As filed with the Securities and Exchange Commission on October 23, 1998

    

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

   
                                   FORM 10-Q/A
    

(Mark One)
[ X ]    QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

   
For the quarterly period ended June 30, 1998
    

                                       OR

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

For the transition period from ____________ to _____________

Commission File Number:             1-8063


                                  CAPITAL TRUST
             (Exact name of registrant as specified in its charter)

California                                              94-6181186
-------------------------------------       -----------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

605 Third Avenue, 26th Floor, New York, NY                                 10016
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)


                                 (212) 655-0220
              (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  / /


<PAGE>


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class                                             Outstanding at August 13, 1998
-------------------------------------------       ------------------------------
Class A Common Shares of Beneficial Interest,                 18,213,816
$1.00 par value ("Class A Common Shares")


<PAGE>


                                  CAPITAL TRUST
                                      INDEX
<TABLE>
<CAPTION>

   
<S>                                                                                                      <C> 
Part I.       Financial Information

              Item 1:      Financial Statements                                                          1

                      Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997
                           (audited)                                                                     1

                      Consolidated Statements of Operations - Three and Six Months Ended
                           June 30, 1998 and 1997 (unaudited)                                            2

                      Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended
                           June 30, 1998 and 1997 (unaudited)                                            3

                      Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997
                           (unaudited)                                                                   4

                      Notes to Consolidated Financial Statements (unaudited)                             5


              Item 2:      Management's Discussion and Analysis of Financial Condition and Results of
                           Operations                                                                   13

              Signatures                                                                                19
    

</TABLE>



<PAGE>


                         Capital Trust and Subsidiaries
                           Consolidated Balance Sheets
                       June 30, 1998 and December 31, 1997
                                 (in thousands)
   
<TABLE>
<CAPTION>

                                                                                   June 30,               December 31,
                                                                                     1998                     1997
                                                                              --------------------     --------------------
                                                                                  (unaudited)               (audited)
<S>                                                                           <C>                       <C>
                                        Assets

Cash and cash equivalents                                                       $        9,804           $       49,268
Other available-for-sale securities, at market value                                     7,367                   11,975
Commercial mortgage-backed securities, available-for-sale and recorded 
   at market value at June 30, 1998, held to maturity and recorded at 
   amortized cost at December 31, 1998                                                  60,321                   49,490
Loans receivable, net of $1,702 (unaudited) and $462 reserve for 
   possible credit losses at June 30, 1998 and December 31, 1997, 
   respectively
                                                                                       545,530                  202,322
Excess of purchase price over net tangible assets acquired, net                            319                      331
Deposits and other receivables                                                           2,438                      284
Accrued interest receivable                                                              5,520                      818
Prepaid and other assets                                                                 5,962                    2,878
                                                                              --------------------     --------------------
     Total assets                                                               $      637,261           $      317,366
                                                                              ====================     ====================
    
                         Liabilities and Shareholders' Equity

Liabilities:
   Accounts payable and accrued expenses                                        $        8,758           $        5,718
   Notes payable                                                                        14,611                    4,953
   Credit Facilities                                                                   353,894                   79,864
   Repurchase obligations                                                              105,954                   82,173
   Deferred origination fees and other revenue                                           4,989                    1,369
                                                                              --------------------     --------------------
Total liabilities                                                                      488,206                  174,077
                                                                              --------------------     --------------------

Commitments and contingencies

   
Shareholders' equity:
   Class A Convertible Preferred Shares, $1.00 par value, $0.26 
     cumulative annual dividend, 12,639 shares authorized, 12,268 shares 
     issued and outstanding (liquidation preference of $33,000)                         12,268                   12,268
   Class A Common Shares, $1.00 par value; unlimited shares 
     authorized, 18,157 shares issued and outstanding                                   18,157                   18,157
   Restricted Class A Common Shares, $1.00 par value, 72 shares issued 
     and outstanding at June 30, 1998                                                       72                     -
   Additional paid-in capital                                                          158,790                  158,137
   Unearned compensation                                                                  (646)                    -
   Accumulated other comprehensive income                                                  (55)                     387
   Accumulated deficit                                                                 (39,531)                 (45,660)
                                                                              --------------------     --------------------
Total shareholders' equity                                                             149,055                  143,289
                                                                              --------------------     --------------------
    

Total liabilities and shareholders' equity                                      $      637,261           $      317,366
                                                                              ====================     ====================
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

<PAGE>



                         Capital Trust and Subsidiaries
                      Consolidated Statements of Operations
                Three and Six Months Ended June 30, 1998 and 1997
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                             Three Months Ended                         Six Months Ended
                                                                  June 30,                                  June 30,
                                                    --------------------------------------    --------------------------------------
                                                         1998                  1997                 1998                 1997
                                                    ----------------     -----------------    -----------------    -----------------
<S>                                                 <C>                  <C>                  <C>                  <C>            
Income from loans and other investments:
   Interest and related income                        $      14,066        $          40       $       22,043       $           76
   Less: interest and related expenses                        6,516                 -                   9,597                 -
                                                    ----------------     -----------------    -----------------    -----------------
     Net income from loans and other investments              7,550                   40               12,446                   76
                                                    ----------------     -----------------    -----------------    -----------------

Other revenues:
   Advisory and investment banking fees                       5,790                 -                   8,650                 -
   Rental income                                                -                     15                 -                     305
   Other interest income                                        310                  316                  680                  603
   Loss on sale of rental properties                            -                   -                    -                    (432)
                                                    ----------------     -----------------    -----------------    ----------------
     Total other revenues                                     6,100                  331                9,330                  476
                                                    ----------------     -----------------    -----------------    ----------------

 Other expenses:
   General and administrative                                 4,020                  710                7,261                1,142
   Other interest expense                                       105                   24                  211                  123
   Rental property expenses                                     -                    (14)                -                     123
   Depreciation and amortization                                 62                    3                  108                   24
   Provision for possible credit losses                         760                 -                   1,240                 -
                                                    ----------------     -----------------    -----------------    ----------------
     Total other expenses                                     4,947                  723                8,820                1,412
                                                    ----------------     -----------------    -----------------    ----------------

   
   Net income (loss) before income taxes                      8,703                 (352)              12,956                 (860)
Provision for income taxes                                    3,679                -                    5,259                -
                                                    ----------------     -----------------    -----------------    ----------------

   Net income (loss)                                 $       5,024        $         (352)      $        7,697       $         (860)
Less:  Class A Preferred Share dividend and
dividend requirement                                           784                 -                    1,568                -
                                                    ----------------     -----------------    -----------------    ----------------
   Net income (loss) allocable to Class A
      Common Shares                                  $       4,240        $         (352)      $        6,129       $         (860)
                                                    ================     =================    =================    ================
    

