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

                                    FORM 10-Q

(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, 1997

                                       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
  incorporation or organization)                Identification No.)

885 Third Avenue, Suite 1240, New York, NY                     10022
-------------------------------------------------------------------------------
(Address of principal executive offices)                     (Zip Code)

                                 (212) 593-5400
              (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 [    ]


622033.3

<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 June 30, 1997
--------------------------------------------     ----------------------------
Class A Common Shares of Beneficial Interest,                       9,137,335
$1.00 par value ("Class A Common Shares")

                                EXPLANATORY NOTE

     This Form 10-Q Quarterly Report reflects (i) the  reclassification  on July
15, 1997 of the common shares of beneficial  interest,  $1.00 par value,  of the
Registrant  (f/k/a  California  Real  Estate  Investment  Trust),  a  California
business  trust,  as class A common  shares of  beneficial  interest,  $1.00 par
value,  in the  Registrant  and (ii) the change in the name of the Registrant on
July 15, 1997 to "Capital Trust."






622033.3

<PAGE>



                                  CAPITAL TRUST

                                      INDEX
                                                                          PAGE

Part I.  Financial Information

         Item 1: Financial Statements...................................... 1

                 Consolidated Balance Sheets -
                     June 30, 1997 and December 31, 1996................... 1

                 Consolidated Statements of Operations -
                     For the Six Months Ended
                     June 30, 1997 and 1996................................ 2

                 Consolidated Statements of Cash Flows -
                     For the Six Months Ended June 30, 1997 and 1996....... 3

                 Notes to Consolidated Financial Statements................ 4

         Item 2: Management's Discussion and Analysis of
                     Financial Condition and Results of Operations.........11


Part II. Other Information

         Item 1: Legal Proceedings.........................................15

         Item 2: Changes in Securities.....................................15

         Item 3: Defaults Upon Senior Securities...........................15

         Item 4: Submission of Matters to a Vote of Security Holders.......15

         Item 5: Other Information.........................................16

         Item 6: Exhibits and Reports on Form 8-K..........................17


622033.3

<PAGE>



PART I.   Financial Information
<TABLE>
<CAPTION>

                                             CAPITAL TRUST
                                            AND SUBSIDIARIES
                                      Consolidated Balance Sheets


                                                                         June 30,           December
                                                                           1997             31, 1996
                                                                       (Unaudited)          (Audited)
                          ASSETS

<S>                                                                    <C>                 <C>
Investment, Held to Maturity:
   Investment in CMBS                                                   $49,524,000        $        --
Investments, Held for Sale:
     Rental properties                                                           --          8,585,000
     Notes receivable net of valuation allowances and deferred
        gains of $6,127,000 at June 30, 1997 and December 31, 1996        2,650,000          1,576,000
     Marketable securities available-for-sale                            12,696,000         14,115,000
Cash                                                                      2,059,000          4,698,000
Receivables, net of allowance of $1,250,000 and $1,001,000
     at June 30, 1997 and December 31, 1996, respectively                   796,000            707,000
Other assets                                                                554,000            355,000
                                                                        -----------        -----------
               Total Assets                                             $68,279,000        $30,036,000
                                                                        ===========        ===========

                                     LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
     Notes payable, collateralized by deeds of trust on rental
     properties                                                         $   873,000        $ 5,169,000
     Accounts payable and accrued expenses                                1,160,000            326,000
     Other liabilities                                                           --             70,000
     Repurchase Obligations                                              42,451,000                 --
                                                                         ----------        -----------
               Total Liabilities                                         44,484,000          5,565,000
                                                                         ----------        -----------

Shareholders' Equity:
     Class A Common Shares of beneficial interest, par value $1 a share;
     unlimited authorization, 9,137,000 shares outstanding at
     June 30, 1997 and December 31, 1996                                  9,137,000          9,137,000
     Additional paid-in capital                                          55,145,000         55,118,000
     Unrealized holding income (loss) on marketable                         135,000            (22,000)
     Accumulated deficit                                                (40,622,000)       (39,762,000)
                                                                        -----------        -----------
               Total Shareholders' Equity                                23,795,000         24,471,000
                                                                        -----------        -----------
               Total Liabilities and Shareholders' Equity               $68,279,000        $30,036,000
                                                                        ===========        ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

622033.3
                                        1

<PAGE>


<TABLE>
<CAPTION>

                                                   CAPITAL TRUST
                                                 AND SUBSIDIARIES
                                       Consolidated Statements of Operations
                                                    (Unaudited)




                                                   Three Months Ended                  Six Months Ended
                                                        June 30,                           June 30,
                                                   1997            1996              1997            1996
                                                   ----            ----              ----            ----
<S>                                             <C>             <C>              <C>              <C>
Revenues:
   Rent                                         $      --       $ 534,000        $  236,000       $1,103,000
   Interest                                       356,000         246,000           679,000          548,000
   Other                                           15,000              --            69,000               --
                                                ---------       ---------        ----------       ----------

                                                  371,000         780,000           984,000        1,651,000
                                                ---------       ---------        ----------       ----------

