As filed with the Securities and Exchange Commission on December 11, 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 March 31, 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 May 13, 1998
-------------------------------------------          ---------------------------
Class A Common Shares of Beneficial Interest                18,229,650
$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 - March 31, 1998 (unaudited) and December 31, 1997
                           (audited)                                                                     1

                      Consolidated Statements of Operations - Three Months Ended March 31, 1998 and
                           1997 (unaudited)                                                              2

                      Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended
                           March 31, 1998 and 1997 (unaudited)                                           3

                      Consolidated Statements of Cash Flows - Three Months Ended March 31, 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                                                                   11


              Signatures                                                                                16

</TABLE>

<PAGE>



                         Capital Trust and Subsidiaries
                           Consolidated Balance Sheets
                      March 31, 1998 and December 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>

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


   
Cash and cash equivalents                                                           $        7,075           $       49,268
Available-for-sale securities                                                                9,604                   11,975
Commercial mortgage-backed securities                                                       67,486                   49,490
Certificated mezzanine investment available-for-sale, at market value                       21,839                   21,998
Loans receivable, net of $942 (unaudited) and $462 reserve for possible 
   credit losses at March 31, 1998 and December 31, 1997, respectively                     327,749                  180,324
Excess of purchase price over net tangible assets acquired, net                                326                      331
Deposits and other receivables                                                               3,824                      284
Accrued interest receivable                                                                  3,418                      818
Prepaid and other assets                                                                     3,858                    2,878
                                                                                  --------------------     --------------------
     Total assets                                                                     $    445,179             $    317,366
                                                                                  ====================     ====================
    


                         Liabilities and Shareholders' Equity

Liabilities:
   Accounts payable and accrued expenses                                            $        5,098           $        5,718
   Notes payable                                                                             4,447                    4,953
   Credit facility                                                                         188,714                   79,864
   Repurchase obligations                                                                   97,945                   82,173
   Deferred origination fees and other revenue                                               3,099                    1,369
                                                                                  --------------------     --------------------
Total liabilities                                                                          299,303                  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 March 31, 1998                                                          72                     -
   Additional paid-in capital                                                              158,790                  158,137
   Unearned compensation                                                                      (693)                    -
   Accumulated other comprehensive income                                                      269                      387
   Accumulated deficit                                                                     (42,987)                 (45,660)
                                                                                  --------------------     --------------------
Total shareholders' equity                                                                 145,876                  143,289
                                                                                  --------------------     --------------------


Total liabilities and shareholders' equity                                            $    445,179             $    317,366
                                                                                  ====================     ====================
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

<PAGE>



                         Capital Trust and Subsidiaries
                      Consolidated Statements of Operations
                   Three Months Ended March 31, 1998 and 1997
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                              1998                    1997
                                                                       -------------------      ------------------
<S>                                                                   <C>                       <C>
Income from loans and other investments:
   Interest and related income                                           $        7,977           $           36
   Less: interest and related expenses                                            3,081                     -
                                                                       -------------------      ------------------
     Net income from loans and other investments                                  4,896                       36
                                                                       -------------------      ------------------

Other revenues:
   Advisory and investment banking fees                                           2,860                     -
   Rental income                                                                   -                         290
   Other interest income                                                            370                      287
   Loss on sale of rental properties                                               -                        (432)
                                                                       -------------------      ------------------
     Total other revenues                                                         3,230                      145
                                                                       -------------------      ------------------

 Other expenses:
   General and administrative                                                     3,241                      432
   Other interest expense                                                           106                       99
   Rental property expenses                                                        -                         137
   Depreciation and amortization                                                     46                       21
   Provision for possible credit losses                                             480                     -
                                                                       -------------------      ------------------
     Total other expenses                                                         3,873                      689
                                                                       -------------------      ------------------

   Net income (loss) before income taxes                                          4,253                     (508)
Provision for income taxes                                                        1,580                     -
                                                                       -------------------      ------------------

