  organization,  sources of income,
      nature of assets, and distribution of income to shareholders. In addition,
      the Trust must maintain  certain records and request  certain  information
      from its stockholders designed to disclose actual ownership of its stock.

      In order to maintain its  qualification as a REIT, the Trust must annually
      satisfy  three  gross  income  requirements.  First,  at least  75% of the
      Trust's gross income (excluding gross income from prohibited transactions)
      for each taxable year must be derived from,  among other things,  interest
      on  obligations  secured by mortgages on real property and rents from real
      property.  Second,  at least 95% of the Trust's  gross  income  (excluding
      gross income from prohibited  transactions)  for each taxable year must be
      derived  from the  sources  described  under  the 75% gross  income  test,
      dividends,  interest,  and gain from the sale or  disposition  of stock or
      securities.  Third,  short-term  gain from the  disposition of securities,
                                        8
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)

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

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

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

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

     As part of the  Taxpayer  Relief Act of 1997 (the "1997 Tax Act"),  various
     changes have been made to the tax treatment of REITs  effective for taxable
     years  beginning  January 1, 1998.  These changes include the repeal of the
     rule that requires less than 30% of a REIT's income to be derived from gain
     on the sale of other  disposition of stock or securities held for less than
     one year,  certain real  property  held less than four years,  and property
     that is sold or disposed of in a prohibited  transaction.  In addition, the
     1997 Tax Act expands the class of excess noncash items that are not subject
     to the 95% distribution requirement to include income from the cancellation
     of indebtedness.

     Until final regulations or other  pronouncements are issued by the Internal
     Revenue Service concerning the provisions of the 1997 Tax Act, there may be
     uncertainties  affecting the  interpretation  of such  provisions and their
     effect on a REIT in  general.  The Trust  cannot  give  assurance  that its
     positions or actions in reliance on the 1997 Tax Act provisions will not be
     challenged by the Internal Revenue Service.

     Fair value of financial  instruments.  For cash and cash  equivalents,  the
     carrying amount is a reasonable  estimate of fair value.  For mortgage note
     receivables, fair value is estimated by discounting the future cash flows

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)

     using the current  interest  rates at which  similar loans would be made to
     borrowers   with  similar   credit  ratings  and  for  the  same  remaining
     maturities.  It was  determined  that the  difference  between the carrying
     amount and the fair value of the mortgage notes receivable is immaterial.

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

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

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

     Pro-forma earnings per share. Prior to the merger of the Predecessors,  the
     Preferred  Shares  received  100% of the Trust's net income.  The Preferred
     Shares  currently  receive  an annual  preferred  allocation  of income and
     distributions.  After  completion of the current  offering of common shares
     and after meeting such  preference,  100% of any  additional  income earned
     will be  distributed  to the Common  Shares until the  distribution  on the
     Common Shares matches that of the Preferred  Shares (see Note 9). No common
     shares were outstanding in prior periods.

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

     Pursuant to mortgage loan  agreements  between the Trust and certain of its
     borrowers,  a  portion  of the  loan  proceeds  are  held by the  Trust  in
     segregated  accounts to be disbursed only to such borrowers upon completion
     of certain  improvements on the secured property.  As of September 30, 1997
     and December 31, 1996,  mortgage note  holdbacks from the  consummation  of
     mortgage loans made amounted to $171,840 and $64,991, respectively.

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

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

     Mortgage notes receivable are stated at the principal outstanding. Interest
     on the mortgages is due monthly and  principal is due as a balloon  payment
     at loan  maturity.  The notes are secured by deeds of trust on  residential
     properties located primarily in California which results in a concentration

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)

     of credit risk.  The value of the loan portfolio may be affected by changes
     in the economy or other conditions of the  geographical  area. A portion of
     the notes are secured by a second position on the underlying properties and
     loans are non-conforming loans to B/C-credit borrowers.

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

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

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

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

      As of September 30, 1997 the Trust held no mortgage notes payable.