Expenses:
   Operating expenses                                  --         178,000           123,000          326,000
   Property management                              1,000          29,000            15,000           56,000
   Depreciation and amortization                    4,000          20,000            25,000           25,000
   Interest                                        24,000         137,000           123,000          274,000
   General and administrative                     694,000         367,000         1,126,000          780,000
                                                ---------       ---------        ----------       ----------

                                                  723,000         731,000         1,412,000        1,461,000
                                                ---------       ---------        ----------       ----------

   Income (loss) before gain (loss)
       on foreclosure or sale of
       investments and valuation losses          (352,000)         49,000          (428,000)         190,000

       Gain (loss) on sale of
       investments                                     --         297,000          (432,000)         596,000
                                                ---------       ---------        ----------       ----------

          Income (loss) before
          valuation (losses)                     (352,000)        346,000          (860,000)         786,000

Valuation (losses)                                     --        (559,000)               --         (559,000)
                                                ---------       ---------        ----------       ----------

          Net (loss) income                     $(352,000)      $(213,000)       $ (860,000)      $  227,000
                                                =========       =========        ==========       ==========

Net (loss) income per share of
   beneficial interest                         $    (0.04)      $   (0.02)       $    (0.09)      $     0.02
                                               ==========       =========        ==========       ==========
</TABLE>


          See accompanying notes to consolidated financial statements.


622033.3
                                                         2

<PAGE>


<TABLE>
<CAPTION>

                                                   CAPITAL TRUST
                                                 AND SUBSIDIARIES
                                       Consolidated Statements of Cash Flows
                                                    (Unaudited)




                                                                  Six Months Ended
                                                                       June 30,
                                                                1997            1996
                                                                ----            ----

<S>                                                        <C>             <C>
Cash flows from operating activities:
  Net (loss) income                                        $  (860,000)    $   227,000
  Adjustments to reconcile net (loss) income to net cash
  used in) provided by operating activities:
    Depreciation and amortization                               25,000          25,000
    Loss (gain) on foreclosure or sale of investments          432,000        (596,000)
    Valuation losses                                                --         559,000

  Changes in assets and liabilities:
    (Increase) in receivables, net                             (89,000)         (4,000)
    (Increase) Decrease in other assets                       (403,000)         12,000
    (Decrease) increase in accounts payable
         and accrued expenses                                  834,000          12,000
    (Decrease) increase in other liabilities                   (70,000)        130,000
                                                           -----------     -----------
    Total adjustments to net income                            729,000         138,000
                                                           -----------     -----------
    Net cash (used in) provided by operating activities       (131,000)        365,000
                                                           -----------     -----------

Cash flows from investing activities:
  Proceeds from sale of investments                          7,306,000      11,142,000
  Purchase of CMBS                                         (49,524,000)             --
  Purchase of marketable securities                                 --     (11,993,000)
  Improvements to rental properties                            (64,000)       (118,000)
  Principal collections on notes receivable                     16,000          22,000
  Principal collection on marketable securities              1,576,000              --
                                                           -----------     -----------
    Net cash used in investing activities                  (40,690,000)       (947,000)
                                                           -----------     -----------

Cash flows from financing activities:
  Principal payments on long-term notes payable             (4,296,000)        (38,000)
  Proceeds from repurchase obligation                       42,451,000              --
  Additional paid-in capital                                    27,000              --
                                                           -----------     -----------
    Net cash provided by (used in) financing activities     38,182,000         (38,000)
                                                           -----------     -----------
    Net decrease in cash                                    (2,639,000)       (620,000)
Cash, beginning of period                                    4,698,000       4,778,000
                                                           -----------     -----------

Cash, end of period                                        $ 2,059,000     $ 4,158,000
                                                           ===========     ===========
</TABLE>


          See accompanying notes to consolidated financial statements.

622033.3
                                        3

<PAGE>



                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.   Organization and Basis of Presentation:
     --------------------------------------

                                  Organization
                                  ------------

     Capital Trust (f/k/a California Real Estate Investment Trust) (the
     "Company") was organized under the laws of the State of California pursuant
     to a Declaration of Trust dated September 15, 1966. On July 15, 1997, a
     change of control of the Company occurred. This change of control followed
     the purchase on January 3, 1997 by CalREIT Investors Limited Partnership
     ("CRIL"), an affiliate of Equity Group Investments, Inc. ("EGI") and Samuel
     Zell, of the 6,959,593 Class A Common Shares (representing approximately
     76% of the outstanding Class A Common Shares) then owned by the Company's
     former parent. Prior to the purchase which was approved by the then
     incumbent board of trustees, EGI and Victor Capital Group, L.P. ("VCG")
     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 opportunities in commercial real
     estate. EGI and VCG 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 million in a new class of preferred shares to
     be issued by the Company. In connection with the foregoing, the Company
     subsequently agreed that, concurrently with the consummation of the
     proposed preferred equity investment, it would acquire for $5.0 million
     VCG's real estate investment banking, advisory and asset management
     businesses, including the services of its experienced management team.