Per share information:
   Net income (loss) per Class A Common Share:
     Basic                                           $        0.23        $       (0.04)       $        0.34        $       (0.09)
                                                    ================     =================    =================    ================
     Diluted                                         $        0.16        $       (0.04)       $        0.25        $       (0.09)
                                                    ================     =================    =================    ================
   Weighted average Class A Common Shares
   outstanding:
     Basic                                              18,229,650            9,157,150           18,218,835            9,157,150
                                                    ================     =================    =================    ================
     Diluted                                            30,770,567            9,157,150           30,744,162            9,157,150
                                                    ================     =================    =================    ================
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

<PAGE>


                         Capital Trust and Subsidiaries
           Consolidated Statements of Changes in Shareholders' Equity
                 For the Six Months Ended June 30, 1998 and 1997
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>

   
                                                                              Restricted             
                                                      Class A     Class A      Class A     Additional
                                 Comprehensive       Preferred     Common       Common      Paid-In  
                                 Income (Loss)        Shares       Shares       Shares      Capital  
                               ------------------   -------------------------------------------------

<S>                            <C>                  <C>          <C>           <C>        <C>         
Six months ended
  June 30, 1997
---------------------
Balance at December 31, 1996       $      -          $       -    $ 9,157      $     -    $  55,098   
Net loss                                (860)                -         -             -           -         
Change in unrealized gain          
  (loss) on available-for-sale
  securities                             157                 -         -             -           -         
Other                                      -                 -         -             -           27    
                                   --------------------------------------------------------------------
Balance at June 30, 1997           $     (703)        $      -    $ 9,157      $     -    $  55,125   
                                   =====================================================================

Six months ended
  June 30, 1998
---------------------
    
Balance at December 31, 1997       $        -         $  12,268    $18,157      $    -    $ 158,137    
Net income                                7,697              -          -            -           -     
Change in unrealized gain 
  (loss) on available-for-sale
  securities                               (442)             -          -            -           -       
Issuance of restricted 
  Class A Common Shares                      -               -          -             72        653  
Restricted Class A Common 
  Shares earned                              -               -          -            -            -     
Class A Preferred Share
  Dividend                                   -               -          -            -            -     
                                 -------------------------------------------------------------------------
Balance at June 30, 1998         $        7,255       $  12,268    $18,157      $     72   $ 158,790   
                                 =======================================================================
</TABLE>



<TABLE>
<CAPTION>

                                                  Accumulated
                                                     Other
                                   Unearned      Comprehensive     Accumulated
                                 Compensation        Income          Deficit        Total
                               ---------------------------------------------------------------

<S>                              <C>             <C>              <C>           <C>         
Six months ended
  June 30, 1997
---------------------
Balance at December 31, 1996     $      -        $        (22)    $ (39,762)    $    24,471
Net loss                                -                  -           (860)           (860)
Change in unrealized gain
  (loss) on available-for-sale          -                 157            -              157
  securities
Other                                   -                  -             -              27
                                 ---------------------------------------------------------------
Balance at June 30, 1997         $      -        $        135     $ (40,622)    $   23,795
                                 ===============================================================

Six months ended
  June 30, 1998
---------------------
Balance at December 31, 1997     $      -        $        387     $ (45,660)    $  143,289
Net income                              -                  -          7,697          7,697
Change in unrealized gain 
  (loss) on available-for-sale          
  securities                            -                (442)          -             (442) 
Issuance of restricted
  Class A Common Shares                (725)               -            -              -
Restricted Class A Common 
  Shares earned                          79                -            -               79
Class A Preferred Share
  Dividend                              -                  -         (1,568)        (1,568)
                                 ---------------------------------------------------------------
Balance at June 30, 1998         $     (646)      $       (55)    $ (39,531)    $  149,055
                                 ===============================================================
</TABLE>

          See accompanying notes to unaudited consolidated financial statements.


                                      - 3 -
<PAGE>


                         Capital Trust and Subsidiaries
                      Consolidated Statements of Cash Flows
                     Six months ended June 30, 1998 and 1997
                            (in thousands)(unaudited)
<TABLE>
<CAPTION>

                                                                                      1998                       1997
                                                                               -------------------    ------------------
<S>                                                                             <C>                    <C>
   
Cash flows from operating activities:
   Net income (loss)                                                             $        7,697         $         (860)
  Adjustments to reconcile net income (loss) to net cash
     Provided by (used in) operating activities:
       Depreciation and amortization                                                        108                     25
       Restricted Class A Common Shares earned                                               79                   -
       Net amortization of premiums and accretion of discounts on loans
          and other investments                                                             477                   -
       Loss on sale of investments and properties                                          -                       432
       Provision for possible credit losses                                               1,240                   -
   Changes in assets and liabilities:
       Deposits and receivables                                                          (2,154)                   (89)
       Accrued interest receivable                                                       (4,702)                  -
       Prepaid and other assets                                                          (2,940)                  (403)
       Deferred  revenue                                                                  3,620                   -
       Accounts payable and accrued expenses                                              3,040                    834
       Other liabilities                                                                   -                       (70)
                                                                               -------------------    ------------------
   Net cash provided by (used in) operating activities                                    6,465                   (131)
                                                                               -------------------    ------------------

Cash flows from investing activities:
       Purchase of commercial mortgage-backed securities                                (36,302)               (49,524)
       Principal collections of commercial mortgage-backed securities                    25,471                   -
       Origination and purchase of loans receivable                                    (374,297)                  -
       Principal collections of loans receivable                                         29,372                     16
       Purchases of equipment and leasehold improvements                                   (240)                  -
       Improvements to rental properties                                                   -                       (64)
       Proceeds from sale of rental properties                                             -                     7,306
       Principal collections on available-for-sale securities                             4,166                  1,576
                                                                               -------------------    ------------------
   Net cash used in investing activities                                               (351,830)               (40,690)
                                                                               -------------------    ------------------

Cash flows from financing activities:
       Proceeds from repurchase obligations                                              41,837                 42,451
       Repayment of repurchase obligations                                              (18,056)                  -
       Proceeds from credit facilities                                                  383,289                   -
       Repayment of credit facilities                                                  (109,259)                  -
       Proceeds from notes payable                                                       10,170                   -
       Repayment of notes payable                                                          (512)                (4,296)
       Dividends paid on Class A Preferred Shares                                        (1,568)                  -
       Additional Paid-in Capital                                                          -                        27
                                                                               -------------------    ------------------
   Net cash provided by financing activities                                            305,901                 38,182
                                                                               -------------------    ------------------

