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 September 30, 1998

                                       OR

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

For the transition period from ____________ to _____________

Commission File Number:    1-8063


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

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

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


                                 (212) 655-0220
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes / X /    No /  /


<PAGE>



                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

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




<PAGE>



                                  CAPITAL TRUST
                                      INDEX
<TABLE>
<CAPTION>

Part I.       Financial Information

<S>           <C>                                                                                        <C>
              Item 1:      Financial Statements                                                          1

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

                      Consolidated  Statements  of  Operations  - Three and Nine
                           Months Ended September 30, 1998 (unaudited) and Three
                           and Nine Months Ended  September 30, 1997  (unaudited
                           and audited, respectively)                                                    2

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

                      Consolidated  Statements of Cash Flows - Nine Months Ended
                           September 30, 1998  (unaudited) and Nine Months Ended
                           September 30, 1997 (audited)                                                  4

                      Notes to Consolidated Financial Statements (unaudited)                             5

              Item 2:      Management's  Discussion  and  Analysis of  Financial
                           Condition and Results of Operations                                          14

Part II.      Other Information

              Item 1:      Legal Proceedings                                                            24

              Item 2:      Changes in Securities and Use of Proceeds                                    24

              Item 3:      Defaults Upon Senior Securities                                              24

              Item 4:      Submission of Matters to a Vote of Security Holders                          24

              Item 5:      Other Information                                                            24

              Item 6:      Exhibits and Reports on Form 8-K                                             25

              Signatures                                                                                27

</TABLE>



<PAGE>



                         Capital Trust and Subsidiaries
                           Consolidated Balance Sheets
                    September 30, 1998 and December 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                      September 30,            December 31,
                                                                                           1998                     1997
                                                                                  --------------------     --------------------
                                                                                       (unaudited)               (audited)
                                     Assets

<S>                                                                               <C>                       <C>          
   
  Cash and cash equivalents                                                       $      16,420             $     49,268
  Other available-for-sale securities, at market value                                    5,497                   11,975
  Commercial mortgage-backed securities, available-for-sale and recorded at
     market value at September 30, 1998, held to maturity and recorded at
     amortized cost at December 31, 1998                                                 33,974                   49,490
  Certificated mezzanine investments available-for-sale, at market value                 43,253                   21,993
  Loans receivable, net of $2,821 (unaudited) and $462 reserve for possible
     credit losses at September 30, 1998 and December 31, 1997, respectively            627,324                  180,324
  Excess of purchase price over net tangible assets acquired, net                           314                      331
  Deposits and other receivables                                                            331                      284
  Accrued interest receivable                                                             8,249                      818
  Prepaid and other assets                                                                7,164                    2,878
                                                                                  --------------------     --------------------
Total assets                                                                      $     742,526            $     317,366
                                                                                  ====================     ====================
    

                      Liabilities and Shareholders' Equity

Liabilities:
  Accounts payable and accrued expenses                                           $        7,781           $       5,718
  Notes payable                                                                            4,181                   4,953
  Credit facilities                                                                      348,780                  79,864
  Repurchase obligations                                                                  80,420                  82,173
  Deferred origination fees and other revenue                                              6,054                   1,369
                                                                                  --------------------     --------------------
Total liabilities                                                                        447,216                 174,077
                                                                                  --------------------     --------------------

Company-obligated, mandatorily redeemable, convertible preferred securities of
   CT Convertible Trust I, holding solely 8.25% junior subordinated debentures
   of Capital Trust ("Convertible Trust Preferred Securities")                           145,334                      -
                                                                                  --------------------     --------------------

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, 
     18,159 and 18,157 shares issued and outstanding at September 30, 1998 
     and December 31, 1997, respectively                                                  18,159                  18,157
  Restricted Class A Common Shares, $1.00 par value, 55 shares issued and
     outstanding at September 30, 1998                                                        55                      -
  Additional paid-in capital                                                             158,641                 158,137
  Unearned compensation                                                                     (454)                     -
  Accumulated other comprehensive income                                                  (2,306)                    387
  Accumulated deficit                                                                    (36,387)                (45,660)
                                                                                  --------------------     --------------------
Total shareholders' equity                                                               149,976                 143,289
                                                                                  --------------------     --------------------

Total liabilities and shareholders' equity                                        $      742,526           $     317,366
                                                                                  ====================     ====================

</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                      -1-
<PAGE>



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

<TABLE>
<CAPTION>

                                                                 Three Months Ended                     Nine months Ended
                                                                    September 30,                         September 30,
                                                        ------------------------------------   -----------------------------------
                                                             1998                1997                1998                 1997
                                                        ----------------   -----------------   ---------------    -----------------
                                                          (unaudited)         (unaudited)         (unaudited)           (audited)

<S>                                                     <C>                <C>                 <C>                <C>              
Income from loans and other investments:
    Interest and related income                         $    20,782        $      1,787        $      42,825      $           1,863
    Less: interest and related expenses                       8,714                 790               18,311                    790
                                                        ----------------   -----------------   ----------------   -----------------
Net income from loans and other investments                  12,068                 997               24,514                  1,073
                                                        ----------------   -----------------   ----------------   ------------------

Other revenues:
    Advisory and investment banking fees                        829                 529                9,479                    529
    Rental income                                                -                    8                  -                      313
    Other interest income                                       261                 405                  941                  1,008
    Loss on sale of rental properties                            -                   -                   -                     (432)
                                                        ----------------   ----------------     -----------------    ---------------
Total other revenues                                          1,090                 942               10,420                  1,418
                                                        ----------------   -----------------    -----------------    ---------------