     On July 15, 1997, the proposed preferred share investment was consummated;
     12,267,658 class A 9.5% cumulative convertible preferred shares, $1.00 par
     value, of beneficial interest in the Company ("Class A Preferred Shares")
     were sold to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel
     Zell and the principals of VCG for an aggregate purchase price of
     $33,000,000 (the "Preferred Share Investment"). Concurrently with the
     foregoing transaction, Veqtor purchased from CRIL the 6,959,593 Class A
     Common Shares held by it for an aggregate purchase price of approximately
     $21.3 million. As a result of these transactions, Veqtor beneficially owns
     19,227,251 or approximately 90% of the outstanding voting shares of the
     Company.

     In addition, on July 15, 1997, the Company consummated the acquisition of
     the real estate services businesses of VCG. A new management team was
     appointed by the Company from among the rank's of VCG's professional team
     and elsewhere. Thereafter, the Company immediately commenced full
     implementation of the new business plan under the direction of its newly
     elected board of trustees and its new management team.




622033.3
                                        4

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


1.   Organization and Basis of Presentation, continued:
     --------------------------------------

     As of March 31,  1997,  the Company had sold its two  remaining  commercial
     rental  properties,  Fulton  Square  Shopping  Center  and Totem  Square in
     Sacramento,  California and in Kirkland,  Washington,  respectively. At the
     end of the second  quarter,  the Company owned a mortgage note portfolio of
     four notes encompassing approximately $8,777,000 in loans with an aggregate
     book value of  approximately  $2,650,000.  These loans bear  interest at an
     overall  effective rate of  approximately  8%;  approximately  $2.1 million
     (book  value) of these  loans  pay  interest  on a  monthly  basis and bear
     interest  at an overall  effective  rate of  approximately  8.7%.  They are
     collateralized  by mortgages on real property.  Three of the investments in
     the four loans  were  originated  by the  Company  in  connection  with the
     disposition of Company properties prior to 1996. The remaining note, in the
     face amount of approximately  $1,090,000,  was made in conjunction with the
     sale of Fulton Square Shopping Center in February 1997.

     Additionally, as of June 30, 1997 the Company had approximately $12,696,000
     invested in liquid mortgage-backed securities.

                              Basis of Presentation
                              ---------------------

     The accompanying  financial  statements are unaudited;  however,  they have
     been prepared in accordance with generally accepted  accounting  principles
     for interim  financial  information  and in conjunction  with the rules and
     regulations of the Securities and Exchange Commission. Accordingly, they do
     not  include  all  of  the  disclosures   required  by  generally  accepted
     accounting principles for complete financial statements.  In the opinion of
     management, all adjustments (consisting solely of normal recurring matters)
     necessary for a fair  presentation  of the financial  statements  for these
     interim  periods  have been  included.  The results for the interim  period
     ended June 30, 1997,  are not  necessarily  indicative of the results to be
     obtained for the full fiscal year.  These  financial  statements  should be
     read  in  conjunction  with  the  December  31,  1996,   audited  financial
     statements  and notes thereto,  included in the Company's  Annual Report on
     Form 10-K. The accompanying  unaudited consolidated financial statements of
     Capital  Trust  include the  accounts  of the Company and its wholly  owned
     subsidiaries.


622033.3
                                        5

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


1.   Organization and Basis of Presentation, continued:
     --------------------------------------

                            Stock-Based Compensation
                            ------------------------

     As of June 30,  1997 and  December  31,  1996 there  were no share  options
     outstanding  nor  share  option  plans in  place.  The  Company's  board of
     trustees  adopted,  subject to  shareholder  approval which was obtained on
     July 15, 1997, two share option plans pursuant to which options to purchase
     an  aggregate  of two  million  Class A  Common  Shares  may be  issued  to
     employees and trustees of the Company.

2.   Investment in CMBS and Related Repurchase Obligations:
     -----------------------------------------------------

     On June 30, 1997, the Company completed an approximately $49.3 million
     investment in a junior, subordinated class of commercial mortgage-backed
     securities ("CMBS"). The CMBS investment, which is secured by 20 short-term
     commercial mortgage loans with original maturities ranging from two to
     three years, was structured to provided an effective yield of a specified
     number of basis points over LIBOR based on specified base case modeling
     assumptions. The purchase price was financed in part pursuant to a reverse
     repurchase agreement. Pursuant to the reverse repurchase agreement, the
     Company posted 25% of the purchase price (approximately $12.3 million) from
     available cash sources as maintenance margin and received an extension of
     credit from the counter party for the remaining 75% balance (approximately
     $36.9 million). In connection with the foregoing, the Company entered into
     a separate repurchase agreement in the approximate amount of $5.6 million
     secured by certain of its FNMA securities.