   Net income (loss)                                                     $        2,673           $         (508)
Less:  Class A Preferred Share dividend requirement                                (784)                    -
                                                                       -------------------      ------------------
   Net income (loss) allocable to Class A Common Shares                  $        1,889           $         (508)
                                                                       ===================      ==================

Per share information:
   Net income (loss) per Class A Common Share:
     Basic                                                               $         0.10           $        (0.06)
                                                                       ===================      ==================
     Diluted                                                             $         0.09           $        (0.06)
                                                                       ===================      ==================
  Weighted average Class A Common Shares outstanding:
     Basic                                                                   18,207,900                9,157,150
                                                                       ===================      ==================
     Diluted                                                                 30,736,405                9,157,150
                                                                       ===================      ==================
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

<PAGE>

                                      -2-




                         Capital Trust and Subsidiaries
           Consolidated Statements of Changes in Shareholders' Equity
               For the Three Months Ended March 31, 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>         
Three months ended March 31, 1997
--------------------------------
Balance at December 31, 1996       $         -          $       -      $ 9,157    $     -      $  55,098   
Net loss                                   (508)                -           -           -            -    
Change in unrealized gain
  (loss) on available-for-sale               41                 -           -           -            -         
  securities
Other                                        -                  -           -           -             27 
                                   ------------------   ---------------------------------------------------
Balance at March 31, 1997          $       (467)        $       -      $ 9,157     $    -      $  55,125    
                                   ==================   ===================================================


Three months ended March 31, 1998
---------------------------------
Balance at December 31, 1997       $         -          $   12,268     $18,157     $    -      $ 158,137      
Net income                                2,673                 -           -            -            -         
Change in unrealized gain
  (loss) on available-for-sale
  securities                               (118)                -           -            -            -         
Issuance of restricted
  Class A Common Shares                      -                  -           -            72          653   
Restricted Class A Common
  Shares earned                              -                  -           -            -            -    
                                   ------------------   ---------------------------------------------------
Balance at March 31, 1998          $      2,555         $   12,268     $18,157     $     72    $ 158,790    
                                   ==================   ===================================================

</TABLE>


<TABLE>
<CAPTION>
                                                    Accumulated
                                                       Other
                                     Unearned      Comprehensive     Accumulated
                                   Compensation        Income          Deficit        Total
                                  --------------------------------------------------------------

<S>                               <C>              <C>               <C>              <C>
Three months ended March 31, 1997
--------------------------------
Balance at December 31, 1996      $        -        $       (22)       $ (39,762)     $   24,471
Net loss                                   -                 -              (508)           (508)
Change in unrealized gain
  (loss) on available-for-sale             -                 41               -               41
  securities
Other                                      -                 -                -               27
                                  --------------------------------------------------------------
Balance at March 31, 1997         $        -        $        19        $ (40,270)     $   24,031
                                  ==============================================================


Three months ended March 31, 1998
---------------------------------
Balance at December 31, 1997      $        -         $      387        $ (45,660)     $  143,289
Net income                                 -                 -             2,673           2,673
Change in unrealized gain
  (loss) on 
  available-for-sale
  securities                               -               (118)              -             (118)
Issuance of restricted
  Class A Common Shares                  (725)               -                -               -
Restricted Class A Common
  Shares earned                            32                -                -               32
                                  --------------------------------------------------------------
Balance at March 31, 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
                   Three months ended March 31, 1998 and 1997
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                      1998                  1997
                                                                               -------------------    ------------------

