UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB
(Mark One)

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                               For the quarterly period ended September 30, 2006

                                       OR

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                               Commission File Number: 333-11625


       CAPITAL ALLIANCE INCOME TRUST LTD., A REAL ESTATE INVESTMENT TRUST
       -------------------------------------------------------------------
              (Exact name of small business issuer 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
                                 --------------
                           (Issuer's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

      Title of each class           Name of each exchange on which registered
      -------------------           -----------------------------------------
Common Stock $0.01 par value                American Stock Exchange

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 [_]

As of October 30, 2006, the issuer's common shares closed at $10.70 and the
aggregate market value of the issuer's shares of Common Stock, $.01 par value,
held by non-affiliates of the issuer was approximately $2,910,400. At that date
approximately 380,532 common shares were outstanding and 272,000 common shares
were held by non-affiliates.

Transitional Small Business Disclosure Format.                  Yes [_]  No [X]


<PAGE>



                                TABLE OF CONTENTS



PART I

     ITEM 1   CONSOLIDATED FINANCIAL STATEMENTS                           3-5

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 6-10

     ITEM 2   MANAGEMENT'S DISCUSSION AND ANALYSIS                      11-16

     ITEM 3   CONTROLS AND PROCEDURES                                      17

PART II

     OTHER INFORMATION                                                  17-18

     SIGNATURES                                                            19

     CERTIFICATION PURSUANT TO THE SARBANES-OXLEY ACT                      20

     CERTIFICATION OF FORM 10-QSB                                          21












<PAGE>
<TABLE>
<CAPTION>

PART I
ITEM 1.
FINANCIAL STATEMENTS


                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                          Consolidated Balance Sheets
                           September 30, December 31,
                                                                             2006           2005
                                                                         ------------    ------------
ASSETS                                                                    (Unaudited)       (Audited)

<S>                                                                      <C>             <C>
    Cash and cash equivalents                                            $    252,291    $  1,626,247
    Restricted cash                                                           123,037         280,923
    Marketable securities                                                      19,572          19,577
    Accounts receivable                                                       754,647         715,742
    Other assets, net                                                           7,515          91,267
    Due from related party                                                     42,600           2,244
    Notes receivable:
       Mortgage notes receivable                                           17,546,643      26,443,616
       Allowance for loan losses                                             (355,000)       (390,000)
                                                                         ------------    ------------
          Net notes receivable                                             17,191,643      26,053,616
    Real estate owned                                                         300,000       1,978,350
    Investments in related party                                                5,000           5,000
    Origination costs, net                                                    145,753         183,900
                                                                         ------------    ------------

    Total assets                                                         $ 18,842,058    $ 30,956,866
                                                                         ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

    Liabilities
         Mortgage note holdbacks                                         $    123,037    $    280,923
         Bank loans payable                                                 6,228,214      10,474,997
         Warehousing facilities                                                    --       4,842,646
         Warehousing facilities from related party                                 --         950,000
         Mortgage payable                                                          --         962,127
         Due to related party                                                      --         343,326
         Other liabilities                                                     52,713         169,854
                                                                         ------------    ------------
    Total liabilities                                                       6,403,964      18,023,873

    Commitments and contingent liabilities

    Stockholders' equity
       Preferred stock, $.01 par value;1,600,000 shares authorized;             2,138           2,138
           213,820 shares issued and outstanding at September 30, 2006
           and December 31, 2005
       Additional paid in capital - preferred stock                         5,509,728       5,509,728
    Less treasury stock: 12,659 and 4,139 preferred shares at
           September 30, 2006 and December 31, 2005 at cost                  (186,579)       (101,389)

       Common stock, $.01 par value; 2,000,000 shares authorized;               5,001           5,001
           500,032 shares issued and outstanding at September 30, 2006
           and December 31, 2005
       Additional paid in capital - common stock                            9,370,911       9,370,911
    Less treasury stock: 119,500 and 110,000 common shares at
           September 30, 2006 and December 31, 2005 at cost                (1,699,771)     (1,630,734)
       Accumulated other comprehensive income                                 (13,098)        (25,686)
       Accumulated deficit                                                   (550,236)       (196,976)
                                                                         ------------    ------------

    Total stockholders' equity                                             12,438,094      12,932,993
                                                                         ------------    ------------

    Total liabilities and stockholders' equity                           $ 18,842,058    $ 30,956,866
                                                                         ============    ============
</TABLE>


                See accompanying notes to financial statements.

                                       3

<PAGE>
<TABLE>
<CAPTION>

                      CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
                     Consolidated Statements of Operations
                                  (unaudited)


                                                             Three Months Ended            Nine Months Ended
                                                                September 30                 September 30
                                                             2006          2005           2006           2005
                                                        -----------    -----------    -----------    -----------
REVENUES
<S>                                                     <C>            <C>            <C>            <C>
       Interest income                                  $   540,367    $   732,865    $ 1,773,044    $ 2,044,037
       Loan origination income                                   --        192,093        190,474        540,636
       Service release premium                                   --        178,074         85,797        341,718
       Other income                                             655        (22,686)         8,668         48,913
                                                        -----------    -----------    -----------    -----------
           Total revenues                                   541,022      1,080,346      2,057,983      2,975,304