Net decrease in cash and cash equivalents                                               (39,464)                (2,639)
Cash and cash equivalents at beginning of period                                         49,268                  4,698
                                                                               -------------------    ------------------
Cash and cash equivalents at end of period                                       $        9,804         $        2,059
                                                                               ===================    ==================

Supplemental disclosure of cash flow information
Interest paid during the period                                                  $        7,640         $          123
                                                                               ===================    ==================
Taxes paid during the period                                                     $        3,139         $           -
                                                                               ===================    ==================
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

    

                                      -4-
<PAGE>



                         Capital Trust and Subsidiaries
                   Notes to Consolidated Financial Statements
                                  June 30, 1998
                                   (unaudited)


1.  Presentation of Financial Information

The accompanying  unaudited  consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  The accompanying unaudited consolidated interim financial
statements  should be read in conjunction with the financial  statements and the
related management's  discussion and analysis of financial condition and results
of operations  filed with the 1997 Form 10-K of Capital  Trust and  Subsidiaries
(the "Company"). In the opinion of management,  all adjustments (consisting only
of normal recurring accruals)  considered necessary for a fair presentation have
been included. The results of operations for the three and six months ended June
30, 1998, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1998.

At  December  31,  1996,  the  Company  owned  commercial   rental  property  in
Sacramento,  California  through a 59%  limited  partnership  interest  in Totem
Square L.P.,  a Washington  limited  partnership  ("Totem"),  and an indirect 1%
general  partnership  interest  in Totem  through its  wholly-owned  subsidiary,
Cal-REIT Totem Square,  Inc. An unrelated party held the remaining 40% interest.
This  property  was sold  during the  quarter  ended June 30, 1997 and the Totem
Square L.P. and Totem Square, Inc. subsidiaries were liquidated and dissolved.

The unaudited  consolidated  interim financial statements of the Company include
the accounts of the Company,  Victor Capital Group, L.P. ("Victor  Capital") and
its  wholly-owned  subsidiaries  (included  in  the  consolidated  statement  of
operations  since their  acquisition  on July 15, 1997) and the results from the
disposition of the Company's  rental  property held by Totem,  which was sold on
March 4, 1997. All significant  intercompany balances and transactions have been
eliminated  in  consolidation.  The  accounting  and  reporting  policies of the
Company  conform in all  material  respects  to  generally  accepted  accounting
principles.  Certain prior period amounts have been  reclassified  to conform to
current period classifications.

2.  Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principals 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.



                                      -5-

<PAGE>



                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


3.  Earnings Per Class A Common Share

Earnings  per Class A Common  Share is presented  based on the  requirements  of
Statement of  Accounting  Standards  No. 128 ("SFAS No. 128") which is effective
for periods ending after December 15, 1997. SFAS No. 128 simplifies the standard
for computing  earnings per share and makes them comparable  with  international
earnings per share standards.  The statement replaces primary earnings per share
with basic earnings per share ("Basic EPS") and fully diluted earnings per share
with diluted earnings per share ("Diluted EPS").  Basic EPS is computed based on
the income  applicable  to Class A Common  Shares  (which is net  income  (loss)
reduced by the dividends on the class A 9.5%  cumulative  convertible  preferred
shares of beneficial  interest,  $1.00 par value  ("Class A Preferred  Shares"))
divided  by the  weighted-average  number of Class A Common  Shares  outstanding
during the period.  Diluted EPS is based on the net earnings applicable to Class
A Common Shares plus dividends on the Class A Preferred  Shares,  divided by the
weighted average number of Class A Common Shares and dilutive  potential Class A
Common Shares that were outstanding during the period.  Dilutive potential Class
A Common Shares include the  convertible  Class A Preferred  Shares and dilutive
options  to  purchase  Class A Common  Shares.  At June 30,  1998,  the  Class A
Preferred  Shares and  dilutive  portion of options to  purchase  Class A Common
Shares  were  considered  Class A  Common  Share  equivalents  for  purposes  of
calculating Diluted EPS. At June 30, 1997, there was no difference between Basic
EPS and Diluted EPS or weighted  average Class A Common Shares  outstanding,  as
there were no dilutive securities outstanding.

4.  Comprehensive Income

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130,  "Reporting  Comprehensive  Income" ("SFAS No. 130") which is effective for
fiscal  years  beginning  after  December 15, 1997.  The  statement  changes the
reporting  of certain  items  currently  reported  in the  shareholders'  equity
section  of the  balance  sheet  and  establishes  standards  for  reporting  of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial statements. The Company has adopted this standard effective January 1,
1998.  Total  comprehensive  income (loss) was $4,700,000 and $(236,000) for the
three  months ended June 30, 1998 and 1997,  respectively,  and  $7,255,000  and
$(703,000)  for the six months ended June 30, 1998 and 1997,  respectively.  The
primary  component of comprehensive  income other than net income was unrealized
gain (loss) on available-for-sale securities.


                                      -6-
<PAGE>



                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


   
5.    Commercial Mortgage-Backed Securities

During the six months ended June 30, 1998,  the Company  purchased  interests in
three subordinated commercial  mortgage-backed  securities issued by a financial
asset securitization investment trust for $36.3 million.

During the quarter ended June 30, 1998,  due to  prepayments  made on underlying
securities  that  reduced  the  interest  rate/risk  profile  and  maturity of a
commercial  mortgage-backed  security,  the Company  concluded that it no longer
anticipated holding this security to maturity.  The security was sold during the
quarter  ended  September  30, 1998 at par.  Because of this  decision to sell a
held-to-maturity security, the Company has transferred all of its investments in
commercial mortgage-backed securities, which have a book value of $60,321,000 as
of June 30, 1998,  from  held-to-maturity  securities to  available-for-sale  at
amortized cost, which approximated market value. The securities bear interest at
floating rates,  for which the weighted  average interest rate in effect at June
30, 1998 is 9.56%.