Other expenses:
    General and administrative                                4,482               3,328               11,743                  4,470
    Other interest expense                                       98                  21                  309                    144
    Rental property expenses                                     -                   -                    -                     123
    Depreciation and amortization                                63                  28                  171                     52
    Provision for possible credit losses                      1,119                 155                2,359                    155
                                                        ----------------   -----------------    -----------------    ---------------
Total other expenses                                          5,762               3,532               14,582                  4,944
                                                        ----------------   -----------------    ----------------    ----------------

Net income (loss) before income taxes and
   distributions and amortization on Convertible
   Trust Preferred Securities                                 7,396              (1,593)              20,352                 (2,453)
    Provision for income taxes                                3,053                  -                 8,312                    -
                                                        ----------------   -----------------    -----------------    ---------------

Net income (loss) before distributions and
   amortization on Convertible Trust Preferred
   Securities                                                 4,343              (1,593)              12,040                 (2,453)
    Distributions and amortization on Convertible
       Trust Preferred Securities, net of income tax
       benefit of $1,069                                      1,199                  -                 1,199                    -
                                                        ----------------   -----------------    -----------------    ---------------
Net income (loss)                                       $     3,144        $     (1,593)        $     10,841         $       (2,453)
    Less:  Class A Preferred Share dividend and
       dividend requirement                                     783                 679                2,351                    679
                                                        ----------------   -----------------    -----------------    ---------------
Net income (loss) allocable to Class A Common 
     Shares                                             $     2,361        $     (2,272)        $      8,490         $       (3,132)
                                                        ================   =================    =================    ===============
Per share information:
   Net income (loss) per Class A Common Share:
     Basic                                              $      0.13        $      (0.25)        $       0.47         $        (0.34)
                                                        ================   =================    =================    ===============
     Diluted                                            $      0.10        $      (0.25)        $       0.35         $        (0.34)
                                                        ================   =================    =================    ===============
  Weighted average Class A Common Shares 
    outstanding:
    Basic                                                18,217,186           9,157,150           18,218,279             9,157,150
                                                        ================   =================    =================    ===============
    Diluted                                              30,612,406           9,157,150           30,705,867             9,157,150
                                                        ================   =================    =================    ===============

</TABLE>

See accompanying notes to unaudited consolidated financial statements.

<PAGE>



                         Capital Trust and Subsidiaries
           Consolidated Statements of Changes in Shareholders' Equity
    For the Nine Months Ended September 30, 1998 (unaudited) and Nine Months
                       Ended September 30, 1997 (audited)
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                 
                                                                       Class A      Class A      
                                                  Comprehensive       Preferred     Common       
                                                  Income (Loss)        Shares       Shares       
                                               -----------------    -----------------------------
<S>                                            <C>                 <C>             <C>           
Nine months ended September 30, 1997
------------------------------------
   Balance at December 31, 1996                $          -        $       -       $   9,157     
     Net loss                                          (2,453)             -             -       
     Change in unrealized gain (loss) on                  481              -             -       
       available-for-sale securities
     Issuance of Class A Preferred Shares                 -             12,268           -       
                                               -----------------    -----------------------------
   Balance at September 30, 1997               $       (1,972)      $   12,268     $   9,157     
                                               =================    =============================


Nine months ended September 30, 1998
------------------------------------
   Balance at December 31, 1997                $          -         $   12,268     $  18,157     
     Net income                                        10,841              -             -       
     Change in unrealized gain (loss) on
       available-for-sale securities                   (2,693)             -             - 
     Issuance of Class A Common Shares 
       under stock option plan                            -                -               2     
     Issuance of restricted Class A Common 
       Shares                                             -                -             -       
     Cancellation of previously issued                    -                -             -       
       restricted Class A Common Shares
     Restricted Class A Common Shares 
       earned                                             -                -             -       
     Class A Preferred Share Dividend                     -                -             -       
                                               -----------------    -----------------------------
   Balance at September 30, 1998               $        8,148       $   12,268     $  18,159     
                                               =================    =============================

</TABLE>


<TABLE>
<CAPTION>

                                               Restricted                                Accumulated
                                                 Class A     Additional                     Other
                                                 Common        Paid-In     Unearned     Comprehensive    Accumulated
                                                 Shares        Capital   Compensation       Income          Deficit        Total
                                              ------------------------------------------------------------------------------------
<S>                                            <C>         <C>           <C>            <C>             <C>          <C>      
Nine months ended September 30, 1997
------------------------------------
   Balance at December 31, 1996                $   -       $ 55,098      $     -        $     (22)      $ (39,762)   $  24,471
     Net loss                                      -            -              -              -            (2,453)      (2,453)
     Change in unrealized gain (loss) on           -            -              -              481             -            481
       available-for-sale securities
     Issuance of Class A Preferred Shares          -         20,602            -              -               -         32,870
                                              ------------------------------------------------------------------------------------
   Balance at September 30, 1997               $   -       $ 75,700      $     -        $     459       $ (42,215)   $  55,369
                                              ====================================================================================


Nine months ended September 30, 1998
------------------------------------
   Balance at December 31, 1997                $   -       $158,137      $    -         $     387       $ (45,660)   $ 143,289
     Net income                                    -            -             -               -            10,841       10,841
     Change in unrealized gain (loss) on
       available-for-sale securities               -            -             -            (2,693)            -         (2,693)
     Issuance of Class A Common Shares 
       under stock option plan                     -              8           -               -               -             10
     Issuance of restricted Class A Common 
       Shares                                       72          653          (725)            -               -            -
     Cancellation of previously issued
       restricted Class A Common Shares            (17)        (157)          156             -               -            (18)
     Restricted Class A Common Shares 
       earned                                      -            -             115             -               -            115
     Class A Preferred Share Dividend              -            -             -               -            (1,568)      (1,568)
                                              ------------------------------------------------------------------------------------
   Balance at September 30, 1998               $    55     $158,641      $   (454)      $  (2,306)      $ (36,387)   $ 149,976
                                              ====================================================================================

</TABLE>

See accompanying notes to unaudited consolidated financial statements.