EXPENSES
       Loan servicing fees to related parties                92,220        154,491        333,010        427,930
       Management fees to related parties                    49,204         82,201        181,674        267,508
       Interest expense on loans                            247,672        387,051        814,710        915,380
       Interest expense on loans from related parties            --             --         38,403             --
       Loan origination costs                                 9,895         76,411         80,649        163,112
       Provision for loan losses                             63,657        139,500         96,030        193,500
       Wages and salaries                                        --        157,176        152,643        453,184
       Taxes                                                 18,193          8,403         28,595         30,767
       Amortization                                              --         13,050          5,550         33,466
       General and administrative                            90,605        153,784        418,965        498,676
                                                        -----------    -----------    -----------    -----------
             Total expenses                                 571,446      1,172,067      2,150,229      2,983,523
                                                        -----------    -----------    -----------    -----------

INCOME (LOSS) FROM
    CONTINUING OPERATIONS                                   (30,424)       (91,721)       (92,246)        (8,219)

       Operating expenses of real estate owned                   --          6,000        (72,360)       (17,900)
       Gain (loss) on real estate owned                     100,867             --       (138,983)       (82,084)
       Loss from asset held for disposal                    (49,671)            --        (49,671)            --
                                                        -----------    -----------    -----------    -----------
         Total income (loss) from asset held for
         disposal and real estate owned                      51,196          6,000       (261,014)       (99,984)
                                                        -----------    -----------    -----------    -----------

NET INCOME (LOSS)                                       $    20,772    $   (85,721)   $  (353,260)   $  (108,203)
                                                        ===========    ===========    ===========    ===========

PREFERRED DIVIDENDS                                              --             --             --        159,395
                                                        -----------    -----------    -----------    -----------

NET INCOME  (LOSS) AVAILABLE TO COMMON                  $    20,772    $   (85,721)   $  (353,260)   $  (267,598)
                                                        ===========    ===========    ===========    ===========

BASIC EARNINGS PER COMMON SHARE                         $      0.05    $     (0.21)   $     (0.93)   $     (0.63)
                                                        ===========    ===========    ===========    ===========

DILUTED EARNINGS PER COMMON SHARE                       $      0.05    $     (0.21)   $     (0.93)   $     (0.63)
                                                        ===========    ===========    ===========    ===========

DIVIDENDS PAID PER PREFERRED SHARE                      $        --    $        --    $        --    $      0.76
                                                        ===========    ===========    ===========    ===========

DIVIDENDS PAID PER COMMON SHARE                         $        --    $        --    $        --    $      0.10
                                                        ===========    ===========    ===========    ===========

BASIC COMMON SHARES                                         380,532        403,715        381,760        425,008
                                                        ===========    ===========    ===========    ===========

DILUTED COMMON SHARES                                       380,532        403,715        381,760        420,658
                                                        ===========    ===========    ===========    ===========
</TABLE>

                See accompanying notes to financial statements.

                                       4


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

                                                                             Nine Months Ended
                                                                                September 30
                                                                             2006          2005
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                                  $  (353,260)   $  (108,203)
     Adjustments to reconcile net income (loss) to net cash (used in)
       provided by operating activities:
       Provision for loan losses (net)                                      (35,000)        75,000
       Amortization                                                              --         33,466
       Loss on real estate owned                                                 --         82,084
       (Increase) decrease in accounts receivable                           (38,905)       170,198
       (Increase) in other assets                                            83,752        (49,803)
       Change in due to / due from related party                           (383,682)        (9,673)
       Increase (decrease) in other liabilities                            (117,141)      (145,617)
                                                                        -----------    -----------
         Net cash (used in) provided by operating activities               (844,236)        47,452

CASH FLOWS FROM INVESTING ACTIVITIES
     Sale of (investment in) marketable securities                                5        (31,908)
     (Increase) decrease in origination costs                                38,147         75,551
     (Increase) decrease in warehousing facilities                       (4,842,646)            --
     (Increase) decrease in warehousing facilities to related party        (950,000)     1,415,487
     Decrease in real estate owned                                        1,678,350     (1,270,885)
     Payment of mortgage payable                                           (962,127)       410,205
     (Loss) from asset held for sale                                         12,588        (37,626)
     (Increase) decrease in net mortgage notes receivable                 8,896,973       (965,893)
                                                                        -----------    -----------
       Net cash provided by (used in) investing activities                3,871,290       (405,069)

CASH FLOWS FROM FINANCING ACTIVITIES
     Net proceeds from bank loans                                                --      2,599,483
     Payments of bank loans                                              (4,246,783)            --
     Purchase of treasury stock                                            (154,227)      (535,971)
     Preferred dividends paid                                                    --       (159,395)
     Common dividends paid                                                       --        (43,774)
                                                                        -----------    -----------
       Net cash (used in) provided by financing activities               (4,401,010)     1,860,343
                                                                        -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (1,373,956)     1,502,726

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                          1,626,247        155,462
                                                                        -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $   252,291    $ 1,658,188
                                                                        ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
     Cash paid for interest                                             $   403,570    $         6
                                                                        ===========    ===========
     Cash paid for taxes                                                $     83,43    $    24,886
                                                                        ===========    ===========
</TABLE>


                See accompanying notes to financial statements.