6.   Loans Receivable

At June 30, 1998,  the amount and weighted  average  interest rate the Company's
loans receivable by category was as follows (in thousands):
    

<TABLE>
<CAPTION>

                                                                                           Weighted Average
                                                                                            Interest Rate
                                                                     Amount
                                                               -------------------        -------------------
<S>                                                             <C>                       <C>   
         Mortgage Loans                                         $       277,653                   11.43%
         Mezzanine Loans                                                267,539                   11.60%
         Other mortgage loans receivable                                  2,040                    8.41%
                                                               -------------------
         Total loans and other investments                              547,232                   11.50%
           Less:  Reserve for possible credit losses                     (1,702)
                                                               ===================
         Net loans and other investments                        $       545,530
                                                               ===================
</TABLE>

   
At June 30, 1998,  $414.2 million of the  aforementioned  loans bear interest at
floating  rates ranging from LIBOR plus 320 basis points to LIBOR plus 700 basis
points before amortization of fees, premiums and discounts. The remaining $133.0
million of loans were  originated or purchased  with fixed rates ranging from 8%
to 12% at June 30,  1998.  All of the loans with fixed rates were the subject of
interest rate swaps to provide a floating  rate. The weighted  average  interest
rate in effect at June 30, 1998,  including interest rate swaps and amortization
of fees, premiums and discounts, was 11.50%.

During the six months ended June 30,  1998,  the Company  completed  sixteen new
loan  transactions  totaling  approximately  $400.4  million and  provided  $7.4
million of additional fundings on four existing loans. The Company funded $374.3
million of the foregoing loans receivable and investments  through June 30, 1998
and had unfunded  commitments on such assets  totaling $45.4 million at June 30,
1998.
    


                                      -7-
<PAGE>


                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)

   
At June 30, 1998,  the Company had  committed  to  originate  one loan for $28.0
million subject to definitive  documentation  (of which $23.0 million was funded
in early July 1998) and had  letters of intent  outstanding  for  various  other
lending transactions, which were subject to satisfaction of certain conditions.

7.  Long-Term Debt
    

Credit Facilities

Effective January 1, 1998, pursuant to an amended and restated credit agreement,
the Company  increased its existing  line of credit with a commercial  lender to
$250 million (the "Credit Facility") and subsequently further amended the credit
agreement to increase the facility to $300 million  effective  June 22, 1998. An
additional  commitment fee was paid when the Company's  borrowings exceeded $250
million. The Credit Facility provides for advances to fund lender-approved loans
and investments made by the Company.  The amended and restated agreement expires
on December 31, 2000.

On June 8, 1998, the Company  entered into an additional  credit  agreement with
another  commercial  lender that provides for a $300 million line of credit that
expires in November 1999 (the "Second Credit Facility"  together with the Credit
Facility,  the "Credit  Facilities").  The Second Credit  Facility  provides for
advances to fund lender-approved loans and investments made by the Company (such
loans and  investments  together with loans and  investments  approved under the
Credit Facility, the "Funded Portfolio Assets").

The Company  incurred an initial  commitment  fee upon the signing of the Second
Credit Facility and will pay an additional commitment fee when borrowings exceed
$250 million. Future repayments and redrawdowns of amounts previously subject to
the drawdown fee will not require the Company to pay any  additional  fees.  The
Second Credit Facility provides for margin calls on asset-specific borrowings in
the event of asset quality and/or market value deterioration as determined under
the Second  Credit  Facility.  The Second  Credit  Facility  contains  customary
representations and warranties,  covenants and conditions and events of default.
The Second Credit  Facility also contains a covenant  obligating  the Company to
avoid undergoing an ownership  change that results in Craig M. Hatkoff,  John R.
Klopp or Samuel Zell no longer  retaining their senior offices and  trusteeships
with the Company and practical control of the Company's business and operations.

The  obligations  of the  Company  under the Credit  Facilities  are  secured by
pledges of the Funded  Portfolio  Assets acquired with advances under the Credit
Facilities.  Borrowings  under the Credit  Facilities bear interest at specified
rates over LIBOR (averaging  approximately 8.02% for the borrowings  outstanding
at June 30, 1998) which rates vary according to the credit quality of the Funded
Portfolio Assets and the advance rate.

On June 30, 1998, the unused amounts  available under the Credit Facilities were
$246.1 million.


                                      -8-
<PAGE>


                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


Repurchase Obligations

In May 1998, the Company entered into a repurchase agreement in connection with
the purchase of a subordinated participation in a note. At June 30, 1998, the
Company has sold such assets totaling $19.0 million and has a liability to
repurchase these assets for $15.2 million. The liability bears interest at
specified rates over LIBOR (reflecting a total borrowing rate of 7.16% at June
30, 1998) and matures in May 1999.

   
8.       Income Taxes
    

The Company will elect to file a consolidated federal income tax return for the
year ending December 31, 1998. The provision for income taxes for the six months
ended June 30, 1998 is comprised of the following (in thousands):

Current
   Federal                                                  $   2,842
   State                                                        1,270
   Local                                                        1,147
Deferred
   Federal                                                       -
   State                                                         -
   Local                                                         -
                                                          ==============
Provision for income taxes                                  $   5,259
                                                          ==============

The Company has federal net operating loss carryforwards ("NOLs") as of June 30,
1998 of approximately $17.7 million.  Such NOLs expire through 2012. The Company
also has a federal capital loss carryover of approximately $1.6 million that can
be used to offset  future  capital  gains.  Due to an  affiliate's  purchase  of
6,959,593 Class A Common Shares from the Company's former parent in January 1997
and  another  prior  ownership  change,  a  substantial  portion of the NOLs are
limited for federal income tax purposes to approximately  $1.5 million annually.
Any unused portion of such annual  limitation  can be carried  forward to future
periods. The Company also has approximately $3.5 million of NOL's from losses in
1997 (after the ownership  changes described above) that can be utilized against
taxable income in 1998.

The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the  effective  income tax rate for the  quarter  ended  June 30,  1998 is as
follows (in thousands):

<TABLE>
<CAPTION>

<S>                                                                             <C>             <C>  
   Federal income tax at statutory rate (34%)                                   $  4,405        34.0%
   State and local taxes, net of federal tax benefit                               1,595        12.3
   Tax benefit of utilization of net operating loss carryforward                    (850)       (6.5)
   Other                                                                             109         0.8
                                                                            ------------------------------
                                                                                $  5,259        40.6%
                                                                            ==============================
</TABLE>

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for tax reporting purposes.



                                      -9-
<PAGE>



                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


The components of the net deferred tax assets  recorded under SFAS No. 109 as of
June 30, 1998 are as follows (in thousands):

   Net operating loss carryforward                               $     8,240
   Reserves on other assets and for possible credit losses             3,552
   Deferred revenue                                                      616
   Reserve for uncollectible accounts                                    208
                                                               -----------------
   Deferred tax assets                                           $    12,616
   Valuation allowance                                               (12,616)
                                                               ----------------
                                                                 $      -
                                                               =================

The Company  recorded a valuation  allowance  to fully  reserve its net deferred
assets.  Under SFAS No. 109, this valuation allowance will be adjusted in future
years, as appropriate. However, the timing and extent of such future adjustments
can not presently be determined.