<S>                                                                             <C>                   <C>
Cash flows from operating activities:
   Net income (loss)                                                             $        2,673         $         (508)
  Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
       Depreciation and amortization                                                         46                     21
       Restricted Class A Common Shares earned                                               32                   -
       Loss on sale of investments and properties                                          -                       432
       Provision for possible credit losses                                                 480                   -
   Changes in assets and liabilities:
       Deposits and receivables                                                          (3,540)                    20
       Accrued interest receivable                                                       (2,600)                  -
       Prepaid and other assets                                                            (895)                   (53)
       Deferred  revenue                                                                  1,730                   -
       Accounts payable and accrued expenses                                               (620)                  (213)
       Other liabilities                                                                   -                       (70)
                                                                               -------------------    ------------------
   Net cash used in operating activities                                                 (2,694)                  (371)
                                                                               -------------------    ------------------


   
Cash flows from investing activities:
       Purchase of commercial mortgage-backed securities                                (28,959)                  -
       Principal collections of commercial mortgage-backed securities                    10,963                   -
       Principal collections of certificated mezzanine investment                           159                   -
       Origination and purchase of loans receivable                                    (148,153)                  -
       Principal collections of loans receivable                                            248                      8
       Purchases of equipment and leasehold improvements                                   (126)                  -
       Improvements to rental properties                                                   -                       (64)
       Proceeds from sale of rental properties                                             -                     7,306
       Principal collections on available-for-sale securities                             2,253                  1,015
                                                                               -------------------    ------------------
   Net cash provided by (used in) investing activities                                 (163,615)                 8,265
                                                                               -------------------    ------------------
    


Cash flows from financing activities:
       Proceeds from repurchase obligations                                              26,612                   -
       Repayment of repurchase obligations                                              (10,840)                  -
       Proceeds from credit facility                                                    148,714                   -
       Repayment of credit facility                                                     (39,864)                  -
       Repayment of notes payable                                                          (506)                (4,289)
       Additional Paid-in Capital                                                          -                        27
                                                                               -------------------    ------------------
   Net cash provided by (used in) financing activities                                  124,116                 (4,262)
                                                                               -------------------    ------------------

Net increase (decrease) in cash and cash equivalents                                    (42,193)                 3,632
Cash and cash equivalents at beginning of period                                         49,268                  4,698
                                                                               -------------------    ------------------
Cash and cash equivalents at end of period                                       $        7,075         $        8,330
                                                                               ===================    ==================

Supplemental disclosure of cash flow information
Interest paid during the period                                                  $        2,260         $           99
                                                                               ===================    ==================
Taxes paid during the period                                                     $          143         $           -
                                                                               ===================    ==================

</TABLE>

See accompanying notes to unaudited consolidated financial statements.



                                      -4-
<PAGE>



                         Capital Trust and Subsidiaries
                   Notes to Consolidated Financial Statements
                                 March 31, 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 months ended March 31,
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 March 31, 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 March 31,  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 March 31,  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 $2,555,000 and $(467,000) for the
three months ended March 31, 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  quarter  ended  March  31,  1998,  the  Company   purchased   three
subordinated commercial  mortgage-backed  securities issued by a financial asset
securitization investment trust for $29.0 million.

The Company's commercial mortgage-backed securities totaled $67,486,000 at March
31,  1998,  all of which earned  interest at floating  rates  (weighted  average
interest rate is 9.68% at March 31, 1998).

6.   Loans receivable

At March 31, 1998, the amount and weighted  average  interest rate the Company's
loans receivable by category was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                               Weighted 
                                                                                               Average
                                                                     Amount                 Interest Rate
                                                               -------------------        -------------------

<S>                                                             <C>                       <C>   
   
         Mortgage Loans                                         $       201,367                   11.20%
         Mezzanine Loans                                                125,272                   11.89%
         Other mortgage loans receivable                                  2,052                    8.41%
                                                               -------------------
         Total loans and other investments                              328,691                   11.45%
           Less:  Reserve for possible credit losses                       (942)
                                                               -------------------
         Net loans and other investments                        $       327,749
                                                               ===================
</TABLE>

At March 31, 1998, $217.8 million of the  aforementioned  loans bear interest at
floating  rates ranging from LIBOR plus 370 basis points to LIBOR plus 660 basis
points before amortization of fees, premiums and discounts. The remaining $110.9
million of loans were originated or purchased with fixed rates ranging from 8.5%
to 12% at March 31, 1998.  All of the loans financed at fixed rates were swapped
to yield a floating rate. The weighted  average interest rate in effect at March
31, 1998,  including interest rate swaps and amortization of fees,  premiums and
discounts, was 11.45%.
    