                                       5

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

                   Notes to Consolidated Financial Statements
                                   (Unaudited)

1.   Organization

     References to the "Company" refer to Capital Alliance Income Trust Ltd., A
     Real Estate Investment Trust (the "Trust"), a Delaware corporation, and
     Capital Alliance Funding Corporation ("CAFC"), collectively. The Trust was
     formed December 12, 1995 as an 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. On April 11, 1997 the Trust formed a
     non-qualified REIT subsidiary, CAFC, to conduct a mortgage banking
     business. On April 1, 2006 the company suspended the origination of loans
     by CAFC for the benefit of the Trust.

     Capital Alliance Advisors, Inc. (the "Manager") currently manages the
     Company (management contract) and originates, services, and sells loans for
     the Company (loan origination and servicing contract). Both the management
     contract and the loan origination and servicing contract are scheduled to
     terminate on December 31, 2006. On October 18, 2006 the shareholder's voted
     not to renew the Manager's management contract and a majority of the
     shareholders voted to approve self management.

2.   Summary of significant accounting policies and nature of operations

     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 2005 filed
     pursuant to 15d-2 on Form 10-KSB with the Securities and Exchange
     Commission.

     Basis of presentation. The financial information herein is unaudited;
     however, such information reflects all adjustments (consisting of normal,
     recurring adjustments), which are, in the opinion of management, necessary
     for a fair presentation of results for the interim period. The results of
     operations for the three and nine months ended September 30, 2006, are not
     necessarily indicative of the results to be expected for the full year.
     These financial statements should be read in conjunction with the Company's
     audited financial statements and the notes thereto included in the
     Company's Form 10-KSB filed for the year ending December 31, 2005.

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

     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. However, if the mortgage's collateral is
     considered insufficient to satisfy the outstanding balance, after estimated
     foreclosure and selling costs, interest is not accrued. The Trust's loan
     origination income is deferred and recognized over the life of the loan.
     The Trust's loan origination income is recognized at origination. The
     Trust's service release premium is recognized at the time of the mortgage's
     sale into the secondary market.

                                       6
<PAGE>

                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                   Notes to Consolidated Financial Statements
                                   (Unaudited)


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

     Stock options.   During the nine months ended September 30, 2006 and the
     twelve months ended December 31, 2005 no awards were issued to the Manager
     or its employees. Therefore, there was no disclosure necessary pursuant to
     FASB Statement No. 123 (revised 2004) ("FAS 123(R)"), "Share-Based
     Payment," which is a revision of FASB Statement No. 123 ("FAS 123"),
     "Accounting for Stock-Based Compensation."

     Reclassifications.   Certain 2005 amounts may have been reclassified to
     conform to the 2006 presentation. Such reclassifications had no effect on
     previously reported net income or earnings per share.

     Recent accounting pronouncements.   In March 2005, the FASB issued FASB
     Interpretation No.47, "Accounting for Conditional Asset Retirement
     Obligations" ("FIN 47"). FIN 47 clarifies the term conditional asset
     retirement obligations as used in FASB Statement No. 143, "Accounting for
     Asset Retirement Obligations". The Company's adoption of FIN 47 did not
     have a material impact on the consolidated financial statements.

     In May 2005, the FASB issued FASB No.154, "Accounting Changes and Error
     Corrections" ("FAS154"), which replaces APB Opinion No.20, "Accounting
     Changes" and FASB No.3 "Reporting Accounting Changes in Interim Financials
     Statements". This Standard retained accounting guidance related to changes
     in estimates, changes in reporting entity and error corrections. However,
     changes in accounting principles must be accounted for retrospectively by
     modifying the financial statements of prior periods unless it is
     impracticable to do so. FAS 154 is effective for accounting changes made in
     fiscal years beginning after December 15, 2005. The Company does not
     believe adoption of FAS 154 will have a material impact on its financial
     condition or results of operations.

3.   Mortgage notes receivable
     -------------------------

     Reconciliation of the mortgage notes receivable balances follows:

                                             (Unaudited)
                                          Nine months ended  Twelve months ended
                                         September 30, 2006   December 31, 2005
                                         ------------------   -----------------
     Balance, beginning of period            $ 26,443,616       $   19,053,474
     Additions during period:
         Originations                          21,542,427           65,213,362
         CAFC adjustment                               --            4,674,462
     Deductions during period:
         Collections of principal               (103,127)          (14,207,241)
         Repayments                          (10,815,670)           (3,302,412)
         Sales                               (19,220,603)          (44,253,688)
         Foreclosures, net of reserve           (300,000)             (734,341)
                                             -----------          ------------
     Balance, end of period                  $ 17,546,643         $ 26,443,616
                                             ============         ============

     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.


4.   Allowance for loan losses
     -------------------------

     The allowance for loan losses is based on the fair value of the related
     collateral, since all loans subject to this measurement are collateral
     dependent. Management believes a $355,000 and $390,000 allowance for loan
     losses are adequate to protect against potential losses inherent in all
     receivables as of September 30, 2006 and December 31, 2005, respectively.
     Actual losses may differ from the estimate.