   
9.  Employee Benefit Plans
    

1998 Long-Term Incentive Share Plan

On May 23, 1997, the Board of Trustees adopted the 1997 Long-Term Incentive Plan
(the "Incentive Share Plan"),  which became effective upon shareholder  approval
on July 15, 1997 at the 1997 annual  meeting of  shareholders  (the "1997 Annual
Meeting").  The  Incentive  Share Plan permits the grant of  nonqualified  share
option  ("NQSO"),  incentive  share  option  ("ISO"),  restricted  share,  share
appreciation right ("SAR"),  performance unit,  performance share and share unit
awards. The Company has reserved an aggregate of 2,000,000 Class A Common Shares
for issuance  pursuant to awards under the Incentive  Share Plan and the Company
Non-Employee  Trustee  Share  Plan.  The  maximum  number of shares  that may be
subject of awards to any employee  during the term of the  Incentive  Share Plan
may not exceed  500,000  shares and the  maximum  amount  payable in cash to any
employee with respect to any performance period pursuant to any performance unit
or performance share award is $1.0 million.

During the quarter  ended June 30,  1998,  the Company  issued an  aggregate  of
82,000  options to  acquire  Class A Common  Shares  with an  exercise  price of
between  $10.00 and $11.38 per share  (which were issued at or above the Class A
Common Share price on the date of the grant).


                                      -10-
<PAGE>



                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


The following  table  summarizes the activity under the Incentive Share Plan for
the six months ended June 30, 1998:

<TABLE>
<CAPTION>

                                                           Options                 Exercise Price
                                                         Outstanding                  per Share
                                                  --------------------------  --------------------------

<S>                                               <C>                          <C>  
   Outstanding at January 1, 1998                               607,000                  $6.00
   Granted                                                    1,007,250             $10.00 - $11.38
   Exercised                                                         -
   Canceled                                                      57,500             $6.00 - $10.00
                                                  --------------------------  --------------------------
   Outstanding at June 30, 1998                               1,556,750             $6.00 - $11.38
                                                  ==========================  ==========================
</TABLE>


10.   Subsequent Event

   
On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible
Trust  Preferred  Securities  (liquidation  amount $1,000 per security)  with an
aggregate  liquidation  amount of $150 million (the "Convertible Trust Preferred
Securities").  The  Convertible  Trust  Preferred  Securities were issued by the
Company's consolidated  statutory trust subsidiary,  CT Convertible Trust I (the
"Trust").  The  Convertible  Trust Preferred  Securities  represent an undivided
beneficial  interest  in the  assets of the Trust  which  consist  solely of the
Company's  Convertible  Debentures.   This  private  placement  transaction  was
completed  concurrently  with the related  issuance and sale to the Trust of the
Company's  8.25%  Step Up  Convertible  Junior  Subordinated  Debentures  in the
aggregate  principal  amount of  $154,650,000  (the  "Convertible  Debentures").
Distributions  on  the  Convertible  Trust  Preferred   Securities  are  payable
quarterly in arrears on each calendar quarter-end and correspond to the payments
of interest made on the  Convertible  Debentures,  the sole assets of the Trust.
Distributions are payable only to the extent payments are made in respect to the
Convertible Debentures.

The Company  received  $145.2  million in net  proceeds,  after  original  issue
discount  and  transaction   expenses,   pursuant  to  the  above  transactions,
reflecting an original issue discount of 3% from the  liquidation  amount of the
Convertible Trust Preferred Securities.  The proceeds were initially used to pay
down the Company's Credit Facilities. The Convertible Trust Preferred Securities
will be convertible into class A common shares of beneficial interest, $1.00 par
value,  of  the  Company,  pursuant  to  the  direction  of  the  holder  of the
Convertible Trust Preferred  Securities to the conversion agent to exchange such
Convertible  Trust  Preferred  Securities  for  a  portion  of  the  Convertible
Debentures  held by the Trust on the basis of one security per $1,000  principal
amount  of  Convertible  Debentures,  and  immediately  convert  such  amount of
Convertible  Debentures  into Class A Common  Shares at an initial rate of 85.47
Class A Common Shares per $1,000 principal amount of the Convertible  Debentures
(which is equivalent to a conversion  price of $11.70 per Class A Common Share).
The Convertible Debentures have a 20-year maturity and are non-callable for five
years.  Upon  repayment  of the  Convertible  Debentures  at  maturity  or  upon
redemption,  the proceeds of such  repayment or payment shall be  simultaneously
paid and applied to redeem,  among other things, the Convertible Trust Preferred
Securities.  If the securities have not been redeemed by September 30, 2004, the
distribution  rate  will  step up by 0.75%  per  annum.  The 3%  ($4.5  million)
discount on the  issuance  will be  amortized  over the life of the  Convertible
Trust Preferred Securities.
    


                                      -11-
<PAGE>


                         Capital Trust and Subsidiaries
             Notes to Consolidated Financial Statements (continued)
                                   (unaudited)


   
For financial reporting  purposes,  the Trust will be treated as a subsidiary of
the Company and, accordingly,  the accounts of the Trust will be included in the
consolidated  financial  statements  of the Company.  Intercompany  transactions
between the Trust and the Company, including the Junior Subordinated Debentures,
will be eliminated in the consolidated  financial statements of the Company. The
Convertible  Trust Preferred  Securities will be presented as a separate caption
between liabilities and shareholders'  equity in the consolidated  balance sheet
of the  Company  as  "Company-obligated,  madatorily  redeemable  securities  of
subsidiary trust holding solely junior subordinated  debentures of the Company".
Distributions on the Convertible Trust Preferred  Securities will be recorded as
a  separate  caption   immediately   following   non-interest   expense  in  the
consolidated statement of operations of the Company.
    


                                      -12-
<PAGE>


ITEM 2.       Management's  Discussion  and Analysis of Financial  Condition and
                  Results of Operations

         The  following  discussion  should  be read  in  conjunction  with  the
consolidated  financial statements and notes thereto appearing elsewhere in this
Form 10-Q.  Historical  results set forth are not necessarily  indicative of the
future  financial  position  and  results  of  operations  of the  Company.  The
following  discussion  reflects  the  reclassification  on July 15,  1997 of the
Company's  common  shares of beneficial  interest,  $1.00 par value ("Old Common
Shares"), as class A common shares of beneficial interest,  $1.00 par value (the
"Class A Common Shares").