                                      -3-

<PAGE>



                         Capital Trust and Subsidiaries
                      Consolidated Statements of Cash Flows
                  Nine months ended September 30, 1998 and 1997
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                              1998               1997
                                                                                       ----------------   ------------------
                                                                                            (unaudited)         (audited)

<S>                                                                                    <C>                <C>
Cash flows from operating activities:
   Net income (loss)                                                                   $   10,841         $   (2,453)
   Adjustments to reconcile net income (loss) to net cash  provided by (used in) 
     operating activities:
     Depreciation and amortization                                                            171                 52
     Restricted Class A Common Shares earned                                                  115                -
     Net amortization of premiums and accretion of discounts on loans and other
       investments                                                                          1,025                -
     Net accretion of discounts and fees on Convertible Trust Preferred Securities            137                -
     (Gain) loss on sale of investments and properties                                       (100)               432
     Expenses reversed on cancellation of restricted shares previously issued                 (18)               -
     Provision for possible credit losses                                                   2,359                155
   Changes in assets and liabilities net of effects from subsidiaries purchased:
     Deposits and receivables                                                                 (47)               (804)
     Accrued interest receivable                                                           (7,431)               (334)
     Prepaid and other assets                                                              (4,095)             (2,512)
     Deferred  revenue                                                                      4,685                 725
     Accounts payable and accrued expenses                                                  2,063               2,877
     Other liabilities                                                                        -                   (64)
                                                                                        ---------------   ------------------
Net cash provided by (used in) operating activities                                         9,705              (1,926)
                                                                                        ---------------   ------------------

   
Cash flows from investing activities:
   Purchases of commercial mortgage-backed securities                                     (36,335)            (49,524)
   Principal collections and proceeds from sale of commercial mortgage-backed
     securities                                                                            49,591                  33
   Purchase of certificated mezzanine investments                                         (21,583)                 -
   Principal collections of certificated mezzanine investments                               (328)                 -
   Origination and purchases of loans receivable                                         (500,981)            (38,102)
   Principal collections of loans receivable                                               50,901                  90
   Purchases of equipment and leasehold improvements                                         (345)               (421)
   Improvements to rental properties                                                          -                   -
   Proceeds from sale of rental properties                                                    -                 8,153
   Principal collections on available-for-sale securities                                   5,841               3,964
   Acquisition of Victor Capital Group, L.P., net of cash acquired                            -                (4,066)
    
                                                                                                        
                                                                                        ---------------   ------------------
Net cash used in investing activities                                                    (452,583)            (79,873)
                                                                                        ---------------   ------------------

Cash flows from financing activities:
   Proceeds from repurchase obligations                                                    41,837              54,166
   Repayment of repurchase obligations                                                    (43,590)            (17,285)
   Proceeds from credit facilities                                                        564,646              11,715
   Repayment of credit facilities                                                        (295,730)                -
   Proceeds from notes payable                                                             10,000               4,001
   Repayment of notes payable                                                             (10,772)             (4,303)
   Net proceeds from issuance of Convertible Trust Preferred Securities                   145,197                 -
   Dividends paid on Class A Preferred Shares                                              (1,568)                -
   Net proceeds from issuance of Class A Common Shares under stock option plan                 10                 -
   Net proceeds from issuance of Class A Preferred Shares                                     -                32,870
                                                                                        ---------------   -----------------
Net cash provided by financing activities                                                 410,030              81,164
                                                                                        ---------------   -----------------

Net decrease in cash and cash equivalents                                                 (32,848)               (635)
Cash and cash equivalents at beginning of period                                           49,268               4,698
                                                                                        ---------------   ------------------
Cash and cash equivalents at end of period                                              $  16,420         $     4,063
                                                                                        ===============   ==================

Supplemental disclosure of cash flow information
Interest paid during the period                                                         $  18,007         $       858
                                                                                        ===============   ==================
Taxes paid during the period                                                            $   7,741         $       -
                                                                                        ===============   ==================

</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                      -4-



<PAGE>



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

1.  Presentation of Financial Information

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

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

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

2.  Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principals requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.



<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 September 30, 1998, the Class A
Preferred  Shares and  dilutive  portion of options to  purchase  Class A Common
Shares  were  considered  Class A  Common  Share  equivalents  for  purposes  of
calculating  Diluted EPS. At September 30, 1997, there was no difference between
Basic EPS and Diluted EPS or weighted average Class A Common Shares outstanding,
as there were no dilutive securities outstanding.

4.  Comprehensive Income

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130,  "Reporting  Comprehensive  Income" ("SFAS No. 130") which is effective for
fiscal  years  beginning  after  December 15, 1997.  The  statement  changes the
reporting  of certain  items  currently  reported  in the  shareholders'  equity
section  of the  balance  sheet  and  establishes  standards  for  reporting  of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial statements. The Company has adopted this standard effective January 1,
1998.  Total  comprehensive  income (loss) was $893,000 and $(1,269,000) for the
three months ended September 30, 1998 and 1997, respectively, and $8,148,000 and
$(1,972,000)   for  the  nine  months  ended   September   30,  1998  and  1997,
respectively.  The primary  component  of  comprehensive  income  other than net
income was unrealized gain (loss) on available-for-sale securities.






                                       -6-
<PAGE>


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


5.    Commercial Mortgage-Backed Securities

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

During the quarter ended June 30, 1998,  due to  prepayments  made on underlying
securities  that  reduced  the  interest  rate/risk  profile  and  maturity of a
commercial  mortgage-backed  security,  the Company  concluded that it no longer
anticipated holding this security to maturity.  The security was sold during the
quarter ended September 30, 1998 at a gain of approximately $100,000. Because of
this decision to sell a held-to-maturity  security,  the Company has transferred
all  of  its   investments  in  commercial   mortgage-backed   securities   from
held-to-maturity securities to available-for-sale.