                                       7
<PAGE>

                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                   Notes to Consolidated Financial Statements
                                   (Unaudited)


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

     A reconciliation of the allowance for loan losses follows:

                                           (Unaudited)
                                        Nine months ended  Twelve months ended
                                       September 30, 2006   December 31, 2005
                                       ------------------   -----------------
     Balance, beginning of period             $  390,000           $  175,000
     CAFC adjustment                                 ---               40,000
     Provision for loan loss                      96,030              469,483
     Write off of uncollectible loans            (5,000)            (294,483)
     Writedown of sellable loans
                                               (126,030)               ---
                                              ---------               ---
     Balance, end of period                   $  355,000           $  390,000
                                              ==========           ==========

5.   Real estate owned
     -----------------

     As of December 31, 2005, the Company owned one property. During the nine
     months ended September 30, 2006, the Company foreclosed on one property and
     sold one property. As of September 30, 2006, the Trust had one property.

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

                                                                     (Unaudited)
                                                                  Nine months ended  Twelve months ended
                                                                 September 30, 2006   December 31, 2005
                                                                 ------------------   -----------------
<S>                                                                   <C>                   <C>
     Balance, beginning of period                                     $ 1,978,350           $  680,000
     Additions                                                            300,000                   --
     Foreclosed mortgage notes, net of reserve (non-cash)                      --              988,758
     Assumption of senior debt                                                 --              962,127
     Repayment of senior debt                                            (952,611)            (551,992)
     Accrued interest capitalized (non-cash)                              (18,375)                  --
     Gain (loss) on sale or writedown (non-cash)                         (101,172)             (54,669)
                                                                       ----------          -----------
                                                                        1,206,192            2,024,294
     Less: Proceeds from sale of real estate owned
     (net of closing costs )                                             (906,192)             (45,944)
                                                                       ----------         ------------
     Balance, end of period                                            $  300,000         $  1,978,350
                                                                       ==========         ============
</TABLE>


6.   Related party transactions
     --------------------------

     The Manager, which is owned by Mr. Thomas Swartz (the Trust's Chairman and
     Chief Executive Officer) and Mr. Dennis Konczal (the Trust's President),
     contracts 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 Trust for direct expenses and
     administrative services at cost and for clerical and administrative
     services based on relative utilization of facilities and personnel. The
     Manager is also reimbursed by the Trust for direct expenses and
     administrative services.

     Since the April 1, 2006 suspension of loan originations by CAFC for the
     Company, the Manager has originated portfolio loans for the Company, in the
     name of Capital Alliance Income Trust. The Manager, however, has continued
     to originate sellable loans through CAFC, for the Manager's own benefit
     using the operating facilities, licenses, and selling agreements of CAFC.
     The Manager has reimbursed CAFC for the interest expense of utilizing
     CAFC's warehouse facility.. From April 1, 2006 through September 30, 2006,
     the Manager originated $5,582,905 in sellable loans and sold $5,582,905in
     sellable loans through CAFC. The Manager obtained its own credit facility
     in July 2006, satisfied its obligation on CAFC's warehouse facility and
     CAFC's warehouse facility was terminated. The Manager has indemnified CAIT
     and CAFC from all contingent liabilities that may arise from the Manager's
     mortgage banking operations conducted through CAFC.

                                       8
<PAGE>

                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                   Notes to Consolidated Financial Statements
                                   (Unaudited)




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

     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 Company. The
     Trust paid the Manager $51,009 and $82,201 and $183,479 and $267,508 in
     management fees for the three and nine month period ended September 30,
     2006 and 2005, 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 $1,500 and $500 and $4,500 and $3,000 in REO
     management fees for the three and nine month period ended September 30,
     2006 and 2005, respectively. Within the financial statements, REO
     management fees are included in the Management fees to related parties.

     The Manager earns an administrative fee up to 25 basis points on mortgages
     funded for the benefit of the Trust. The Trust expensed $0 and $26,806 and
     $28,220 and $86,155 for the three and nine month period ended September 30,
     2006 and 2005, respectively. Within the financial statements,
     administrative fees are included in the Management fees to related parties.

     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, 2006 and 2005 was $0 and $0 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 2005, the Trust capitalized 32.5%
     of this fee as loan origination costs and amortized them over the average
     life of the portfolio. The remaining 67.5% of the fee is expensed as the
     portion attributed for servicing. As of September 30, 2006, 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, 2006 and 2005, the Trust expensed loan
     origination and servicing fees of $92,220 and $154,491 and $333,010 and
     $427,930, respectively.

     On occasion, the Company and its affiliates had related receivables and
     payables arising from ordinary business transactions. As of September 30,
     2006, the Company had a receivable of $42,600 from the Manager. As of
     December 31, 2005, the company had a payable of $6,859 to the Manager and
     $336,465 to Calliance Realty Fund. No interest is charged on these
     inter-company accounts.


7.   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.


                                       9
<PAGE>

                          CAPITAL ALLIANCE INCOME TRUST
                         A REAL ESTATE INVESTMENT TRUST

                   Notes to Consolidated Financial Statements
                                   (Unaudited)



     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 liquidating distributions until the aggregate adjusted net
     capital contributions of all Common Shares have been reduced to zero. Any
     subsequent liquidating distributions will be allocated among Common and
     Preferred Shareholders pro rata.

     The Preferred Shares are redeemable by a shareholder, subject to the
     consent of the Board of Directors, annually on June 30 ("Redemption Date")
     for written redemption requests received by May 15 of such year. Preferred
     Shares requesting redemption shall cease to be entitled to distribution,
     voting rights and other benefits as of May 30 prior to the Redemption Date.
     However, if the Board of Directors postpones or delays action on Preferred
     Shares redemption request beyond June 30, the date for the suspension of
     such shareholders rights and benefits shall be delayed proportionately. 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 declared and accrued dividends, divided by the
     aggregate net capital contributions plus declared and 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 Shares or the
     exercise of warrants and/or options that would result in a violation of the
     Trust's shareholding requirements. 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.