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

     The Manager, which is owned by several of the Trustees and their affiliate,
     contracted with the Trust to provide administration services and receives a
     fee for these  services  from the Trust.  The  Manager is entitled to a per
     annum Base  Management Fee payable monthly in arrears of an amount equal to
     1% of the Gross Mortgage Assets of the Trust (computed  monthly) plus 2% of
     cash or money-market or equivalent  assets and incentive  compensation  for
     each fiscal quarter,  equal to 25% of the net income of the Trust in excess
     of an  annualized  return on equity for such quarter  equal to the ten year
     U.S.  Treasury  Rate plus 2% provided  that the  payment of such  incentive
     compensation  does not reduce the Trust's  annualized  return on equity for
     such  quarter  to less  than the ten year  U.S.  Treasury  Rate plus 2% and
     amounts payable on account of the Series A Preferred Preference Amount have
     been paid. The Manager is also entitled to  reimbursement  for clerical and
     administrative services at cost based on relative utilization of facilities
     and personnel.  Additionally,  the Manager will receive a Loan  Origination
     and Servicing Fee payable  monthly equal to 2% of the Gross Mortgage Assets
     together with certain miscellaneous fees from borrowers customarily payable
     in  connection  with  origination  and  servicing of mortgages and fees for
     other  services  requested by the Trust.  The Manager bears all expenses of
     services  for which it is  separately  compensated.  During the nine months
     ended  September  30,  1996,  the Trust paid  $39,254 to the Manager  under
     contracts with different compensation  arrangements from those which became
     effective in February,  1997.  During the nine months ended  September  30,
     1997, the Trust paid $99,611 to the Manager.

     As described  in Note 3, the Trust holds an  investment  in Sierra  Capital
     Acceptance  and receives a 15%  guaranteed  return per annum.  For the four
     months ended April 30, 1996,  the  Predecessors  earned  interest of $7,500
     from the  investment.  For the five months ended  September  30, 1996,  the
     Trust earned interest of $12,500 from the  investment.  For the nine months
     ended September 30, 1997, the Trust received  distributions of $22,500 from
     this investment.

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

                          Notes to Financial Statements
              For the nine months ended September 30, 1997 and 1996
                                   (Unaudited)

      As  described  in  Note  1,  the  Trust  formed  its  non-qualified   REIT
      subsidiary,   Capital  Alliance  Funding   Corporation,   which  commenced
      operations  in the  third  quarter  of  1997.  For the nine  months  ended
      September 30, 1997, the Trust received  distributions of $19,964 from this
      investment.

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

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

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

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

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

                                       12
<PAGE>


                                     PART I
                                     ITEM 2.


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






                                       13

<PAGE>
                     MANAGEMENT' DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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

General

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

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

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

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

     Commitments and  Contingencies.  As of September 30, 1997, the Trust's loan
portfolio included total loans of $4,654,228 of which $463,584  representing 10%
of the loans were  delinquent.  There were no delinquent loans which were in the
process of foreclosure at September 30, 1997. In assessing the collectibility of
these  delinquent  mortgage  loans,  management  estimates  a net  gain  will be
realized upon sale of the properties  securing these loans if it is necessary to
foreclose the mortgage loans due to the Trust. Management's estimate is based on


                                       14

<PAGE>

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

Results of Operations

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

      Three months and Nine months ended  September 30, 1997 and 1996.  Revenues
for the third quarter decreased to $188,343 as compared to $190,284 for the same
period in the previous  year.  Revenues for the nine months of 1997 increased to
$596,266 as compared to $574,444  the same period of the  previous  year.  Total
revenues  remained  constant in third quarter due to higher  interest  income in
1996 but offset by  origination  income and other income in third  quarter 1997.
The  increase in revenue in the nine month period in 1997 was  primarily  due to
origination  income  received from borrowers and to dividends  received from the
Trust's  newly-formed  Mortgage  Conduit  Business  compared to none in the same
period in the previous year.

      Expenses for the third quarter 1997 decreased  $54,980 compared to $59,709
for the same  period in  previous  year.  For the nine  month  period,  expenses
increased  to  $208,931  compared  to  $123,117  for the  predecessors  from the
previous  year. The decrease in the third quarter 1997 compared to third quarter
1996 is primarily due to lower general and administrative expenses. The increase
in the nine months of 1997 compared to 1996 is primarily due to loan  servicing,
origination  fees and management fees resulting from the increase in the Trust's
asset  value  from  the  Combination  in  April  30,  1996  and  from  different
compensation  arrangements  with the Manager  prior to the  commencement  of the
Trust's current offering.