As of  September  30,  1998,  the  remaining  securities,  consisting  of  three
subordinated commercial  mortgage-backed  securities issued by a financial asset
securitization  investment  trust,  had an amortized cost of $36.4 million and a
market value of $34.0 million. These securities bear interest at floating rates,
for which the weighted  average interest rate in effect at September 30, 1998 is
10.68%.

   
6.   Certificated Mezzanine Investments

During the nine  months  ended  September  30,  1998,  the  Company  purchased a
certificated mezzanine investment committing a total of $32.5 million of capital
of which $21.6 million was funded through  September 30, 1998. The  certificated
mezzanine  investment  has a  remaining  term  of 8  months  with 36  months  of
additional  extensions  and pays  distributions  at a specified  rate over LIBOR
until  redemption.  The  weighted  average  rate in effect for all  certificated
mezzanine investments is 10.13% at September 30, 1998.

7.   Loans Receivable

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

<TABLE>
<CAPTION>

                                                                                                Weighted 
                                                                                                Average
                                                                     Amount                   Interest Rate
                                                               -------------------        -------------------
<S>                                                             <C>                               <C>   
         Mortgage Loans                                         $       291,407                   10.99%
         Mezzanine Loans                                                336,706                   11.55%
         Other mortgage loans receivable                                  2,029                    8.41%
                                                               -------------------
         Total loans and other investments                              630,324                   11.28%
           Less:  Reserve for possible credit losses                     (2,821)
                                                               -------------------
         Net loans and other investments                        $       627,324
                                                               ===================
</TABLE>

At September 30, 1998, $466.9 million of the aforementioned  loans bear interest
at floating  rates  ranging  from LIBOR plus 320 basis  points to LIBOR plus 700
basis points before amortization 


                                       -7-
<PAGE>

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


of fees,  premiums and  discounts.  The remaining  $163.2  million of loans were
originated  or  purchased  with  fixed  rates  ranging  from  8.50% to 12.00% at
September  30,  1998.  All of the loans  with fixed  rates  were the  subject of
interest rate swaps to provide a floating  rate. The weighted  average  interest
rate in  effect  at  September  30,  1998,  including  interest  rate  swaps and
amortization of fees, premiums and discounts, was 11.28%.

During the nine months ended September 30, 1998, the Company completed  nineteen
new loan transactions  totaling  approximately  $513.9 million and provided $7.5
million of additional  fundings on two loans  originated in the prior year.  The
Company  funded $493.5  million of the  foregoing  loans  receivable  originated
during the nine months ended September 30, 1998 and has outstanding  commitments
at September 30, 1998 totaling $32.2 million.

8.  Long-Term Debt
    

Credit Facilities

Effective January 1, 1998, pursuant to an amended and restated credit agreement,
the Company  increased its existing  line of credit with a commercial  lender to
$250 million (the "Credit Facility") and subsequently further amended the credit
agreement to increase the facility to $300 million  effective  June 22, 1998 and
$355 million effective July 23, 1998. An additional commitment fee was paid when
the Company's  borrowings exceeded $250 million and will be paid when borrowings
exceed  $300  million.  The  Credit  Facility  provides  for  advances  to  fund
lender-approved  loans and  investments  made by the  Company.  The  amended and
restated agreement expires on December 31, 2000.

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

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

The  obligations  of the  Company  under the Credit  Facilities  are  secured by
pledges of the Funded  Portfolio  Assets acquired with advances under the Credit
Facilities.  Borrowings  under the Credit  Facilities bear interest at specified
rates over LIBOR (averaging  approximately 7.25% for the 


                                       -8-
<PAGE>


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


borrowings  outstanding at September 30, 1998) which rates vary according to the
credit quality of the Funded Portfolio Assets and the advance rate.

On September 30, 1998, the unused amounts  available under the Credit Facilities
were $306.2 million.


Repurchase Obligations

During the nine months ended  September 30, 1998, the Company  entered into four
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 September 30,
1998,  the  Company  had sold  such  assets  totaling  $10.0  million  and had a
liability to  repurchase  these assets for $7.5  million.  The  liability  bears
interest at specified  rates over LIBOR  (reflecting a total  borrowing  rate of
6.74% at September 30, 1998) and had an original maturity in February 1999 which
was extended to August 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
September 30, 1998, the Company had sold such assets  totaling $14.0 million and
had a liability to  repurchase  these assets for $10.5  million.  The  liability
bears interest at specified rates over LIBOR  (reflecting a total borrowing rate
of 7.29% at September 30, 1998) and matures in March 1999.

In March 1998,  the Company  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
September  30,  1998,  the  Company had sold such  securities  with a book value
totaling  $10.0 million and had a liability to repurchase  these assets for $8.0
million.  The liability bears interest at specified rates over LIBOR (reflecting
a total  borrowing  rate of 6.58% at  September  30,  1998) and matures in March
1999.

   
In May 1998, the Company entered into a repurchase  agreement in connection with
the purchase of a certificated mezzanine investment. At September 30, 1998,
the Company had sold such assets  totaling  $21.4 million and had a liability to
repurchase  these assets for $15.2  million.  The  liability  bears  interest at
specified  rates  over  LIBOR  (reflecting  a total  borrowing  rate of 7.14% at
September 30, 1998) and matures in May 1999.
    

At September 30, 1998,  the Company had sold, in total,  106.6 million of assets
and had a  liability  to  repurchase  these  assets  for  $80.4  million.  These
liabilities  bear  interest at  specified  rates over LIBOR  reflecting  a total
borrowing rate that averaged 6.74% at September 30, 1998.