8.   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
     three and nine months ended June 30, 2006 and 2005:
<TABLE>
<CAPTION>

                                                      Three months ended        Nine months ended
                                                         September 30             September 30
                                                       2006        2005        2006          2005
                                                    ---------   ---------    ---------    ---------
<S>                                                 <C>         <C>          <C>          <C>
     Numerator:
     Net income (loss)                              $  20,772   $ (85,721)   $(353,260)   $(108,203)

     Preferred dividends                                   --          --           --     (159,395)
                                                    ---------   ---------    ---------    ---------
     Numerator for basic and diluted earnings per
     share income (loss) available to common        $  20,772   $ (85,721)   $(353,260)   $(267,598)
                                                    =========   =========    =========    =========
     Denominator:
         Basic weighted average shares                380,532     403,715      381,760      420,658

         Dilutive effect of options                        --          --           --           --
                                                    ---------   ---------    ---------    ---------
         Diluted weighted average shares              380,532     403,715      381,760      420,658
                                                    =========   =========    =========    =========
     Basic earnings per common share                $    0.05   $   (0.21)   $   (0.93)   $   (0.63)
                                                    =========   =========    =========    =========
     Diluted earnings per common share              $    0.05   $   (0.21)   $   (0.93)   $   (0.63)
                                                    =========   =========    =========    =========
</TABLE>


                                       10

<PAGE>




                                     PART I
                                     ITEM 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                                PLAN OF OPERATION

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.

Preparation of the Company's consolidated financial statements is based upon the
operating results of the Trust and CAFC. Management's discussion and analysis of
the results of operations for the nine months ended September 30, 2006 and 2005
follows:

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 have been listed on the American Stock Exchange with the
exchange symbol of "CAA".

Prior to year end 2004, Management identified CAFC as an asset held for sale
within the meaning of Financial Accounting Standard No.144 ("FAS 144"). On
November 11, 2004, CAFC's common shareholder notified the Trust of its intention
to retire 100% of CAFC's preferred stock. Subsequently, the offer to purchase
CAFC's preferred shares was withdrawn and CAFC's common shares were acquired by
the Trust on December 30, 2005. During the first quarter of 2006, the Trust
announced its intent to suspend mortgage loan originations by CAFC, to monetize
CAFC's loan inventory, and to eliminate all employee expenses. Any loans not
sold will into the secondary mortgage market will be transferred to the Trust.

Management believes that discontinuing CAFC's operations will provide numerous
benefits. These benefits include: restoring the Trust to its original intent as
an investor in non-conforming mortgages; reducing a source of volatility in the
Trust's reported net income; reducing the cost of annual audits and quarterly
reviews; reducing the costs of Sarbanes Oxley compliance; reducing the number of
related party transactions; simplifying the process of cost allocation; and
accelerating the compilation and reporting of operating results. The costs of
disposing of the Trust's investment in CAFC include: the loss of CAFC's
potential profitability; less control over the mortgage investment supply chain;
and the Trust's access to any CAFC's funding agreement.

The 2006 revenues and expenses for the nine months ended September 30, 2006 were
significantly reduced by the March 30, 2006 suspension of CAFC's operations.
Revenues from loan originations and the service release premiums from loan sales
declined $350,162 and $255,921, respectively from 2005's same nine month period.
Expenses for wages and salaries were eliminated, providing a $300,541 cost
reduction, and loan origination costs declined $82,463 from 2005's same nine
month period. The Company believes that these line item changes are indicative
of future operating results without the resumption of CAFC's activities.

As of September 30, 2006 CAFC's four remaining loans had an outstanding
principal balance of $1,196,654 and a net carrying value of $1,136,654. The
Manager, however, has continued to originate sellable loans through CAFC, for
the Manager's own benefit, using the former operating facilities, licenses, and
selling agreements of CAFC. The Manager has reimbursed CAFC for the interest
expenses of utilizing CAFC's warehouse facility. The Manager has reimbursed CAFC
for the interest expense of utilizing CAFC's warehouse facility.

From April 1, 2006 through September 30, 2006, the Manager originated $5,582,905
in sellable loans and sold $5,582,905 in sellable loans through CAFC. The
Manager obtained its own credit facility in July 2006, satisfied its obligation
on CAFC's warehouse facility and CAFC's warehouse facility was terminated. The
Manager has indemnified the Company from any contingent liabilities that may
arise from the Manager's mortgage banking operations conducted through CAFC.



                                       11
<PAGE>
The recent interest rate environment of a negative yield curve, has reduced the
profitability of CAIT. The rise in short term rates has increased the cost of
carrying a mortgage portfolio. Also, the non-conforming residential mortgage
market has continued to attract better financed competitors willing to offer
higher LTV (loan-to-value) loans or more competitive pricing. These developments
have exerted downward pressure on CAIT's investment yield and investment spread.
Management is addressing this deterioration in yield and spread by emphasizing
our ability to promptly fund transactions in order to deflect price competition,
by continuing to seek more competitive portfolio financing and exploring
alternative investment opportunities available to real estate investment trusts.