During the quarter ended March 31, 1998,  the Company  completed  eight new loan
transactions totaling  approximately $159.1 million and provided $5.4 million of
additional  fundings on two existing loans. The Company funded $148.1 million of
the  foregoing  loans  receivable  through  March  31,  1998  and  had  unfunded
commitments on such assets totaling $37.9 million at March 31, 1998.

At March 31,  1998,  the Company has letters of intent  outstanding  for various
other  lending  transactions,  which  were  subject to  satisfaction  of certain
conditions.


                                      -7-

<PAGE>



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


7.   Long-Term Debt


Credit Facility

Effective January 1, 1998, pursuant to an amended and restated credit agreement,
the  Company  increased  its line of  credit  with a  commercial  lender to $250
million (the "Credit  Facility").  The Credit Facility  provides for advances to
fund  lender-approved  loans  and  investments  made  by  the  Company  ("Funded
Portfolio  Assets").  The amended and restated agreement expires on December 31,
2000.

The  obligations of the Company under the Credit Facility are secured by pledges
of the Funded Portfolio Assets acquired with advances under the Credit Facility.
Borrowings under the Credit Facility bear interest at specified rates over LIBOR
(averaging approximately 7.82% for the borrowings outstanding at March 31, 1998)
which rates may fluctuate based upon the credit quality of the Funded  Portfolio
Assets and the advance rate. The Company incurred an initial commitment fee upon
the signing of the Credit Facility and paid additional  commitment fees when the
total borrowing under the Credit Facility exceeded $75 million and exceeded $150
million.

On March 31, 1998,  the unused amount  available  under the Credit  Facility was
$61.3 million.

Repurchase Obligations

During the quarter ended March 31, 1998,  the Company has entered into three new
repurchase agreements.

In February 1998, the Company entered into a repurchase  agreement in connection
with the purchase of a subordinated  participation in a note. At March 31, 1998,
the Company has sold such assets  totaling  $10.0 million and has a liability to
repurchase  these  assets for $7.5  million.  The  liability  bears  interest at
specified  rates over LIBOR  (7.09% at March 31,  1998) and  matures in February
1999.

In March 1998,  the Company  entered into a repurchase  agreement in  connection
with the purchase of a subordinated  participation  in a first mortgage loan. At
March 31, 1998, the Company has sold such assets  totaling $14.2 million and has
a liability to repurchase  these assets for $10.6 million.  The liability  bears
interest at specified  rates over LIBOR (7.64% at March 31, 1998) and matures in
March 1999.

The Company has also entered into a repurchase agreement in conjunction with the
purchase of a class of subordinated commercial mortgage-backed securities issued
by a financial  asset  securitization  investment  trust. At March 31, 1998, the
Company has sold such  securities  with a book value  totaling $10.0 million and
has a liability to repurchase these assets for $8.5 million. The liability bears
interest at 6.66%, and matures in March 1999.



                                      -8-
<PAGE>



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



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 quarter
ended March 31, 1998 is comprised of the following (in thousands):

Current
   Federal                                                  $     787
   State                                                          417
   Local                                                          376
Deferred
   Federal                                                         -
   State                                                           -
   Local                                                           -
                                                          --------------
Provision for income taxes                                  $   1,580
                                                          ==============

The Company has federal net operating  loss  carryforwards  ("NOLs") as of March
31, 1998 of  approximately  $19.0  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 NOLs 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  March 31, 1998 is as
follows (in thousands):