                                       -9-
<PAGE>

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


   
9.  Junior Subordinated Debt
    

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

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

For financial  reporting  purposes,  the Trust is treated as a subsidiary of the
Company  and,  accordingly,  the  accounts  of the  Trust  are  included  in the
consolidated  financial  statements  of the Company.  Intercompany  transactions
between the Trust and the Company, including the Junior Subordinated Debentures,
are  eliminated in the  consolidated  financial  statements of the Company.  The
Convertible  Trust  Preferred  Securities  are  presented as a separate  caption
between liabilities and shareholders'  equity in the consolidated  balance sheet
of  the  Company  as  "Company-obligated,  mandatorily  redeemable,  convertible
preferred  securities  of CT  Convertible  Trust I, holding  solely 8.25% junior
subordinated   debentures  of  Capital  Trust   ("Convertible   Trust  Preferred
Securities")".  Distributions on the Convertible Trust Preferred  Securities are
recorded,  




                                       -10-
<PAGE>

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


net  of the  tax  benefit,  in a  separate  caption  immediately  following  the
provision  for income taxes in the  Consolidated  Statement of Operations of the
Company.

   
10.  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 nine
months ended September 30, 1998 is comprised of the following (in thousands):

Current                            
   Federal                                                $   4,516
   State                                                      1,995
   Local                                                      1,801
Deferred
   Federal                                                     -
   State                                                       -
   Local                                                       -
                                                        --------------
Provision for income taxes                                $   8,312
                                                        ==============

The  Company  has  federal  net  operating  loss  carryforwards  ("NOLs")  as of
September 30, 1998 of  approximately  $16.5  million.  Such NOLs expire  through
2012.  The Company also has a federal  capital loss  carryover of  approximately
$1.6  million  that  can be used  to  offset  future  capital  gains.  Due to an
affiliate's  purchase of  6,959,593  Class A Common  Shares  from the  Company's
former parent in January 1997 and another prior ownership  change, a substantial
portion of the NOLs are limited for federal income tax purposes to approximately
$1.5  million  annually.  Any unused  portion of such annual  limitation  can be
carried  forward to future  periods.  The Company  also has  approximately  $3.5
million of NOL's from  losses in 1997  (after the  ownership  changes  described
above) that can be utilized against taxable income in 1998.

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

<TABLE>
<CAPTION>

<S>                                                                             <C>             <C>  
   Federal income tax at statutory rate                                         $  6,920        34.0%
   State and local taxes, net of federal tax benefit                               2,505        12.3
   Tax benefit of utilization of net operating loss carryforward                  (1,275)       (6.5)
   Other                                                                             162         0.8
                                                                            ------------------------------
                                                                                $  8,312        40.6%
                                                                            ==============================
</TABLE>

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




                                       -11-
<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
September 30, 1998 are as follows (in thousands):

   Net operating loss carryforward                             $     7,815
   Reserves on other assets and for possible credit losses           4,664
   Deferred revenue                                                    616
   Reserve for uncollectible accounts                                  208
                                                            -----------------
   Deferred tax assets                                         $    13,303
   Valuation allowance                                             (13,303)
                                                            -----------------
                                                               $      -
                                                            =================

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.

   
11.  Employee Benefit Plans
    

1997 Long-Term Incentive Share Plan

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

During the three months ended September 30, 1998, the Company issued an
aggregate of 105,000 options to acquire Class A Common Shares with an exercise
price of between $9.00 and $10.00 per share (which were issued at or above the
Class A Common Share price on the date of the grant).



                                       -12-
<PAGE>

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

<PAGE>



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

<TABLE>
<CAPTION>

                                                           Options                 Exercise Price
                                                         Outstanding                  per Share
                                                  --------------------------  --------------------------
<S>                                               <C>                          <C>  
   Outstanding at January 1, 1998                               607,000                  $6.00
   Granted                                                    1,112,250             $9.00 - $11.38
   Exercised                                                     (1,666)                 $6.00
   Canceled                                                    (156,501)            $6.00 - $10.00
                                                  --------------------------  --------------------------
   Outstanding at September 30, 1998                          1,561,083             $6.00 - $11.38
                                                  ==========================  ==========================

</TABLE>


                                       -13-
<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



                                       -14-
<PAGE>


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

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

         After the 1997 Annual  Meeting,  the Company  completed two significant
financing  and capital  raising  transactions.  As of September  30,  1997,  the
Company  obtained  a $150  million  line of credit  ("Credit  Facility")  from a
commercial  lender,  which was  subsequently  increased  to $250  million  as of
January 1, 1998,  $300  million as of June 22, 1998 and $355  million as of July
23,  1998.  On December  16, 1997,  the Company  completed a public  offering of
9,000,000  Class A Common  Shares  resulting  in net  proceeds to the Company of
approximately  $91.4  million.  This  significant  source of borrowed  funds and
infusion of cash  allowed the Company to  commence  full scale  operations  as a
specialty finance company pursuant to its current business plan.

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

         The Company  received  $145.2  million in net proceeds,  after original
issue discount and  transaction  expenses,  pursuant to the above  transactions,
reflecting an original issue discount of 3% from the  liquidation  amount of the
Convertible Trust Preferred  Securities.  The proceeds



                                       -15-
<PAGE>


were used to pay down the Company's  Credit  Facilities (as defined below).  The
Convertible  Trust  Preferred  Securities  are  convertible  at any  time by the
holders thereof into the Company's  listed Class A Common Shares at a conversion
price of $11.70.  The  Convertible  Debentures  have a 20-year  maturity and are
non-callable  for five years.  Upon repayment of the  Convertible  Debentures at
maturity or upon redemption,  the proceeds of such repayment or payment shall be
simultaneously  paid and applied to redeem,  among other things, the Convertible
Trust  Preferred  Securities.  If the  securities  have  not  been  redeemed  by
September 30, 2004,  the  distribution  rate will step up by 0.75% per annum for
each annual period  thereafter.  The 3% ($4.5 million) discount and $0.3 million
of transaction costs on the issuance will be amortized over the expected life of
the Convertible Trust Preferred Securities.