Shareholders as of September 12, 2006 voted to advise the Board of Directors on
the Company's future organizational structure. The shareholder vote addressed:
(a) Self-management; (b) Liquidation; and (c) Affirmation of the existing
Manager's agreement. On October 18, 2006, at the Company's Annual Shareholders
meeting, the Trust's shareholder overwhelmingly voted to approve Self-management
and to reject both Liquidation and the Affirmation of the existing Manager's
agreement. The Trust's agreements with the Manager expire on December 31, 2006.
CAIT's Board of Directors is evaluating the timing and transitional issues to
convert the Company to Self-management.

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 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 financial statements and are not presented in
their relative order of importance.

Revenue recognition. Interest income accrues as it is earned. Loans may be
placed on a nonaccrual 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. Nonaccrual 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 loan 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 loan loss experience, trends
in loan delinquency and other factors that warrant recognition in providing for
an adequate loan loss allowance.

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 Officers and 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 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.


                                       12
<PAGE>
Assets held for disposal. CAFC's operations were discontinued in the first
quarter of 2006. CAFC's mortgage notes receivable are identified as assets held
for disposal. Disposal of CAFC's non-portfolio mortgage notes receivable is
expected during the fourth quarter of 2006. CAFC's loan sales are expected to
occur at or near their net carrying cost. Unsold mortgage notes receivable, may
be transferred to the Trust.

Operating Strategy.   As a portfolio lender the company will primarily invest in
California 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. Portfolio loan underwriting guidelines limit the
maximum potential loan-to-value ("LTV") to 75%. The 75% restriction includes the
effect of any potential negative amortization.

Loan Origination and Loan Servicing.   Since the suspension of loan originations
by CAFC for the Company, the Manager will originate portfolio loans for the
Company, in the name of Capital Alliance Income Trust. The Manager, however, has
continued to originate sellable loans through CAFC, for the Manager's own
benefit, using the operating facilities, licenses, and selling agreements of
CAFC. The Manager has reimbursed CAFC for the interest expenses of utilizing
CAFC's warehouse facility. The Manager has indemnified the Company from any
liabilities that may arise from its mortgage banking operations conducted
through CAFC. The Manager obtained its own credit facility in July 2006 and
satisfied its obligation on CAFC's warehouse facility.

Mortgage loan servicing consists of collecting payments from borrowers, making
required advances, accounting for principal and interest payments, holding
borrowed proceeds in escrow until fulfillment of mortgage loan requirements,
contacting delinquent borrowers, supervising foreclosures and property
dispositions in the event of unremedied defaults and performing other
administrative duties. The Company does not acquire or maintain a loan's
servicing rights, unless the mortgage loan is owned by the Company. All or a
portion of the aforementioned servicing responsibilities may be subcontracted by
the Manager.

Commitments and Contingencies.   As of September 30, 2006, the Company's loan
portfolio included 42 loans totaling $17,546,643 of which 7 loans totaling
$2,830,541 representing 16% of the loan portfolio were delinquent over two
payments. In assessing the entire loan portfolio, including these delinquent
mortgage loans, management has established a loan loss reserve of $355,000.

As of September 30, 2005, the Company's loan portfolio included 72 loans
totaling $24,687,071 of which 12 loans totaling $4,617,994 representing 18% of
the loan portfolio were delinquent over two payments. In assessing the entire
loan portfolio, including these delinquent mortgage loans, management has
established a loan loss reserve of $290,500.

In assessing the delinquent mortgage loans, management estimates a net gain may
be recognized, if it is necessary to foreclose on the delinquent mortgage loans.
Estimates are based on an anticipated sales price of the foreclosed property
that includes a discount from the latest appraised value of the property, less
the sum of pre-existing liens, costs of disposition, 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, 2006
(exclusive of any loan commitments of the Manager made by CAFC for the benefit
of the Manager) and September 30, 2005.

On December 14, 2005 the Trust unconditionally guaranteed CAFC's sale of
mortgage loans to Lehman Brothers Bank. During the third quarter of 2006, no
loans were sold under the guarantee. During the nine months ended September 30,
2006, two loans with a combined note amount balance of $1,204,000 were sold to
Lehman Bothers Bank pursuant to this guarantee. During 2005, no loans were sold
to Lehman Brothers Bank pursuant to this guarantee.

                                       13
<PAGE>



As of September 30, 2006, the following table summarizes the Company's
outstanding repayment obligations:
<TABLE>
<CAPTION>

                                                         Amount of Commitment Expiration Per Period
       Maximum Other                           ---------------------------------------------------------------------
Commercial Commitments (a)    Total Amounts       Less than       1 - 3 years          4 - 5           After 5
 as of September 30, 2006       Committed          1 year                              years            years
--------------------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>          <C>                   <C>              <C>
Lines of Credit (b)              $6,228,214           0            $6,228,214            0                0
--------------------------------------------------------------------------------------------------------------------
Standby Repurchase                  (c)               0                0                 0                0
Obligations
--------------------------------------------------------------------------------------------------------------------
Total Commercial Commitments     $6,228,214           0            $6,228,214            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)  The Mortgage Investment Business outstanding obligations as of September
     30, 2006 due in 1-3 years were $6,228,214

(c)  The 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.