3.   Investments in Notes Receivable:
     -------------------------------

     As of June 30, 1997 and December 31, 1996, the Company had long-term  notes
     receivable,  collateralized by deeds of trust (before valuation  allowances
     and deferred gains) of $8,777,000 and $7,703,000,  respectively.  The notes
     are collateralized by real estate properties in California and Arizona.  In
     conjunction with the Company's plan to monetize  assets,  its mortgage note
     investments are classified for accounting  purposes as "held for sale." The
     notes  bear  interest  at rates  ranging  from 7.63% to 9.5% as of June 30,
     1997.  For the quarter ended June 30, 1997 the overall  effective  rate was
     approximately  8%;  approximately  $2.1 million (book value) of these loans
     pay interest on a monthly basis and bear  interest at an overall  effective
     rate of approximately 8.7%.


622033.3
                                        6

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


4.   Investments in Marketable Securities:
     ------------------------------------


     At June 30, 1997, the Company's  "available-for-sale"  securities consisted
     of the following:

<TABLE>
<CAPTION>

                                                           (In thousands)
                                                             Unrealized       Estimated
                                                Cost     Gains    Losses     Fair Value
<S>                                           <C>       <C>       <C>         <C>
Federal National Mortgage
  Association, adjustable rate interest
  currently at 7.931%, due April 1, 2024      $ 2,535   $  13     $  --       $ 2,548

Federal Home Loan Mortgage
  Corporation, adjustable rate interest
  currently at 7.666%, due June 1, 2024           870       4        --           874

Federal National Mortgage
  Association, adjustable rate interest
  currently at 7.359%, due April 1, 2025          582       4        --           586

Federal National Mortgage
  Association, adjustable rate interest
  currently at 6.82%, due May 1, 2026           2,936      13        --         2,949

Federal National Mortgage
  Association, adjustable rate interest
  currently at 6.869%, due June 1, 2026         5,638     101        --         5,739
                                              -------   -----     -----       -------

                                              $12,561   $ 135     $  --       $12,696
                                              =======   =====     =====       =======

</TABLE>

     The  maturity  dates  above  are not  necessarily  indicative  of  expected
     maturities as principal is often prepaid on such instruments.

5.   Note Payables
     -------------

     The  Company  has one note  payable to John Alden  Life  Insurance  Company
     ("John  Alden")  with an interest  rate of 9.50% per annum.  Principal  and
     interest are payable  monthly  until August 7, 2017 when the entire  unpaid
     principal balance and any unpaid interest are due. John Alden has the right
     to call the entire  note due and payable  upon  ninety  days prior  written
     notice.


622033.3
                                        7

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


6.   Income Taxes:
     ------------

     The Company has here-to-fore elected to be taxed as a real estate
     investment trust and as such, is not taxed on that portion of its taxable
     income which is distributed to shareholders, provided that at least 95% of
     its real estate trust taxable income is distributed and that the Company
     meets certain other REIT requirements. Immediately following the Preferred
     Share Investment, the Company will no longer be operated as a REIT and will
     therefore be subject to federal income taxes.

     The Company had federal and California net operating loss carryforwards
     ("NOLs") as of December 31, 1996 of approximately $17,631,000 and
     $5,194,000, respectively. The Company also has a federal and California
     capital loss carryover of approximately $1,567,000 that can be used to
     offset future capital gain. Due to CRIL's purchase of the 6,959,593 Class A
     Common Shares from the Company's former parent in January 1997 and the
     prior year ownership change related to the former parent's bankruptcy, NOLs
     are limited for both federal and California to approximately $1,500,000
     annually. Any unused portion of such annual limitation can be carried
     forward to future periods.

7.   Related-Party Transactions:
     --------------------------

     Pursuant to an oral agreement with the Company's  former parent,  costs for
     certain general  administrative  services,  including  executive  services,
     accounting  services,  treasury services,  financial reporting and internal
     bookkeeping  services,  shareholder  relations,  and directors and officers
     insurance  were  shared  with the  former  parent.  The  shared  costs were
     allocated to the Company and the former parent based upon their  respective
     asset  values  (real  property  and notes  receivable),  subject  to annual
     negotiation.  At June 30,  1997 and  December  31,  1996,  the  Company had
     $9,000,  and  $31,000,  respectively  due to the  Company's  former  parent
     pursuant  to  the  cost   allocation   arrangement.   The  cost  allocation
     arrangement  between the Company and the former  parent was  terminated  on
     January 7, 1997.


622033.3
                                        8

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


8.   Statement of Cash Flows Supplemental Information:
     ------------------------------------------------

     In  connection  with  the  sale  and   foreclosure  of  properties,   notes
     receivable,  and property,  plant and  equipment  the Company  entered into
     various non-cash transactions as follows:


                                                     (In thousands)
                                                For the Six Months Ended

                                                June 30,         June 30,
                                                  1997             1966

     Sales price less selling costs             $8,396           $11,199
     Liabilities applied to sales price             --               (57)
     Amount due from buyer                      (1,090)               --
                                                ------           -------

     Net cash received                          $7,306           $11,142
                                                ------           -------

     Cash paid for interest  during the three month  periods ended June 30, 1997
     and 1996,  was $24,000 and $137,000,  respectively.  Cash paid for interest
     during the six month  periods ended June 30, 1997,  and June 30, 1996,  was
     $123,000 and $274,000, respectively.