<TABLE>
<CAPTION>

<S>                                                                             <C>             <C>  
   Federal income tax at statutory rate (34%)                                   $  1,446        34.0%
   State and local taxes, net of federal tax benefit                                 523        12.3
   Tax benefit of utilization of net operating loss carryforward                    (425)      (10.0)
   Other                                                                              36         0.9
                                                                            ------------------------------
                                                                                $  1,580        37.2%
                                                                            ==============================

</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
March 31, 1998 are as follows (in thousands):

   Net operating loss carryforward                                $     8,665
   Reserves on other assets and for possible credit losses              3,552
   Deferred revenue                                                       616
   Reserve for uncollectible accounts                                     208
                                                               -----------------
   Deferred tax assets                                            $    13,041
   Valuation allowance                                                (13,041)
                                                               -----------------
                                                                  $      -
                                                               =================

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 Trustee
Share Plan (as defined below).  The maximum number of shares that may be subject
of awards to any  employee  during the term of the 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 March 31,  1998,  the Company  issued an  aggregate of
925,250  options to acquire  Class A Common  Shares  with an  exercise  price of
$10.00  per share (the  closing  Class A Common  Share  price on the date of the
grant)  and  72,500  shares of  restricted  shares  which  will begin to vest in
January 2001 and fully vest in January 2003. In addition,  as of March 31, 1998,
the  Company  had  outstanding  ISOs and NQSOs (the  "Grants")  pursuant  to the
Incentive  Share Plan to purchase an aggregate of 604,500  Class A Common Shares
with an exercise price of $6.00 per share.



                                      -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 ("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 


                                      -11-


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.  The
Veqtor Notes may in the future be converted into  preferred  interests in Veqtor
that may in turn be redeemed for an aggregate of 9,899,710  voting shares of the
Company held by Veqtor.

         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. 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.

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


         During the first quarter of 1998,  the Company  completed nine new loan
and investment in commercial  mortgage-backed  securities  transactions totaling
approximately $188.1 million and provided $5.4 million of additional fundings on
two existing loans. The Company funded $177.1 million of the foregoing loans and
investments  through March 31, 1998 which enabled the Company to grow its assets
from $317.4 million to $445.2 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  Facility  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  nine  loan  and   investment   in   commercial
mortgage-backed  securities  transactions.  This  includes  five  Mortgage  Loan
transactions  totaling $84.2 million (of which $12.4 million remains unfunded at
March 31, 1998),  three Mezzanine Loan  transactions  totaling $74.9 million (of
which $4.0 million remains  unfunded at March 31, 1998), and one transaction for
three subordinated commercial  mortgage-backed  securities issued by a financial
asset securitization investment trust for $29.0 million. The Company also funded
$5.4 million of commitments  to two 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.  


                                      -12-
<PAGE>


At March  31,  1998,  the  Company  had  outstanding  loans and  investments  in
commercial mortgage-backed securities totaling in excess of $418 million and had
additional  commitments for fundings of approximately  $37.9 million pursuant to
certain of the loans originated in such transactions.

         When possible,  in connection with the acquisition of investments,  the
Company obtains seller financing in the form of repurchase agreements.  Three of
the  transactions  completed  during the quarter ended March 31, 1998  described
above were financed in this manner  representing total repurchase  financings of
$26.6 million.  These financings are generally  completed at discounted terms as
compared  to  those   available  under  the  Credit   Facility.   The  remaining
transactions  were funded  primarily  with cash on hand from the proceeds of the
Company's public offering and through borrowings under the Credit Facility.  The
Credit  Facility  was  increased  from $150  million to $250  million  effective
January  1,  1998.  At March  31,  1998,  the  Company  had  $188.7  million  of
outstanding borrowings under the Credit Facility.

         As of  March  31,  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
$49.9  million with  financial  institution  counterparties  whereby the Company
swapped fixed rate instruments, which averages approximately 6.14%, for floating
rate  instruments  based on the London  Interbank  Offered Rate  ("LIBOR").  The
agreements mature at varying times from December 1998 to April 2006.