RESULTS OF OPERATIONS

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

Three and nine months ended September 30, 2006 and 2005. Revenues for the third
quarter decreased to $541,022 as compared to $1,080,346 for the same period in
the prior year. The decrease in revenue during the third quarter of 2006 was due
to decreases in service release premium of $178,074, loan origination income of
$192,093 and interest income of $192,498.

Expenses for the third quarter decreased to $571,446 as compared to $1,172,067
for the same period in the prior year. The decrease in expenses during the third
quarter of 2006 was primarily due to decreases in wages and salaries of
$157,176, interest expenses of $139,379, the provision for loan losses of
$75,843, general and administrative expenses of $63,179 and loan origination
costs of $66,516.

Revenues for the nine months ended September 30 2006 decreased to $2,057,983 as
compared to $2,975,304 for the same period in the prior year. The decrease in
revenue during the first nine months of 2006 was due to decreases in loan
origination income of $350,162, service release premium of $255,921 and interest
income of $270,993.

Expenses for the nine months ended September 30, 2006 decreased to $2,150,229 as
compared to $2,983,523 for the same period in the prior year. The decrease in
expenses during the first nine months of 2006 was primarily due to decreases in
wages and salaries of 300,541, interest expenses of $100,670, and the provision
for loan losses of $97,470, loan servicing fees to related parties of $94,920,
management fees to related parties of $85,834, general and administrative
expenses of $79,711 and loan origination costs of $82,463.


LIQUIDITY AND CAPITAL RESOURCES

The Company has access to CAFC's $25,000,000 funding facility. The funding
facility matures on June 30, 2007. The Trust has a $7,000,000 term facility
scheduled to mature November 14, 2007. The term facility has a one year
extension option. Management believes that the cash flow from operations, the
payment of mortgage notes receivable, existing financing facilities, additional
lines of credit or increased lines of credit anticipated to be acquired during
2006, and if necessary, the limited sale of investment mortgages will be
sufficient to meet the liquidity needs of the Company for the next twelve
months.

                                       14
<PAGE>
Nine months ended September 30, 2006 and 2005.   As of January 1, 2006 and 2005,
the Trust had $1,626,247 and $155,462 of cash and cash equivalents,
respectively. During the nine month period ended September 30, 2006, cash and
cash equivalents decreased by $1,373,956. During the nine month period ended
September 30, 2005, cash and cash equivalents increased by $1,502,726,
respectively. After taking into effect the various transactions discussed below,
cash and cash equivalents at September 30, 2006 and 2005 were $252,291 and
$1,658,188.

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 used in and provided by operating activities during the nine months
ended September 30, 2006 and 2005 was $844,236 and $47,452, respectively. During
the first nine months of 2006, net income used $353,260, a decrease in other
liabilities used $117,141, and related party transactions used $383,682. During
the first nine months of 2005, net income used $108,203, a decrease in accounts
receivable provided $170,198, and a decrease in other liabilities used $145,617.

Net cash provided by and used in investing activities for the nine months ended
September 30, 2006 and 2005 was $3,871,290 and $405,069, respectively. During
the first nine months of 2006, a net decrease in mortgage notes receivable
provided $8,896,973 and a decrease in real estate owned provided$1,678,350.
During the first nine months of 2005, a net increase in mortgage notes
receivable used $965,893, an increase in real estate owned used $1,270,885 and a
decrease in warehousing provided to related parties provided $1,415,487.

Net cash used in and provided by financing activities during the nine months
ended September 30, 2006 and 2005 was $4,401,010 and $1,860,343, respectively.
During the first nine months of 2006, net payments of bank loans used cash of
$4,246,783 while treasury stock purchases reduced cash by $154,227. During the
first nine months of 2005, borrowings provided cash of $2,599,483 while
dividends reduced cash by $203,169 and treasury stock purchases reduced cash by
$535,971.

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 Company 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 Company. Changes in the general level of the U.S. Treasury yield curve can
have significant effects on the market value of the Company's portfolio. The
majority of the Company's assets are fixed-rate loans with a spread to U.S.
Treasuries. The Trust's loans are valued on the September 30, 2006 and December
31, 2005 balance sheet at 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 Company's assets are decreased, the market
value of the Company's portfolio may increase. Conversely, as U.S. Treasury
securities are priced to a higher yield and/or the spread to U.S. Treasuries
used to price the Company's assets is increased, the market value of the
Company'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 United States Prime Rate or one month LIBOR can affect the Trust's net
interest income. The Company's borrowings are floating rate based on a spread
over the daily Prime Rate or one month LIBOR. As these rates increases or
decreases, the Company's interest expense will move in the same direction.

On account of the relatively short adjusted weighted average maturity of the
Company's portfolio loans (26 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. As the level of variable rate mortgage financing
of the portfolio increases or the weighted average maturity of the portfolio
increases, the Trust may utilize a variety of financial instruments to limit the
effects of interest rate fluctuations.



                                       15
<PAGE>
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
Company.

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

The Company 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
Company assumes that a certain portion of its loans will default and adjusts the
allowance for loan losses based on that assumption.

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 (27 months).

The decreasing percentage of the Company's assets pay a fixed coupon and the
income from such assets are relatively unaffected by interest rate changes. An
increasing percentage of the Company's assets pay a variable interest rate and
the income from such assets tends to increase with higher interest rates and
decrease with lower interest rates.