         In light of the  significant  volatility in the global capital  markets
experienced  during the period,  the Company has strategically  reduced its loan
origination  pace.  Likewise,  the  Company's  advisory  business  has also been
affected  as  fee  producing  activity  related  to  real  estate  acquisitions,
dispositions  and  financings  by its  clients  has slowed in reaction to market
conditions.  In the short term, the Company  believes that its asset growth will
be slower and that its advisory fee  revenues  will be less,  as compared to the
first three fiscal  quarters of 1998,  although  there can be no assurance as to
when market conditions will improve.  The Company has significant  liquidity and
believes it is positioned to take  advantage of portfolio  growth  opportunities
that meet its risk/yield profile which it expects will develop as overall market
conditions improve.

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

   
         The  significant  infusion of cash from the public  offering of Class A
Common Shares in December 1997, the issuance of the Convertible  Trust Preferred
Securities in July 1998 and borrowings under the Credit  Facilities  allowed the
Company to expand its  specialty  finance  company  operations.  During the nine
months ended  September 30, 1998,  the Company  completed  twenty-two  new loan,
certificated  mezzanine investment and investment in commercial  mortgage-backed
securities  transactions totaling approximately $582.7 million and provided $7.5
million of additional  fundings on two loans  originated in the prior year.  The
Company funded $551.4  million of the foregoing  loans and  investments  through
September 30, 1998 with the foregoing sources of cash, which enabled the Company
to grow its total  assets  from $317.4  million at  December  31, 1997 to $742.5
million at September 30, 1998.

         Since  December 31, 1997,  the Company has  identified,  negotiated and
committed to fund or acquire twenty-two loan,  certificated mezzanine investment
and  commercial  mortgage-backed  securities  transactions.  These  include  ten
Mortgage  Loan  transactions  totaling  $220.5  million (of which $20.4  million
remains  unfunded at September  30,  1998),  nine  Mezzanine  Loan  transactions
totaling $293.4 million, one certificated mezzanine investment for $32.5 million
(of which  $10.9  million  remains  unfunded at  September  30,  1998),  and two
acquisitions  of three classes of subordinated  interests  issued by a financial
asset  securitization  investment trust totaling $36.3 million. The Company also
funded $7.5 million of commitments under two loans originated in the prior year.
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



                                       -16-
<PAGE>

that  correspond  with the level of risk perceived by the Company to be inherent
in such investments.  At September 30, 1998, the Company had outstanding  loans,
certificated mezzanine investments and investments in commercial mortgage-backed
securities  totaling in excess of $709 million and  additional  commitments  for
fundings  on  outstanding  loans  and  certificated   mezzanine  investments  of
approximately $43.1 million.
    

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

         Effective  January 1, 1998,  pursuant to an amended and restated credit
agreement, the Company increased its line of credit under the Credit Facility to
$250 million and subsequently  increased the facility to $300 million  effective
June 22, 1998 and $355 million effective July 23, 1998. An additional commitment
fee was  paid  when  the  Company's  borrowings  exceeded  $250  million  and an
additional commitment fee will be paid when the Company's borrowings exceed $300
million. The Credit Facility provides for advances to fund lender-approved loans
and investments made by the Company. The Credit Facility expires on December 31,
2000.

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

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

         At September 30, 1998,  the Company had $348.8  million of  outstanding
borrowings under the Credit Facilities.

         As of September  30,  1998,  certain of the  Company's  loans and other
investments  have  been  hedged  so  that  the  assets  and  the   corresponding
liabilities  were matched at floating rates over LIBOR.  The Company has entered
into interest rate swap agreements for notional amounts  totaling  approximately
$119.9 million with  financial  institution  counterparties  whereby the Company
swapped fixed rate instruments, which averages approximately 5.96%, for floating
rate


                                       -17-
<PAGE>



instruments  at  the  London Interbank  Offered Rate ("LIBOR").  The  agreements
mature at varying times from December 1999 to July 2008.

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


Comparison of the Nine and Three Months Ended September 30, 1998 to the
-----------------------------------------------------------------------
     Nine and Three Months Ended September 30, 1997
     ----------------------------------------------

         The Company  reported net income  allocable to Class A Common Shares of
$8,490,000  for the nine  months  ended  September  30,  1998,  an  increase  of
$11,622,000  from the net loss  allocable to Class A Common Shares of $3,132,000
for the nine months ended  September 30, 1997.  The Company  reported net income
allocable  to Class A Common  Shares of  $2,361,000  for the three  months ended
September 30, 1998, an increase of  $4,633,000,  from the net loss  allocable to
Class A Common  Shares of  $2,272,000  for the three months ended  September 30,
1997.  These changes were  primarily the result of the revenues  generated  from
loans and other  investments  and  significant  advisory and investment  banking
fees.

         Net income from loans and other investments amounted to $24,514,000 for
the nine months ended  September 30, 1998, an increase of  $23,441,000  over the
$1,073,000  for the nine months  ended  September  30, 1997.  This  increase was
primarily  due to the  increase  in the  average  interest  earning  assets from
approximately  $24.4 million  earning 10.2% for the nine months ended  September
30, 1997 to approximately $468.8 million earning 12.2% for the nine months ended
September  30,  1998.  This was  partially  offset by an increase in the average
interest bearing liabilities from approximately $13.9 million at an average rate
of 7.6% for the nine months ended  September  30, 1997 to  approximately  $299.8
million at an average rate of 8.2% for the nine months ended September 30, 1998.