         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.


                                      -13-
<PAGE>



Comparison of the Three Months Ended March 31. 1998 to the
----------------------------------------------------------
     Three Months Ended March 31. 1997
     ---------------------------------

         The Company  reported net income  allocable to Class A Common Shares of
$1,889,000  for the three months ended March 31, 1998, an increase of $2,397,000
from loss of $508,000  reported for the three months ended March 31, 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  $4,860,000  to
$4,896,000  for the three  months  ended March 31, 1998 over the $36,000 for the
three months ended March 31, 1997.  This increase is primarily  attributable  to
the revenue earned by the Company from new  investments and loans that increased
by more than $400 million from March 31, 1997 to March 31, 1998.  This  increase
was  partially  offset by the interest  paid on  repurchase  agreements  and the
Credit  Facility  during the  quarter  ended  March 31, 1998 which did not exist
during the quarter ended March 31, 1997.

         During the three months ended March 31, 1998, other revenues  increased
$2,653,000  to  $3,230,000  over the same period in 1997.  The  increase for the
three  months  ended  March  31,  1998  was  primarily  due to the  addition  of
$2,860,000 of advisory and  investment  banking fees generated by Victor Capital
and its  related  subsidiaries  and an  increase  in other  interest  income  of
$83,000, from a higher level of invested cash on hand and investments, which was
partially offset by a $290,000 decrease in rental income as the Company sold its
remaining rental properties during the first quarter of 1997.

         Other expenses increased from $689,000 for the three months ended March
31, 1997 to $3,393,000  for three months ended March 31, 1998.  The increase was
primarily due to the additional  general and  administrative  expenses necessary
for the  commencement  of full-scale  operations as a specialty  finance company
pursuant to the  Company's  business  plan,  the largest  component  of which is
employee  salaries and related  costs.  As of March 31, 1998, the Company has 41
full time employees as compared to none at March 31, 1997.

         The  provision  for possible  credit  losses was $480,000 for the three
months  ended March 31, 1998 as the  company  provided  reserves on its loan and
investment  portfolio  pursuant  to its new  business  plan.  The Company had no
provision for possible credit loss in the quarter ended March 31, 1997.

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

         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 first  quarter of 1998,  the Company
accrued  $1,580,000  of income tax expense for  federal,  


                                      -14-

<PAGE>


state and local income taxes.  For federal  purposes,  the Company  utilized one
quarter of the expected net operating loss  carryforward  to be utilized in 1998
in calculating the accrual.

         The preferred share dividend and dividend  requirement arose in 1997 as
a result of the Company issuing $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.

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

         At March 31,  1998,  the Company had  $7,075,000  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,  and
additional  borrowings under the Company's  Credit Facility.  The Company's loan
origination  activities  have  outpaced its original  plan and as a result,  the
Company is exploring securing additional debt and equity financing.  The primary
demands on the Company's capital resources will be the fundings required for the
origination  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 $42,193,000  for the
three  months  ended  March 31,  1998,  compared  to a net  increase  in cash of
$3,632,000  for the three  months  ended  March 31,  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 quarter of 1998 offset by additional borrowings.  For the three
months ended March 31, 1998,  cash used in operating  activities was $2,812,000,
an increase of  $2,441,000  from $371,000  during the same period in 1997.  Cash
used in investing  activities  during this same period increased by $171,762,000
to $163,497,000, from cash provided by investing activities of $8,265,000 during
the quarter  ended March 31, 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 $128,378,000 to $124,116,000 from a use of
$4,262,000,  was due primarily to the proceeds of repurchase obligations and net
borrowings under the Credit Facility.

         The Company has two  outstanding  notes  payable  totaling  $4,447,000,
outstanding  borrowings on the Credit Facility of  $188,714,000  and outstanding
repurchase obligations of $97,945,000.



<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




   
December 11, 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
<PAGE>