Inflation

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

 Liquidity and Capital Resources

      The liquidity of the Trust will be based upon the need to fund investments
in mortgage loans. In previous years, the Trust's mortgage investment operations
have been funded by capital  contributions  and the payoff of prior  loans.  The
major  portion of the  proceeds  from  issuance  of common  stock in the Trust's
current  Offering will be used to fund future  investments  in mortgage loans by
the Trust's Mortgage  Investment  Business.  The Trust's liquidity  requirements
will also be funded by periodical  payoffs of existing loans which are generally
short term in duration,  by the sale of  foreclosed  properties  and  additional
capital from the proceeds of the Trust's current Offering.  Management  believes
that the Trust's  liquidity is sufficient to meet its cash  requirements for the


                                       15

<PAGE>
next twelve months regardless of whether the Minimum  Subscription  Level in the
Trust's  current  Offering  is  achieved.  Restrictions  on cash  attributed  to
holdbacks do not significantly impact the Trust's liquidity.

      Net cash  provided by  operating  activities  during the nine months ended
September  30, 1997 and 1996 was $434,217 and $362,675,  respectively.  Net cash
for all periods was positively affected by improved marketing conditions and the
volume of loan activity in 1997.

      Net cash  provided by (used in) investing  activities  for the nine months
ended September 30, 1997 and 1996 was $212,376 and $(502,084), respectively. The
large  increase in 1997 compared to the prior year is due to the volume of loans
and the proceeds from three real estate properties sold in 1997.

      Net cash (used in) provided by financing activities during the nine months
ended September 30, 1997 and 1996 was $(669,737) and  $(422,136),  respectively.
The  increase in the end of the year 1996 and nine months  ended  September  30,
1997 is primarily due to the offering costs related to the Trust.

      The Trust will use the net  proceeds  of its  current  public  offering to
provide additional funding for the Trust's Mortgage Investment  Business.  As of
September 1, 1997,  CAFC entered  into an agreement  for a $1,000,000  warehouse
line of credit from  Warehouse  Lending  Corporation  of America,  which line of
credit is  documented  and which  will be  guaranteed  by the  Trust.  The Trust
additionally  plans to enter into a warehouse line of credit  agreement with the
CAFC for up to $4,000,000.  Management  believes that cash flow from  operations
and the net proceeds of the public  offering and of loans that are paid off plus
the  establishment  of the  warehouse  lines of credit for the Mortgage  Conduit
Business  will  be  sufficient  to  meet  the  liquidity  needs  of the  Trust's
businesses for the next twelve months.




                                       16

<PAGE>

                                     PART II

                                OTHER INFORMATION


ITEM 1    LEGAL PROCEEDINGS

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

ITEM 2    CHANGES IN SECURITIES

          There have been no changes in the outstanding  securities of the Trust
          at this time. The Trust's  Certificate of  Incorporation  was amended,
          effective July 31, 1997, to increase the Trust's authorized capital to
          5,675,000  shares,  5,000,000  of which are  Common  Shares,  $.01 par
          value, and 675,000 of which are Series "A" Preferred Shares,  $.01 par
          value

ITEM 3    DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

          The  other  matters  voted on at the  meeting  also  included  (1) the
          approval of an amendment of the Trust's  Certificate of Incorporation;
          and (2) the approval of Novogradac & Company LLP as auditors for 1997.
          402,195  shares voted in favor of both  propositions  with no negative
          votes.

ITEM 5    OTHER INFORMATION

          Not applicable.

ITEM 6    REPORTS ON FORM 8-K

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



                                       17

<PAGE>


                                   SIGNATURES


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


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



Dated:   November 3, 1997           By:     /s/ Thomas B. Swartz
                                            --------------------
                                             Thomas B. Swartz,
                                             Chief Executive Officer



Dated:   November 3,1997            By:     /s/ Jeannette Hagey
                                            -------------------
                                             Jeannette Hagey, 
                                             Chief Financial Officer


                                       18