Recent Developments
-------------------

         On  January  3,  1997,  Capital  Trust  Investors  Limited  Partnership
("CTILP"),  an affiliate of Equity Group  Investments,  Inc.  ("EGI") and Samuel
Zell,  purchased  from the Company's  former  parent,  6,959,593  Class A Common
Shares (representing  approximately 76% of the  then-outstanding  Class A Common
Shares) for an aggregate  purchase price of $20,222,011.  Prior to the purchase,
which was  approved  by the  then-incumbent  Board of  Trustees,  EGI and Victor
Capital Group, L.P. ("Victor Capital") presented to the Company's then-incumbent
Board of Trustees a proposed new business  plan in which the Company would cease
to be a REIT and instead become a specialty  finance company designed  primarily
to take advantage of  high-yielding  mezzanine  investment and other real estate
asset  opportunities  in  commercial  real estate.  EGI and Victor  Capital also
proposed that they provide the Company with a new  management  team to implement
the business  plan and that they invest  through an affiliate a minimum of $30.0
million in a new class of preferred shares to be issued by the Company.

         The Board of Trustees  approved CTILP's purchase of the former parent's
Class A Common  Shares,  the new business  plan and the issuance of a minimum of
$30.0  million of a new class of  preferred  shares of the  Company at $2.69 per
share,  such shares to be convertible  into Class A Common Shares of the Company
on a one-for-one basis. The Company subsequently agreed that,  concurrently with
the consummation of the proposed preferred equity  investment,  it would acquire
for $5.0 million Victor Capital's real estate investment  banking,  advisory and
asset  management   businesses,   including  the  services  of  its  experienced
management team.

         At the  Company's  1997 annual  meeting of  shareholders  ("1997 Annual
Meeting"), the Company's shareholders approved the investment, pursuant to which
the Company  would issue and sell up to  approximately  $34.0 million of class A
9.5% cumulative  convertible preferred shares of beneficial interest,  $1.00 par
value ("Class A Preferred Shares"),  to Veqtor Finance Company,  LLC ("Veqtor"),
an  affiliate  of  Samuel  Zell  and  the  principals  of  Victor  Capital  (the
"Investment"). The Company's shareholders also approved the amended and restated
declaration of trust, which, among other things,  reclassified the Company's Old
Common  Shares  as Class A Common  Shares  and  changed  the  Company's  name to
"Capital Trust."

         Immediately  following  the 1997 Annual  Meeting,  the  Investment  was
consummated;  12,267,658  Class A  Preferred  Shares  were sold to Veqtor for an
aggregate  purchase  price  of  $33,000,000.  Concurrently  with  the  foregoing
transaction,  Veqtor purchased the 6,959,593 Class A Common Shares held by CTILP
for an aggregate purchase price of approximately  $21.3 million.  As a result of
these   transactions,   currently,   Veqtor  beneficially  owns  19,227,251  (or
approximately  63%) of the  outstanding  voting  shares of the  Company.  Veqtor
funded the


                                      -13-
<PAGE>



approximately  $54.3  million  aggregate  purchase  price for the Class A Common
Shares and Class A Preferred  Shares with $5.0 million of capital  contributions
from its  members  and $50.0  million of  borrowings  under the 12%  convertible
redeemable notes (the "Veqtor Notes") issued to institutional investors. In June
1998,  the  Veqtor  Notes  were  converted  into  preferred  units of  Veqtor by
agreement between the common members of Veqtor and the institutional  investors.
Pursuant to an amended and  restated  limited  liability  company  agreement  of
Veqtor,  the Veqtor notes were  converted  into  preferred  units of Veqtor (the
"Veqtor  Preferred  Units") and the  institutional  investors  were  admitted as
preferred  members  of  Veqtor.  Veqtor  may in the  future  redeem  the  Veqtor
Preferred Units for an aggregate of 9,899,710 shares (assuming redemption on the
earliest  possible date, July 16, 1999). The common members of Veqtor and Veqtor
agreed with the Company in December 1997 that Veqtor should redeem the preferred
units then authorized by the original  limited  liability  company  agreement of
Veqtor in effect at such time at the  earliest  date upon  which  Veqtor has the
right to effectuate  such  redemption.  Veqtor has confirmed to the Company that
the foregoing  agreement  obligates  Veqtor to redeem the Veqtor Preferred Units
according to the timetable specified therein.

         In  addition,  immediately  following  the  1997  Annual  Meeting,  the
acquisition  of the real  estate  services  businesses  of  Victor  Capital  was
consummated  and a new  management  team was appointed by the Company from among
the ranks of Victor  Capital's  professional  team and  elsewhere.  The  Company
thereafter  immediately  commenced full  implementation  of its current business
plan  under  the  direction  of its  newly  elected  board of  trustees  and new
management team.

         After the 1997 Annual  Meeting,  the Company  completed two significant
financing  and capital  raising  transactions.  As of September  30,  1997,  the
Company  obtained  a $150  million  line of credit  ("Credit  Facility")  from a
commercial  lender,  which was  subsequently  increased  to $250  million  as of
January 1, 1998 and $300 million as of June 22, 1998. On December 16, 1997,  the
Company completed a public offering of 9,000,000 Class A Common Shares resulting
in net proceeds to the Company of approximately $91.4 million.  This significant
source of borrowed  funds and  infusion of cash  allowed the Company to commence
full scale  operations as a specialty  finance  company  pursuant to its current
business plan.

         On July 28, 1998,  the Company  privately  placed 150,000 8.25% Step Up
Convertible Trust Preferred Securities  (liquidation amount $1,000 per security)
with an aggregate  liquidation  amount of $150 million (the  "Convertible  Trust
Preferred  Securities").  The Convertible Trust Preferred Securities were issued
by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I
(the "Trust").  This private  placement  transaction was completed  concurrently
with the related  issuance and sale to the Trust of the Company's  8.25% Step Up
Convertible Junior Subordinated  Debentures in the aggregate principal amount of
$154,650,000  (the "Convertible  Debentures").  Distributions on the Convertible
Trust  Preferred  Securities  are payable  quarterly in arrears on each calendar
quarter-end  and correspond to the payments of interest made on the  Convertible
Debentures,  the sole assets of the Trust. Distributions are payable only to the
extent payments are made in respect to the Convertible Debentures.