9.   Per Share Data:
     --------------

     Per share data is for the three month and six month  periods ended June 30,
     1997, and June 30, 1996,  based on the weighted average number of shares of
     beneficial  interest  outstanding  during each period. The weighted average
     number of shares used in the computation was 9,137,000.


622033.3
                                        9

<PAGE>


                                  CAPITAL TRUST
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------


10.  Gain (Loss) on Foreclosure or Sale of Investments:
     -------------------------------------------------

     Components of the gain (loss) on foreclosure or sale of investments for the
     three and six  months  ended  June 30,  1997,  and June 30,  1996,  were as
     follows:

<TABLE>
<CAPTION>

                                                          (In thousands)
                                               For the                      For the
                                         Three Months Ended            Six Months Ended
                                              June 30,                     June 30,
                                         1997          1996            1997         1996
                                         ----          ----            ----         ----
<S>                                      <C>          <C>              <C>          <C>
Sale of Bekins property                    --         $(164)             --         (164)

Sale of pavilions at Mesa Note             --           430              --          430

Sale of Spacesaver Mini-Storage Note       --            30              --           30

Sale of Van                                --             1              --            1

Sale of Redfield property                  --            --              --          299

Recognition of deferred gains              --            --              --           --
Sale of Fulton Square                      --            --             (34)          --
Sale of Totem Square                       --            --            (398)          --
                                         ----          ----           -----         ----

                                           --          $297           $(432)        $596
                                         ====          ====           =====         ====
</TABLE>




622033.3
                                       10

<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,  as class A
common  shares of  beneficial  interest,  $1.00 par value  (the  "Class A Common
Shares").

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

     On January 3, 1997,  CalREIT Investors  Limited  Partnership  ("CRIL"),  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  outstanding  Class A Common Shares) then owned by the
former  parent 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.  ("VCG")  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  opportunities  in
commercial real estate.  EGI and VCG 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 million in a new class of preferred shares
to be issued by the Company.

     The board of trustees approved CRIL's purchase of the former parent's Class
A Common  Shares,  the new  business  plan and the  issuance of a minimum of $30
million of convertible  preferred  shares of the Company at $2.69 per share, the
preferred  shares to be  convertible  into  common  shares of the  Company  on a
one-for-one  basis.  The board of  trustees  considered  a number of  factors in
approving  the  foregoing,  including  the  attractiveness  of the  proposed new
business plan, the significant real estate  investment and financing  experience
of the proposed new management team and the significant amount of equity capital
the Company would obtain from the proposed preferred share investment. The Board
also considered the terms of previous  alternative offers to purchase the former
parents's interest in the Company of which the Board was aware and the fact that
the average price of the  Company's  Class A Common Shares during the 60 trading
days  preceding the board of trustees'  meeting at which the proposed  preferred
equity  investment  was approved was $2.38 per share.  The Company  subsequently
agreed that, concurrently with the consummation of the proposed preferred equity
investment,  it would  acquire for $5.0  million  VCG'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 held on July 15, 1997,
the Company's shareholders approved a proposal to issue and sell up to
approximately $34 million of class A 9.5% cumulative convertible preferred
shares, $1.00 par value, of beneficial interest in the Company ("Class A
Preferred Shares") to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of
Samuel Zell and the principals of VCG (the "Preferred Share Investment"). The
Company's shareholders also approved an amended and restated declaration of
trust of the Company, that, among other things, reclassified the Company's
outstanding common shares as Class A Common Shares and changed the Company's
name to Capital Trust.


622033.3
                                       11

<PAGE>



     Immediately  following the Company's  annual meeting of  shareholders,  the
Preferred Share 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 from CRIL the 6,959,593 Class A
Common Shares held by it for an aggregate purchase price of approximately  $21.3
million. As a result of these transactions,  Veqtor beneficially owns 19,227,251
or approximately 90% of the outstanding voting shares of the Company.

     In addition immediately  following the shareholder meeting, the acquisition
of the  real  estate  services  businesses  of  VCG  was  consummated  and a new
management  team was  appointed  by the  Company  from among the rank's of VCG's
professional team and elsewhere.  The Company thereafter  immediately  commenced
full  implementation  of the new business  plan under the direction of its newly
elected board of trustees and new management team.

     In connection  with the foregoing,  the Company  announced on July 15, 1997
the  completion of its first  investment  pursuant to the new business  plan. On
June  30,  1997,  the  Registrant   completed  an  approximately  $49.3  million
investment  in  a  junior,  subordinated  class  of  commercial  mortgage-backed
securities  ("CMBS").  The CMBS  investment,  which is secured by 20  short-term
commercial  mortgage  loans with original  maturities  ranging from two to three
years,  was structured to provided an effective  yield of a specified  number of
basis points over LIBOR based on specified base case modeling  assumptions.  The
purchase price was financed in part pursuant to a reverse repurchase  agreement.
Pursuant  to the reverse  repurchase  agreement,  the Company  posted 25% of the
purchase  price  (approximately  $12.3  million) from  available cash sources as
maintenance  margin and received an  extension of credit from the counter  party
for the remaining 75% balance (approximately $36.9 million).