         Net income from loans and other investments amounted to $12,068,000 for
the three months ended  September 30, 1998, an increase of $11,071,000  over the
$997,000 for the three  months  ended  September  30,  1997.  This  increase was
primarily  due to the  increase  in the  average  interest  earning  assets from
approximately  $65.7 million  earning 10.8% for the three months ended September
30, 1997 to  approximately  $659.0  million  earning  12.5% for the three months
ended  September  30,  1998.  This was  partially  offset by an  increase in the
average interest  bearing  liabilities  from  approximately  $41.4 million at an
average  rate  of  7.6%  for  the  three  months  ended  September  30,  1997 to
approximately  $417.8  million at an average  rate of 8.3% for the three  months
ended September 30, 1998.

         During the nine months ended September 30, 1998, other revenues totaled
$10,420,000,  an increase of $9,002,000 over the same nine month period in 1997.
The  increase  during the three months  ended  September  30, 1998 over the same
three month period in 1997 was $148,000 to $1,090,000. The increase for the nine
months ended September 30, 1998 was primarily due to an additional of $8,950,000
of advisory  and  investment  banking fees  generated by Victor  Capital 


                                      -18-

<PAGE>


and its related subsidiaries over the amount of such fees generated in the prior
year, which was partially offset by a $313,000  decrease in rental income as the
Company sold its remaining rental  properties  during the first quarter of 1997.
The sales of the rental  properties in the first quarter of 1997 resulted in the
Company  recognizing a loss of $432,000.  The Company sold a shopping  center in
Sacramento,  California and recognized a net loss of approximately  $34,000. The
Company also sold a retail property located in Kirkland,  Washington,  resulting
in a net loss of approximately  $398,000, the majority of which was attributable
to transfer taxes and the  elimination of unamortized  tenant  improvements  and
leasing commissions.  The increase for the three months ended September 30, 1998
was primarily due to the addition of $300,000 of advisory and investment banking
fees  generated  by Victor  Capital  and its  related  subsidiaries  offset by a
$144,000 decrease in other interest income.

         Other  expenses  increased  from  $4,944,000  for the nine months ended
September 30, 1997 to $14,582,000  for nine months ended  September 30, 1998 and
from  $3,532,000 for the three months ended September 30, 1997 to $5,762,000 for
the three months ended September 30, 1998. The increase was primarily due to the
additional  general and  administrative  expenses necessary for the commencement
and continuation of full-scale  operations as a specialty  finance company,  the
largest  components of such expenses are employee salaries and related costs and
the provision for possible credit losses.  As of September 30, 1998, the Company
had 44 full  time  employees  as  compared  to 27 at  September  30,  1997.  The
provision for possible  credit losses was  $2,359,000  for the nine months ended
September 30, 1998 and was $1,119,000  for the three months ended  September 30,
1998 as the  Company  provided  reserves  on its loan and  investment  portfolio
pursuant to its reserve  policy.  The  significant  increase  from the  $155,000
provision  for  possible  credit  loss for the  quarter  and nine  months  ended
September  30,  1997  was due to the  increase  in  average  earning  assets  as
previously described.

         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 nine and three months ended September
30, 1998, the Company accrued $8,312,000 and 3,053,000,  respectively, of income
tax expense for federal, state and local income taxes. For federal purposes, the
Company utilized  three-quarters of the expected net operating loss carryforward
to be utilized  in 1998 in  calculating  the  accrual for the nine months  ended
September  30,  1998  and  one  quarter  of  the  expected  net  operating  loss
carryforward  to be  utilized in 1998 in  calculating  the accrual for the three
months ended September 30, 1998.

As previously  discussed,  the Company issued  $150,000,000 of Convertible Trust
Preferred Securities on July 28, 1998. The Company recognized  $1,199,000 of net
expenses  related to these  securities  during the quarter  ended  September 30,
1998. This amount consisted of distributions to the holders totaling  $2,131,000
and amortization of discount and origination costs totaling  $137,000.  This was
partially offset by a tax benefit of $1,069,000.

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



                                       -19-
<PAGE>


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

         At September 30, 1998, the Company had $16,420,000 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 Facilities. The primary demands
on the  Company's  capital  resources  will  be the  funding  required  for  the
origination  or  acquisition  of loans  and  other  investments  as the  Company
continues with its specialty finance  operations and the growth of its portfolio
of loans and other investments.

         The Company  experienced a net decrease in cash of $32,848,000  for the
nine months ended  September 30, 1998,  compared to the net decrease of $635,000
for the nine months ended September 30, 1997. This use of cash was primarily due
to the  utilization  of the  proceeds  of the  Class  A  Common  Share  offering
completed in the fourth  quarter of 1997 and the  utilization of the proceeds of
the Convertible Trust Preferred  Securities  issuance  completed in July 1998 in
making loans and other  investments  during the first nine months of 1998 offset
by additional borrowings.  Cash provided by operating activities during the nine
months ended  September 30, 1998 increased by  $11,631,000  to $9,705,000,  from
cash used in operating  activities of $1,926,000 during the same period of 1997.
For the nine months ended September 30, 1998, cash used in investing  activities
was $452,583,000,  an increase of $372,710,000 from $79,873,000  during the same
period in 1997 primarily the result of the loans and other investments completed
since December 31, 1997. The increase in cash provided by financing  activities,
which increased $328,866,000 to $410,030,000 from $81,164,000, was due primarily
to the proceeds of repurchase  obligations  and net borrowings  under the Credit
Facilities.

         At September 30, 1998,  the Company has two  outstanding  notes payable
totaling  $4,181,000,   outstanding  borrowings  on  the  Credit  Facilities  of
$348,780,000 and outstanding repurchase obligations of $80,420,000. At September
30, 1998, the Company had $306,220,000 of borrowing capacity available under its
Credit Facilities.