         The Company  received  $145.2  million in net proceeds,  after original
issue discount and  transaction  expenses,  pursuant to the above  transactions,
reflecting an original issue discount of 3% from the  liquidation  amount of the
Convertible Trust Preferred Securities.  The proceeds were initially used to pay
down the Company's Credit Facilities. The Convertible Trust Preferred


                                      -14-

<PAGE>


Securities are convertible at any time by the holders thereof into the Company's
listed Class A Common Shares at a conversion  price of $11.70.  The  Convertible
Debentures have a 20-year  maturity and are  non-callable  for five years.  Upon
repayment of the  Convertible  Debentures  at maturity or upon  redemption,  the
proceeds of such repayment or payment shall be  simultaneously  paid and applied
to redeem,  among other things, the Convertible Trust Preferred  Securities.  If
the securities  have not been redeemed by September 30, 2004,  the  distribution
rate will step up by 0.75% per  annum.  The 3% ($4.5  million)  discount  on the
issuance  will be amortized  over the life of the  Convertible  Trust  Preferred
Securities or 20 years.

Overview of Financial Condition
-------------------------------

   
         During  the six months  ended  June 30,  1998,  the  Company  completed
eighteen  new loan  and  investment  in  commercial  mortgage-backed  securities
transactions totaling  approximately $436.7 million and provided $7.4 million of
additional fundings on four existing loans. The Company funded $410.6 million of
the foregoing  loans and  investments  through June 30, 1998,  which enabled the
Company  to  grow  its  assets  from  $317.4  million  to  $637.3  million.  The
significant  infusion of cash from the public  offering of Class A Common Shares
in December  1997 allowed the Company to expand its  specialty  finance  company
operations.  The  equity  capital  provided  by the  public  offering,  used  in
combination with additional  borrowings under the Credit  Facilities (as defined
below) and  repurchase  financing,  allowed the Company to make the  investments
described below.

         Since  December 31, 1997,  the Company has  identified,  negotiated and
committed  to fund or  acquire  eighteen  loan  and  commercial  mortgage-backed
securities transactions. These include eight Mortgage Loan transactions totaling
$153.5 million (of which $16.1 million remains unfunded at June 30, 1998), eight
Mezzanine  Loan  transactions  totaling  $246.9  million (of which $17.4 million
remains  unfunded at June 30, 1998),  and two  acquisitions  of three classes of
subordinated  interests  issued by a financial asset  securitization  investment
trust  totaling  $36.3  million.   The  Company  also  funded  $7.4  million  of
commitments   under  four  existing  loans.  The  Company  believes  that  these
investments will provide  investment yields within the Company's target range of
400 to 600 basis points above LIBOR. The Company  maximizes its return on equity
by  utilizing  its  existing  cash on hand and then  employing  leverage  on its
investments  (employing  a  cash  optimization  model).  The  Company  may  make
investments  with yields  that fall  outside of the  investment  range set forth
above, but that correspond with the level of risk perceived by the Company to be
inherent in such  investments.  At June 30,  1998,  the Company had  outstanding
loans and investment in commercial mortgage-backed securities totaling in excess
of $581 million,  additional  commitments  for fundings on outstanding  loans of
approximately  $45.4 million and a $28.0  million  commitment to originate a new
mortgage loan (of which $23.0 million was funded in early July 1998).
    

         When possible,  in connection with the acquisition of investments,  the
Company obtains seller financing in the form of repurchase  agreements.  Four of
the  transactions  completed during the six months ended June 30, 1998 described
above were  financed  in this  manner  representing  total  original  repurchase
financings  of $41.8  million.  These  financings  are  generally  completed  at
discounted terms as compared to those available under the Credit Facilities.

         Effective  January 1, 1998,  pursuant to an amended and restated credit
agreement, the Company increased its line of credit under the Credit Facility to
$250 million and subsequently


                                      -15-
<PAGE>


increased  the facility to $300 million  effective  June 22, 1998. An additional
commitment fee was paid when the Company's borrowings exceeded $250 million. The
Credit  Facility  provides  for  advances  to  fund  lender-approved  loans  and
investments  made by the Company.  The Credit  Facility  expires on December 31,
2000.

         On June  8,  1998,  the  Company  entered  into  an  additional  credit
agreement with another  commercial  lender that provides for a $300 million line
of credit that expires in November 1999 (the "Second Credit  Facility"  together
with the Credit Facility,  the "Credit Facilities").  The Second Credit Facility
provides for advances to fund lender-approved  loans and investments made by the
Company (such loans and investments together with loans and investments approved
under the Credit Facility, "Funded Portfolio Assets").

         The Company incurred an initial  commitment fee upon the signing of the
Second  Credit  Facility  and an  additional  commitment  fee  will be due  when
borrowings  exceed $250 million.  Future  repayments and  redrawdowns of amounts
previously  subject to the  drawdown fee will not require the Company to pay any
additional  fees.  The Second  Credit  Facility  provides  for  margin  calls on
asset-specific  borrowings  in the event of asset  quality  and/or  market value
deterioration as determined under the Second Credit Facility.  The Second Credit
Facility  contains  customary  representations  and  warranties,  covenants  and
conditions  and events of default.  The Second  Credit  Facility also contains a
covenant  obligating  the Company to avoid  undergoing an ownership  change that
results in Craig M.  Hatkoff,  John R. Klopp or Samuel Zell no longer  retaining
their senior offices and trusteeships  with the Company and practical control of
the Company's business and operations.

         At June 30,  1998,  the  Company  had  $353.9  million  of  outstanding
borrowings under the Credit Facilities.

         As of  June  30,  1998,  certain  of  the  Company's  loans  and  other
investments  have  been  hedged  so  that  the  assets  and  the   corresponding
liabilities  were matched at floating rates over LIBOR.  The Company has entered
into interest rate swap agreements for notional amounts  totaling  approximately
$87.4  million with  financial  institution  counterparties  whereby the Company
swapped fixed rate instruments, which averages approximately 6.04%, for floating
rate  instruments  based on the London  Interbank  Offered Rate  ("LIBOR").  The
agreements mature at varying times from December 1998 to July 2008.

         As of January 1, 1997,  the  Company's  real  estate  portfolio,  which
included two commercial  properties,  was carried at a book value of $8,585,000.
The portfolio  included a shopping  center in  Sacramento,  California and a 60%
interest in a mixed-use  retail  property in  Kirkland,  Washington.  During the
first  quarter,  these two  commercial  properties  were sold. The proceeds from
these  sales  were  invested  in  mortgage  loans and in liquid  mortgage-backed
securities.


                                      -16-
<PAGE>



Comparison of the Six and Three Months Ended June 30, 1998 to the
-----------------------------------------------------------------
     Six and Three Months Ended June 30, 1997
     ----------------------------------------

         The Company  reported net income  allocable to Class A Common Shares of
$6,129,000  for the six months  ended June 30, 1998,  an increase of  $6,989,000
from the net loss  allocable  to Class A Common  Shares of $860,000  for the six
months ended June 30, 1997. The Company reported net income allocable to Class A
Common  Shares of  $4,240,000  for the three  months  ended  June 30,  1998,  an
increase of $4,592,000,  from the net loss allocable to Class A Common Shares of
$352,000 for the three months ended June 30, 1997.  These changes were primarily
the  result of the  revenues  generated  from  loans and other  investments  and
significant advisory and investment banking fees.