Dispositions of Properties and Mortgage Notes
---------------------------------------------

     As of January 1, 1997, the Company's investment portfolio included two
commercial properties, as well as three mortgage notes secured by real property,
all "held for sale." The Company's real estate portfolio, carried at a book
value of $8,585,000 as of January 1, 1997, included Fulton Square Shopping
Center in Sacramento, California and a 60% interest in Totem Square, a mixed-use
retail property in Kirkland, Washington. During the first quarter, these two
commercial properties were sold. The sale of Fulton Square closed on February
14, 1997 and the sale of Totem Square closed on March 3, 1997. The proceeds from
these sales were invested in mortgage loans and liquid mortgage-backed
securities which satisfy REIT-asset qualification requirements. As of the end of
the second quarter, the Company had $12,696,000 invested in such securities.

     The Company's  mortgage note portfolio,  carried at an aggregate book value
of $2,650,000 as of June 30, 1997, consists of four loans which bear interest at
an  overall  effective  rate  of  approximately  8% and  are  collateralized  by
mortgages  on real  property;  approximately  $2.1  million  of these  loans pay
interest on a monthly  basis and bear interest at an overall  effective  rate of
approximately 8.7%.



622033.3
                                       12

<PAGE>



Management of the Company's Investments
---------------------------------------

     All strategic and investment  decisions  during the period were made by the
board of trustees.  The Company was self-administered  and had no employees.  In
1996,  operating and  administration  services were provided by the employees of
the  Company's   former   parent  (for  which  the  former  parent   received  a
reimbursement of costs) and by independent  contractors.  As of January 7, 1997,
the  arrangement  with the former  parent was  mutually  terminated.  Day-to-day
operations and administration of the Company are currently being provided by its
new  management  team which was appointed  following the 1997 annual  meeting of
shareholders. See "-- Recent Developments."

Comparison of the Six Months and Three Months Ended June 30, 1997 to the Six 
-----------------------------------------------------------------------------
Months and Three Months Ended June 30, 1996
-------------------------------------------

     Net loss of $860,000  was reported by the Company the six months ended June
30, 1997, a decrease of $1,087,000, from the six months ended June 30, 1996. Net
loss of $352,000 was reported by the Company for the three months ended June 30,
1997, a decrease of $139,000, or 65% from the net loss of $213,000 for the three
months ended June 30, 1996. These changes were primarily the result of losses on
the sale of  investments  and  expenses  associated  with the annual  meeting of
shareholders and the attendant proxy materials, respectively.

     Total Revenues decreased  $667,000,  or 40%, to $984,000 for the six months
ended June 30, 1997. Total revenues decreased $409,000,  or 52%, to $371,000 for
the three months ended June 30, 1997. This was down from $1,651,000 and $780,000
for the six and three months ended June 30, 1996, respectively.  These decreases
are primarily  attributable to decreases in rental revenues due primarily to the
sale of properties offset by an increase in interest revenues.

     Rental revenues decreased $867,000,  or 79%, to $236,000 for the six months
ended June 30, 1997.  Rental  revenues  decreased  $534,000,  or 100%, to $0 for
three months ended June 30, 1997. This was down from $1,103,000 and $534,000 for
the six and three months ended June 30, 1996, respectively. These decreases were
primarily the result of the sale of the Company's remaining properties.

     Interest  revenues  increased  $131,000,  or 24%, to  $679,000  for the six
months ended June 30, 1997.  Interest revenues  increased  $110,000,  or 45%, to
$356,000 for the three months ended June 30, 1997. This was up from $548,000 and
$246,000 for the six and three months ended June 30, 1996,  respectively.  These
increases  were  primarily  due  to  the  increase  in  interest  received  from
marketable securities and an increase in interest earned on cash accounts.

     Total Expenses decreased $49,000,  or 3 %, to $1,412,000 for the six months
ended June 30, 1997. Total expenses decreased $8,000, or 1%, to $723,000 for the
three months ended June 30, 1997. This was down from $1,461,000 and $731,000 for
the six and three months ended June 30, 1996, respectively. These decreases were
attributable to decreases in operating expenses as well as decreases in interest
expense offset by increases in general and  administrative  expenses,  primarily
associated with the annual meeting of shareholders.

     Interest expense decreased $151,000, or 55%, to $123,000 for the six months
ended June 30, 1997. Interest expense decreased $113,000, or 82%, to $24,000 for
the three months ended June 30, 1997.  This was down from  $274,000 and $137,000
for the six and three months ended June 30, 1996,

622033.3
                                       13

<PAGE>



respectively.  These decreases primarily resulted from the cessation of interest
expense on the sale of Totem Square.