General  Description of the  Year  2000 Issue and the  Nature and Effects of the
--------------------------------------------------------------------------------
Year 2000 on Information Technology (IT) and Non-IT Systems
-----------------------------------------------------------

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer  programs or hardware that have  date-sensitive  software or
embedded  chips may recognize a date using "00" as the year 1900 rather than the
year 2000.  This could  result in a system  failure or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to  process   transactions,   send  invoices,  or  engage  in  similar  business
activities.

         Based upon  recent  assessments,  the  Company  determined  that it was
required to replace  certain of its software and certain  hardware so that those
systems  will  properly  utilize  dates beyond  December  31, 1999.  The Company
believes  that with the  replacement  of the  previously  existing  software and
certain  hardware,  the Year 2000 Issue can be  mitigated.  However,  if certain
replacements  are not made, or not completed  timely,  the Year 2000 Issue could
have a material impact on the operations of the Company.



                                       -20-
<PAGE>



         The  Company's  plan to  resolve  the  Year  2000  Issue  involves  the
following four phases: assessment,  remediation, testing and implementation.  To
date, the Company has completed its assessment of all its in-house  systems that
could be  significantly  affected  by the Year 2000.  The  completed  assessment
indicated  that all of the  Company's  accounting  software  could be  affected,
particularly the general ledger and accounts  payable  systems.  That assessment
also included the software included in modeling and evaluating opportunities for
new business and the equipment  supporting such applications.  In addition,  the
Company will gather  information  about the Year 2000  compliance  status of its
significant service providers to monitor their compliance.


Status of Progress in Becoming  Year 2000  Compliant,  Including  Timetable  for
--------------------------------------------------------------------------------
Completion of Each Remaining Phase
----------------------------------

         For its information technology exposures,  to date the Company believes
it is 100%  complete on the  remediation  phase of its in-house IT systems (both
software and hardware).  Implementation had been completed and the Company plans
to begin  testing of all the  software and  hardware  systems in November  1998.
Completion  of the testing  phase is expected to be completed by March 31, 1999,
with 100% completion targeted for September 30, 1999.

Nature and  Level of Importance of Third Parties and their Exposure to the  Year
--------------------------------------------------------------------------------
2000
----

         The Company's  loan  servicing  function is performed by an independent
third party. This service includes the calculation of interest and principal for
the  Company's  loans  receivable,  the  processing  of bills  to the  Company's
customers  and the  maintenance  of lock boxes and escrow  accounts on behalf of
borrowers.  The  vendor  has  advised  the  Company  that they will be Year 2000
compliant by the end of 1999.

         The Company will query its  significant  service  providers that do not
share  information  systems with the Company  (external  agents).  To date,  the
Company  is not aware of any  external  agent  with a Year 2000 issue that would
materially  impact the Company's  results of operations,  liquidity,  or capital
resources.  However,  the  Company has no means of  ensuring  that any  external
agents used by the Company  will be Year 2000 ready.  The  inability of external
agents to complete their Year 2000  resolution  process in a timely manner could
materially  impact the Company.  The effect of non-compliance by external agents
is not determinable.

Costs of Year 2000 Compliance

         The Company  will  utilize  both  internal  and  external  resources to
replace,  test, and implement the software and operating equipment for Year 2000
modifications.  The total cost of the Year 2000 project is $250,000 and is being
funded  through  operating  cash  flows.  To  date,  the  Company  has  incurred
approximately $175,000 ($5,000 expensed and $170,000 capitalized for new systems
and equipment), related to all phases of the Year 2000 project. Of the remaining
project costs, approximately $75,000 is attributable to the testing of equipment
and software.



                                       -21-
<PAGE>



Risks of Year 2000
------------------

         The  Company  believes  that it has an  effective  program  in place to
resolve the Year 2000 issue in a timely manner.  As noted above, the Company has
not yet  completed all the  necessary  phases of the Year 2000  program.  In the
event that the Company does not complete any additional  phases,  the Company is
not certain that the systems  would operate  correctly,  as the systems have not
been  adequately  tested.  In  addition,  disruptions  in the economy  generally
resulting from Year 2000 issues could  materially  adversely affect the Company.
The  amount  of  potential  liability  and lost  revenue  cannot  be  reasonably
estimated at this time.

         The Company currently has no contingency plans in the event it does not
complete all phases of the Year 2000 program.  The Company plans to evaluate the
status  of  completion  in  March  1999  and  determine  whether  such a plan is
necessary.

Explanatory Note for the Use of Forward-Looking Statements
----------------------------------------------------------

         Certain   statements   in  this   quarterly   report   may   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  These  statements,  which are not statements of
historical  fact,  may  contain  estimates,   assumptions,   projections  and/or
expectations regarding the Company's financial position,  results of operations,
market  position,  growth  opportunities  and  growth  rates and  other  similar
statements of expectation.  Words such as "expects,"  "anticipates,"  "intends,"
"plans,"  "believes,"  "seeks,"  "will," "may,"  "estimates,"  and "should," and
variations  of these words and  similar  expressions,  are  intended to identify
these  forward-looking  statements.  Such  forward-looking  statements  are  not
guarantees  of  future  performance.  They  involve  known  and  unknown  risks,
uncertainties, and other factors which may cause the actual results, performance
or  achievements  of the  Company  to be  materially  different  from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking   statements.   Representative  examples  of  such  factors  are
discussed  in more  detail  in the  Company's  Annual  Report on Form  10-K,  as
amended, and include, among other things, the availability of desirable loan and
investment opportunities,  the ability to obtain and maintain targeted levels of
leverage  and  borrowing  costs,  changes  in  interest  rates,  continued  loan
performance and repayment and the maintenance of loan loss allowance levels. The
Company  disclaims any intention or obligation to update  publicly or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.




                                       -22-
<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


                                      -23-