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 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 March 31, 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>

Part I.   Financial Information

<S>       <C>                                                                          <C>
          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 Statement of Shareholders' Equity -
                       Three Months Ended March 31, 1998 (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                                               10

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                                               15

              Item 6:      Exhibits and Reports on Form 8-K                                15

              Signatures                                                                   17

</TABLE>



<PAGE>



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

<TABLE>
<CAPTION>


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

Cash and cash equivalents                                                                  $        7,075           $       49,268
Available-for-sale securities                                                                       9,604                   11,975
Loans and other investments, net of $942 and $462 reserve for possible 
credit losses at March 31, 1998 and December 31, 1997, respectively                               417,074                  251,812
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 Preferred Shares, $1.00 par value, 12,639 shares authorized, 12,268 shares
     issued and outstanding                                                                        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)                    -
   Unrealized gain on available-for-sale securities                                                   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
                                                                       -------------------      ------------------
     Total other revenues                                                         3,230                      577
                                                                       -------------------      ------------------

 Other expenses:
   General and administrative                                                     3,241                      432
   Other interest expense                                                           106                       99
   Rental property expenses                                                        -                         137
   Depreciation and amortization                                                     46                       21
                                                                       -------------------      ------------------
     Total other expenses                                                         3,393                      689
                                                                       -------------------      ------------------

   Net income (loss) before loss on sale of rental properties,
     provision for possible credit losses and income taxes                        4,733                      (76)
Loss on sale of rental properties                                                  -                        (432)
Provision for possible credit losses                                               (480)                    -
                                                                       -------------------      ------------------
   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.


                                      -2-
<PAGE>


                         Capital Trust and Subsidiaries
                 Consolidated Statement of Shareholders' Equity
                    For the Three Months Ended March 31, 1998
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>


                             Class A                  Class A             Restricted Class A     
                           Preferred Shares          Common Shares            Common Shares      Additional
                   -------------------------     --------------------   ----------------------      Paid-In       Unearned    
                         Number      Amount      Number       Amount      Number       Amount       Capital    Compensation   
                   -----------------------------------------------------------------------------------------------------------
<S>                      <C>       <C>           <C>         <C>         <C>           <C>         <C>           <C>           
Balance at
  December 31, 1997      12,268    $   12,268    18,157      $18,157          -        $   -     $ 158,137     $     -      
Change in
  unrealized                -             -         -            -            -            -          -              -       
  gain on
  available-for-sale
  securities
Issuance of
  restricted                -             -         -            -              72          72         653          (725)   
  Class A
  Common Shares
Restricted
  Class A                   -             -         -            -            -           -           -               32    
  Common Shares
  earned
Net income                  -             -         -            -            -           -           -              -       
                   ===========================================================================================================
Balance at               12,268    $   12,268    18,157      $18,157          72      $    72    $ 158,790     $    (693)    
  March 31, 1998
                   ===========================================================================================================


                          Unrealized   Accumulated
                             Gain         Deficit      Total
                        --------------------------------------------
<S>                      <C>          <C>            <C>        
Balance at
  December 31, 1997      $     387     $ (45,660)     $  143,289
Change in
  unrealized                  (118)         -               (118)
  gain on
  available-for-sale
  securities
Issuance of
  restricted                    -            -                -
  Class A
  Common Shares
Restricted
  Class A                       -            -                32
  Common Shares
  earned
Net income                      -           2,673           2,673
                         ============================================
Balance at               $     269      $ (42,987)     $  145,876
  March 31, 1998
                         ============================================


     See accompanying notes to unaudited consolidated financial statements.
</TABLE>

                                      -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
       Change in unrealized gain on available-for-sale securities                          (118)                  -
       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 net of effects from subsidiaries purchased:
       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                                                 (2,812)                  (371)
                                                                               -------------------    ------------------

Cash flows from investing activities:
       Origination and purchase of loans and other investments                         (177,112)                  -
       Principal collections of loans and other investments                              11,370                      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                             2,371                  1,015

                                                                               -------------------    ------------------
   Net cash provided by (used in) investing activities                                 (163,497)                 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         $           -
                                                                               ===================    ==================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>


                                      -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  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 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 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  Class A Common  Share  options.  At March 31,  1998,  the Class A
Preferred  Shares and dilutive  portion of the Class A Common Share options 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.   Loans and Other Investments

At March 31, 1998, the Company's  loans and other  investments  consisted of the
following (in thousands):

         Mortgage Loans                                     $       201,367
         Mezzanine Loans                                            147,111
         Subordinated Interests                                      67,486
         Other mortgage loans receivable                              2,052
                                                           -------------------
                                                                    418,016
           Less:  Reserve for possible credit losses                   (942)
                                                           -------------------
         Total loans and other investments                  $       417,074
                                                           ===================

At March  31,  1998,  $307.1  million  of the  aforementioned  loans  and  other
investments  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 and other  investments  were
originated  or purchased  with fixed rates ranging from 8.5% to 12% at March 31,
1998.  All of the loans and  other  investments  financed  at fixed  rates  were
swapped to yield a floating  rate.  The average  earning rate in effect at March
31, 1998, before giving effect to interest rate swaps but including amortization
of fees, premiums and discounts, was 11.02%.

During the quarter ended March 31, 1998, the Company completed nine new loan and
investment  transactions totaling approximately $188.1 million and provided $5.4
million of 

                                      -6-
<PAGE>

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


additional  fundings on two existing loans. The Company funded $177.1 million of
the foregoing loans and investments through March 31, 1998.