     General  and  administrative   expenses  increased  $346,000,  or  44%,  to
$1,126,000 for the six months ended June 30, 1997.  The same expenses  increased
$327,000,  or 89%, to $694,000,  for the three months ended June 30, 1997.  This
was up from  $780,000  and  $367,000 for the six and three months ended June 30,
1996, respectively.  These increases were due to the net effect of increases and
decreases in various expense categories. The largest increases were generated by
additional trustee fees and  consulting  fees related to expansion  transaction
activities, the packaging and  disposition of the Company's  mortgage  notes,
and expenses relating to the annual meeting of shareholders.

     Valuation  Losses.  Valuation  losses  decreased to zero for the six months
ended June 30, 1997.

     Dispositions.  During the first  quarter of 1997,  the Company  sold Fulton
Square Shopping Center, a retail property located in Sacramento, California. The
net loss  recognized from the sale of Fulton Square was  approximately  $34,000.
The Company  also sold Totem  Square,  a retail  property  located in  Kirkland,
Washington.  The  net  loss  recognized  from  the  sale  of  Totem  Square  was
approximately  $398,000  of  which  the  majority  was  transfer  taxes  and the
elimination of unamortized tenant improvements and leasing commissions.

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

     At June 30, 1997, the Company had $2,059,000 in cash. Capital Trust's
$8,777,000 mortgage note portfolio is carried at a net book value of $2,650,000
due primarily to cumulative write downs in valuation. Its investment in
marketable securities, available for sale, had a net book value at June 30,
1997, of $12,696,000. The primary sources of liquidity for the Company in the
remainder of 1997, which management believes will adequately meet future
liquidity and capital resource requirements, will be the $33 million of proceeds
from the Preferred Share Investment, cash on hand, cash generated from
operations, and interest payments on its notes and securities. The primary
demands on the Company's capital resources will be the implementation of the
Company's new business plan.

     The Company  experienced a net decrease in cash of  $2,639,000  for the six
months ended June 30,  1997,  compared to a net decrease in cash of $620,000 for
the six months  ended June 30, 1996, a  difference  of  $2,019,000.  For the six
months ended June 30, 1997, cash used in operating activities was $131,000, down
$496,000 from cash provided by operations of $365,000  during the same period in
1996.  Cash used in investing  activities  during this same period  increased by
$39,743,000  to  $40,690,000,  up  from  $(947,000),  primarily  the  result  of
investing in Commercial  Mortgage Backed Securities  ("CMBS").  Cash provided by
financing  activities  increased  $38,220,000 due primarily from the proceeds of
repurchase obligations.

     The Company has one outstanding  debt obligation of $873,000 in addition to
two outstanding repurchase obligations



622033.3
                                       14

<PAGE>



                           PART II. OTHER INFORMATION

ITEM 1:   Legal Proceedings

                    None

ITEM 2:   Changes in Securities

                    None

ITEM 3:   Defaults Upon Senior Securities

                    None

ITEM 4:   Submission of Matters to a Vote of Security Holders

The  Registrant  held its annual meeting of  shareholders  on July 15, 1997. The
Registrant's shareholders consider proposals to:

1.        approve  the  issuance  of the  Registrant's  class A 9.5%  cumulative
          convertible preferred shares, $1.00 par value, of beneficial interests
          in the  Registrant,  upon the  terms and  conditions  set forth in the
          preferred share purchase agreement,  dated as of June 16, 1997, by and
          between  the  Registrant,  Veqtor  Finance  Company,  LLC  and  in the
          certificate of designation, preferences and rights of the class A 9.5%
          cumulative   convertible   preferred  shares  and  the  class  B  9.5%
          cumulative  convertible  non-voting preferred shares of the Registrant
          ("Proposal 1");

2.        (a) approve an amendment to the existing  declaration  of trust of the
          Registrant (the "Existing  Declaration") which reclassifies the common
          shares of beneficial  interest,  $1.00 par value, of the Registrant as
          "class A common  shares" and creates  another class of common  shares,
          "class B non-voting common shares"  ("Proposal  2(a)"); (b) approve an
          amendment  to  the  Existing   Declaration   which   revises   certain
          restrictions  upon  transactions  between the  Registrant  and certain
          large shareholders and other affiliates ("Proposal 2(b)"); (c) approve
          an amendment  to the Existing  Declaration  which  eliminates  certain
          provisions intended to assure the Registrant's  continued treatment as
          a "real estate investment  trust" for federal tax purposes  ("Proposal
          2(c)");  and (d) approve other amendments to the Existing  Declaration
          ("Proposal 2(d)"), each of the foregoing amendments to be contained in
          an amended and restated declaration of trust of the Registrant;

3.        elect Martin L. Edelman, Gary R. Garrabrant, Craig M. Hatkoff, John R.
          Klopp,  Sheli  Z.  Rosenberg,  Lynne B.  Sagalyn  and  Samuel  Zell as
          trustees  to serve  until the  Registrant's  next  annual  meeting  of
          shareholders or until such trustees'  successors are elected and shall
          have qualified ("Proposal 3");

4.        ratify  the  appointment  of  Ernst  &  Young  LLP as the  independent
          auditors of the Registrant for fiscal year 1997 ("Proposal 4);


622033.3
                                       15

<PAGE>



5.        approve a long-term incentive share plan ("Proposal 5"); and

6.        approve a non-employee trustee share plan ("Proposal 6").