         Net income from loans and other  investments  increased  $12,370,000 to
$12,446,000  for the six months ended June 30, 1998 over the $76,000 for the six
months  ended  June 30,  1997.  Net  income  from  loans and  other  investments
increased $7,510,000 to $7,550,000 for the three months ended June 30, 1998 over
the $40,000 for the three months ended June 30, 1997. This increase is primarily
attributable to the revenue earned by the Company from new loans and investments
originated  or acquired by the Company that  increased by more than $550 million
from June 30, 1997 to June 30, 1998.  The  increase in net income was  partially
offset by the interest paid on repurchase  agreements and the Credit  Facilities
during the six months and quarter ended June 30, 1998.  No interest  expense for
these types of  borrowings  was incurred  during the six months or quarter ended
June 30, 1997.

         During the six months ended June 30,  1998,  other  revenues  increased
$8,854,000 to $9,330,000  over the same period in 1997. The increase  during the
three months ended June 30, 1998 over the same period in 1997 was  $5,769,000 to
$6,100,000.  The increase  for the six months ended June 30, 1998 was  primarily
due to the  addition of  $8,650,000  of advisory  and  investment  banking  fees
generated by Victor  Capital and its related  subsidiaries,  which was partially
offset by a $305,000 decrease in rental income as the Company sold its remaining
rental  properties  during the first  quarter  of 1997.  The sales of the rental
properties in the first  quarter of 1997  resulted in the Company  recognizing a
loss of $432,000.  The Company sold a shopping center in Sacramento,  California
and  recognized  a net loss of  approximately  $34,000.  The Company also sold a
retail  property  located in  Kirkland,  Washington,  resulting in a net loss of
approximately $398,000, the majority of which was attributable to transfer taxes
and the elimination of unamortized tenant improvements and leasing  commissions.
The increase for the three months ended June 30, 1998 was  primarily  due to the
addition of  $5,790,000  of advisory and  investment  banking fees  generated by
Victor Capital and its related subsidiaries.

         Other expenses  increased from $1,412,000 for the six months ended June
30, 1997 to $8,820,000  for six months ended June 30, 1998 and from $723,000 for
the three  months ended June 30, 1997 to  $4,947,000  for the three months ended
June 30, 1998.  The increase was  primarily  due to the  additional  general and
administrative  expenses  necessary for the  commencement  and  continuation  of
full-scale  operations as a specialty finance company,  the largest component of
such expenses is employee  salaries and related  costs,  and the increase in the
provision for possible  credit  losses.  As of June 30, 1998, the Company had 42
full time  employees as compared to none at June 30,  1997.  The  provision  for
possible credit losses was $1,240,000 for the six months ended June 30, 1998 and
was $760,000  for the three  months ended June 30, 1998 as the Company  provided
reserves on its loan and investment portfolio pursuant to


                                      -17-

<PAGE>


its reserve policy. The Company had no provision for possible credit loss in the
quarter or six months ended June 30, 1997.

         In 1997,  the  Company  did not incur any income tax expense or benefit
associated  with the loss it incurred due to the  uncertainty  of realization of
net  operating  loss  carryforwards.  In the six and three months ended June 30,
1998, the Company accrued $5,259 and 3,679, respectively,  of income tax expense
for federal,  state and local income taxes.  For federal  purposes,  the Company
utilized one half of the expected net operating loss carryforward to be utilized
in 1998 in  calculating  the accrual for the six months  ended June 30, 1998 and
one quarter of the expected net operating  loss  carryforward  to be utilized in
1998 in calculating the accrual for the three months ended June 30, 1998.

         The preferred share dividend and dividend  requirement arose in 1997 as
a result of the Company's issuance of $33 million of Class A Preferred Shares on
July 15, 1997. Dividends accrue on these shares at a rate of 9.5% per annum on a
per share price of $2.69 for the 12,267,658 shares outstanding.

Liquidity and Capital Resources
-------------------------------

         At June 30,  1998,  the Company  had  $9,804,000  in cash.  The primary
sources of  liquidity  for the  Company  for the  remainder  of 1998,  which the
Company  believes will  adequately meet future  operating  liquidity and capital
resource  requirements,  will be cash on hand,  cash generated from  operations,
interest payments received on its investments, loans and securities,  additional
borrowings under the Company's  Credit  Facilities and the $145.2 million in net
proceeds,  after  original  issue discount and  transaction  expenses,  from the
issuance of the Convertible Trust Preferred  Securities.  The primary demands on
the Company's capital resources will be the funding required for the origination
or acquisition of loans and other  investments as the Company continues with its
specialty finance  operations and the growth of its portfolio of loans and other
investments.

         The Company  experienced a net decrease in cash of $39,464,000  for the
six months ended June 30, 1998,  compared to $2,639,000 for the six months ended
June 30, 1997.  This use of cash was  primarily  due to the  utilization  of the
proceeds of the Class A Common Share  offering in the fourth  quarter of 1997 in
making loans and other investments during the first six months of 1998 offset by
additional  borrowings.  Cash  provided by operating  activities  during the six
months ended June 30, 1998 increased by $6,596,000 to $6,465,000, from cash used
in operating  activities of $131,000 during the same period of 1997. For the six
months ended June 30, 1998, cash used in investing  activities was $351,830,000,
an  increase of  $311,140,000  from  $40,690,000  during the same period in 1997
primarily the result of the loans and other investments completed since December
31, 1997. The increase in cash provided by financing activities, which increased
$267,719,000 to $305,901,000 from $38,182,000, was due primarily to the proceeds
of repurchase obligations and net borrowings under the Credit Facilities.

   
         At June 30,  1998,  the Company  has three  outstanding  notes  payable
totaling  $14,611,000,  outstanding  borrowings  on  the  Credit  Facilities  of
$353,894,000 and outstanding repurchase obligations of $105,954,000.
    

 

                                      -18-

<PAGE>


                                   SIGNATURES

Pursuant  to the  requirement  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 TRUST


   
October 23, 1998                                 /s/ John R. Klopp
----------------                                 -----------------
Date                                             John R. Klopp
                                                 Chief Executive Officer

                                                 /s/ Edward L. Shugrue III
                                                 ------------------------
                                                 Edward L. Shugrue III
                                                 Managing Director and
                                                 Chief Financial Officer
    



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