At March 31,  1998,  the Company has letters of intent  outstanding  for various
other  lending  transactions,  the terms of which have not been  finalized.  The
Company also has unfunded  commitments  on existing loans totaling $37.9 million
at March 31, 1998.

5.   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.


                                      -7-

<PAGE>

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


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.

6.  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 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>

<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.


                                      -8-

<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):

<TABLE>

<S>                                                                       <C>      
   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)
                                                                       -----------------
                                                                          $      -
                                                                       =================
</TABLE>

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.

7.  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 options to acquire
an aggregate of 930,250 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.



                                      -9-
<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




<PAGE>


approximately  $54.3  million  aggregate  purchase  price for the Class A Common
Shares and Class A Preferred  Shares with $5.0 million of capital  contributions
from its  members  and $50.0  million of  borrowings  under the 12%  convertible
redeemable  notes (the "Veqtor Notes") issued to  institutional  investors.  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  credit  facility  ("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.


                                      -11-

<PAGE>


Overview of Financial Condition

         During the first quarter of 1998,  the Company  completed nine new loan
and investment  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  commence  full scale
operations as a specialty  finance  company.  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  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.  At
March 31, 1998, the Company had outstanding  loans and  investments  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, the Company's new investment and loan assets have
been hedged so that the assets and the corresponding liabilities were matched at
floating rates over LIBOR.

         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.


                                      -12-
<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,


                                      -13-
<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.


                                      -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

                           None

ITEM 5:       Other Information

                           None

ITEM 6:       Exhibits and Reports on Form 8-K

     (a)   Exhibits

        Exhibit
        Number                                             Description


        10.1    Amended and Restated Credit  Agreement,  dated as of January 1,
                 1998,   between  the  Company  and  German   American   Capital
                 Corporation  (filed as Exhibit  10.1 to the  Company's  Current
                 Report  on Form 8-K filed on March  18,  1998 and  incorporated
                 herein by reference)

         11.1    Statements regarding computation of earnings (loss) per share


27.1     Financial Data Schedules


     (b)   Reports on Form 8-K

         During the fiscal quarter ended March 31, 1998, the Company filed eight
Current Reports on Form 8-K:

         (1)      Current  Report on Form 8-K, dated December 23, 1997, as filed
                  with the Commission on January 7, 1998, reporting under Item 2
                  "Acquisition or


                                      -15-

<PAGE>



                  Disposition  of Assets"  the  acquisition  of a mortgage  loan
                  obligation,   the   acquisition  of  a  mezzanine   loan,  the
                  acquisition of two mortgage loan  participation  interests and
                  the acquisition of a preferred equity investment and including
                  under  Item 7  "Financial  Statements  and  Exhibits"  certain
                  financial  statements  relating to the events  reported  under
                  Item 2.

         (2)      Current  Report on Form 8-K/A,  dated  December 23,  1997,  as
                  filed  with  the  Commission  on  March 6,  1998,  amending  a
                  previous reporting under Item 2 "Acquisition or Disposition of
                  Assets" the purchase of a mortgage  loan and  including  under
                  Item 7 "Financial  Statements and Exhibits"  certain financial
                  statements relating to the event reported under Item 2.

         (3)      Current  Report on Form 8-K/A,  dated  December 29,  1997,  as
                  filed  with the  Commission  on March  13,  1998,  amending  a
                  previous reporting under Item 2 "Acquisition or Disposition of
                  Assets" the purchase of a mezzanine  loan and including  under
                  Item 7 "Financial  Statements and Exhibits"  certain financial
                  statements relating to the event reported under Item 2.

         (4)      Current  Report on Form 8-K/A,  dated  December 31,  1997,  as
                  filed  with the  Commission  on March  13,  1998,  amending  a
                  previous reporting under Item 2 "Acquisition or Disposition of
                  Assets"  the  purchase of a preferred  equity  investment  and
                  including  under Item 7 "Financial  Statements  and  Exhibits"
                  certain  financial  statements  relating to the event reported
                  under Item 2.

         (5)      Current  Report on Form 8-K,  dated February 9, 1998, as filed
                  with the Commission on February 23, 1998, reporting under Item
                  2  "Acquisition  or  Disposition  of Assets" the purchase of a
                  subordinate participation in a first mortgage loan.

         (6)      Current  Report on Form 8-K, dated February 23, 1998, as filed
                  with the Commission on March 13, 1998,  reporting under Item 2
                  "Acquisition  or  Disposition of Assets" the  origination  and
                  funding of a mezzanine loan.

         (7)      Current  Report on Form 8-K,  dated  January 1, 1998, as filed
                  with the Commission on March 18, 1998,  reporting under Item 5
                  "Other Events" an increase in the Company's line of credit and
                  including under Item 7 "Financial Statements and Exhibits" the
                  Amended  and  Restated  Credit  Agreement  and  press  release
                  relating to the event reported under Item 2.

         (8)      Current  Report on Form 8-K,  dated March 12,  1998,  as filed
                  with the Commission on March 19, 1998,  reporting under Item 2
                  "Acquisition   or  Disposition  of  Assets"  the  purchase  of
                  subordinated commercial mortgage-backed securities issued by a
                  financial asset securitization investment trust.



                                      -16-
<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



May 14. 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




                                      -17-
<PAGE>