     The following table sets forth the number of votes in favor,  the number of
votes opposed the number of  abstentions  (or votes  withheld in the case of the
election of trustees) and broker non-votes with respect to each of the foregoing
proposals.

<TABLE>
<CAPTION>

      Proposal         Votes in Favor    Votes Opposed    Abstentions   Broker Non-
                                                          (Withheld)       Votes
<S>                      <C>                <C>             <C>           <C>
Proposal 1               7,637,601           77,231         35,750        784,029
Proposal 2(a)            7,635,887           64,091         50,604        784,029
Proposal 2(b)            7,635,044           68,278         40,260        784,029
Proposal 2(c)            7,593,678          118,262         38,642        784,029
Proposal 2(d)            7,584,600          115,087         50,895        784,029
Proposal 3
  Martin L. Edelman      8,474,895            --            59,716          --
  Gary R. Garrabrant     8,485,499            --            49,112          --
  Craig M. Hatkoff       8,485,499            --            49,112          --
  John R. Klopp          8,485,499            --            49,112          --
  Sheli Z. Rosenberg     8,485,499            --            49,112          --
  Lynne B. Sagalyn       8,485,499            --            49,112          --
  Samuel Zell            8,485,499            --            49,112          --
                                                            49,112          --
Proposal 4               8,460,551           38,549         35,511          --
Proposal 5               7,591,933          113,232         45,417        784,029
Proposal 6               7,581,740          120,627         48,215        784,029
</TABLE>


ITEM 5:   Other Information

                    None



622033.3
                                       16

<PAGE>



ITEM 6:   Exhibits and Reports on Form 8-K

          (a)  Exhibits


Exhibit
Number                             Description


2.1       Interest Purchase Agreement, dated as of June 16, 1997, by and between
          John R. Klopp, Craig M. Hatkoff, and Valentine Wildove & Company, Inc.
          and the Registrant  (filed as Exhibit 2.1 to the Registrant's  Current
          Report on Form 8-K filed on July 30, 1997 and is  incorporated  herein
          by reference).

3.1       Amended and Restated  Declaration of Trust, dated July 15, 1997 (filed
          as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on
          July 15, 1997 and is incorporated herein by reference).

3.2       By-Laws of the  Registrant  (filed as Exhibit 3.2 to the  Registrant's
          Current Report on Form 8-K filed on July 15, 1997 and is  incorporated
          herein by reference).

4.1       Certificate of Designation, Preferences and Rights of the Class A 9.5%
          Cumulative   Convertible   Preferred  Shares  and  the  Class  B  9.5%
          Cumulative  Convertible  Non-Voting Preferred Shares (filed as Exhibit
          4.1 to the  Registrant's  Current Report on Form 8-K filed on July 15,
          1997 and is incorporated herein by reference).

10.1      Preferred Share Purchase Agreement,  dated as of June 16, 1997, by and
          between  the  Registrant  and Veqtor  Finance  Company,  LLC (filed as
          Exhibit 10.1 to the  Registrant's  Current Report on Form 8-K filed on
          July 30, 1997 and is incorporated herein by reference).

10.2      Non-Negotiable Notes of the Registrant payable to John R. Klopp, Craig
          M. Hatkoff and  Valentine  Wildove & Company,  Inc.  (filed as Exhibit
          10.2 to the Registrant's  Current Report on Form 8-K filed on July 30,
          1997 and is incorporated herein by reference).

10.3      1997 Long-Term Incentive Share Plan, as amended.(filed as Exhibit 10.1
          to the Registrant's  Current Report on Form 8-K filed on July 15, 1997
          and is incorporated herein by reference).

10.4      1997  Non-Employee  Trustee Share Plan,  as amended  (filed as Exhibit
          10.2 to the Registrant's  Current Report on Form 8-K filed on July 15,
          1997 and is incorporated herein by reference).



622033.3
                                       17

<PAGE>



          (b)  Reports on Form 8-K

          During the fiscal  quarter ended March 31, 1997, the Company filed two
          Current Reports on Form 8-K:

               (i)  The Registrant filed on April 16, 1997 a Current Report on
                    Form 8-K,  dated April 10,  1997,  reporting  under Item 4 a
                    change  in  independent  accountants  and  under  Item 5 the
                    filing  of its  preliminary  proxy  statement  for its  1997
                    annual meeting of shareholders.

               (ii) The Registrant  filed on June 12, 1997 a Current Report on
                    Form 8-K,  dated February 14, 1997,  reporting  under Item 2
                    the disposition of certain  commercial  properties and under
                    Item 7 pro forma financial information with respect thereto.



622033.3
                                       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



August 14, 1997                           /s/  John R. Klopp
---------------                           ------------------
     Date                                 John R. Klopp
                                          Chief Executive Officer



                                          /s/ Edward L. Shugrue III
                                          -------------------------
                                          Edward L. Shugrue III
                                          Managing Director and Acting
                                          Chief Financial Officer
                                          (principal financial officer)

622033.3
                                       19