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

CAFC's remaining assets are a fluctuating mix of fixed and variable rate
mortgages. At origination, the disposition of these loans is identified and
their secondary market sales pricing is usually predetermined. Given this
relationship, CAFC's interest rate sensitivity is neutral if the anticipated
secondary market purchase occurs.













                           [Intentionally Left Blank]

                                       16
<PAGE>
                                     PART I
                                     ITEM 3.

                             CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls and Procedures. The Chief Executive
Officer and the Chief Financial Officer of the Trust have, based on their
evaluation of the Company's disclosure controls and procedures within 90 days of
the filing date of this report, evaluated the effectiveness of such controls and
procedures. Based on such evaluations, the Chief Executive Officer and the Chief
Financial Officer concluded that the Trust's disclosure controls and procedures
have operated to ensure that all material information relating to the Company
and its operations and financial condition have been made known to the Chief
Ececutive Officer and the Chief Financial Officer by other officers, and the
Company's Manager and employees on a timely basis. The Board of Directors and
the Audit Committee have been notified of these developments by the Chief
Financial Officer.

(B) Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation. Accordingly,
corrective actions with regard to such controls or procedures are not required.

                                     PART II
                                OTHER INFORMATION

ITEM 1   LEGAL PROCEEDINGS

CAFC was named as defendant in a case filed in the Superior Court, Alameda
County, State of California on December 7, 2004. Plaintiff alleged that CAFC
made a fraudulent loan to him by cross collateralizing two separate properties.
The cross collateralization was necessary to grant the borrower the desired
loan, since there was insufficient equity in the primary property used as
collateral for the loan. Two complaints have been filed and dismissed by the
court. The Plaintiff has represented himself. After CAFC was allowed by the
court to foreclose on the primary collateral and the borrowing was paid in full,
Plaintiff, upon the Court's insistence, obtained counsel and has filed an
amended complaint, which is pending.

ITEM 2   CHANGES IN SECURITIES

No shares were purchased for treasury stock during the three month period ended
September 30, 2006.

ITEM 3   DEFAULTS UPON SENIOR SECURITIES

       None.

ITEM 4   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

During the quarter the Company's proxy was filed with the Securities and
Exchange Commission. Shareholders as of September 12, 2006 were eligible to vote
at the October 18, 2006 Annual Shareholder's Meeting. Approximately 56% of the
eligible shareholder votes participated in the ballot with the following
results:

<TABLE>
<CAPTION>
       Proposal #1:                                      For / (%)   Withhold / (%)
       ------------                                      ---------   --------------
<S>                                                      <C>          <C>
         Election of Directors             Swartz        133,722      193,056
                                                         (40.9%)      (59.1%)
                                                         -------      -------

                                           Blomberg      133,862      192,916
                                                         (41.0%)      (59.0%)
                                                         -------      -------

       Proposal #2:                                      For / (%)    Against / (%)     Abstain / (%)
       ------------                                      ---------    -------------     -------------
          Liquidate and Dissolve Corporation             91,068       215,421           2,673
                                                         (33.3%)      (65.9%)           (0.8%)
                                                         -------      ------            ------
       Proposal #3:
          Restructure for "Self Advised Management"      294,076       30,128           2,574
                                                         (90.0%)       (9.2%)           (0.8%)
                                                         -------       ------           ------
       Proposal #4:
       ------------
         Renew "External Management" Contract            96,836       222,698           7,244
                                                         (29.6%)      (68.1%)           (2.2%)
                                                         -------      -------          -------
       Proposal #5:
       ------------
         Election of Auditors                            289,709      1,664             35,405
                                                         (88.7%)      (0.5%)            (10.8%)
                                                         -------      -------          -------
</TABLE>


                                       17
<PAGE>


ITEM 5   OTHER INFORMATION

       None.

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(5)
     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(4)
     23.6 Consent of Novogradac & Company LLP(4)
     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(6)

     (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.

     (4)  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.

     (5)  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.

     (6)  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.

     (b)  Reports on Form 8-K.

          Form 8-K was filed on:

          o    July 14, 2006 due to the notice of non-compliance from the
               American Stock Exchange regarding the number of independent
               directors on CAIT's Board.
          o    August 2, 2006 due to the announcement regarding stock
               volatility.
          o    August 22, 2006 due to the announcement of earnings for the
               second quarter of 2006.
          o    August 25, 2006 due to the notice of non-compliance with the
               American Stock Exchange listing requirement.
          o    September 21, 2006 due to the announcement of an independent
               director's appointment to the Board of Directors.



                                       18

<PAGE>




                                   SIGNATURES


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


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


Dated:  November 14, 2006

                                 /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












                                       19


<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, 2006 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Thomas B. Swartz, Chief Executive Officer of the Company, and I, Richard J.
Wrensen, Chief Financial 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 14, 2006

                                 /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




                                       20

<PAGE>



                                  CERTIFICATION
               OF FORM 10Q OF CAPITAL ALLIANCE INCOME TRUST LTD.,
                     A REAL ESTATE INVESTMENT TRUST FOR THE
                        PERIOD ENDING SEPTEMBER 30, 2006

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 10-QSB, dated November 14, 2006 for 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.

Date: November 14, 2006
                                            /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




                                       21