SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                              ---------------------

                                   FORM 10-KSB
(Mark One)

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996
                          -----------------

                                       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 1-9900

                         ARIZONA LAND INCOME CORPORATION
--------------------------------------------------------------------------------
              (Exact name of small business issuer in its charter)

         Arizona                                       86-0602478
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

2999 North 44th Street, Suite 100, Phoenix, Arizona                      85018
--------------------------------------------------------------------------------
         (Address of principal executive offices)                     (Zip Code)

Issuer's telephone number, including area code                (602) 952-6800
                                               -----------------------------

Securities registered pursuant to Section 12(b) of the Act:


     Title or class                               Name of each exchange on which
--------------------------                        ------------------------------
                                             registered
                                             -----------------------------------
Common Stock, no par value                          American Stock Exchange
--------------------------                   -----------------------------------

           Securities registered pursuant to Section 12(g) of the Act:

                                      None
--------------------------------------------------------------------------------
                                (Title or Class)

                               Page 1 of 31 pages
<PAGE>
         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]


         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  Registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The issuer's  revenues for the fiscal year ended December 31. 1996 were
$648,625.

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant,  based upon the average of the high and the low prices of the
registrant's Series A Common Stock as reported by the American Stock Exchange on
March 18, 1997,  was  approximately  $8,753,418.  Shares of voting stock held by
each  officer  and  director  and by  each  person  who  owns  5% or more of the
outstanding  voting stock have been  excluded in that such persons may be deemed
affiliates.   This   determination   of  affiliate  status  is  not  necessarily
conclusive.

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

         Indicate the number of shares  outstanding of each of the  Registrant's
classes of common stock, as of the latest practicable date.

2,360,080  shares of Class A Common Stock outstanding on March 18, 1997
           100 shares of Class B Common Stock outstanding on March 18, 1997
--------------------------------------------------------------------------------


                       DOCUMENTS INCORPORATED BY REFERENCE

         Materials from the  registrant's  Proxy Statement  relating to the 1997
Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 9, 10, 11 and 12.

         Transitional Small Business Disclosure Format
                  Yes [ ]  No [X]


                                                       Exhibit Index at page 29
                                                                 Total pages 31
                                       2
<PAGE>
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I   ......................................................................4

         ITEM 1.           DESCRIPTION OF BUSINESS.............................4
         ITEM 2.           DESCRIPTION OF PROPERTY.............................8
         ITEM 3.           LEGAL PROCEEDINGS...................................8
         ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF
                           SECURITY HOLDERS....................................8

PART II  ......................................................................9

         ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED
                           STOCKHOLDER MATTERS.................................9
         ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS
                           OR PLAN OF OPERATION...............................11
         ITEM 7.           FINANCIAL STATEMENTS...............................14
         ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH
                           ACCOUNTANTS ON ACCOUNTING AND
                           FINANCIAL DISCLOSURE...............................28

PART III .....................................................................28

         ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
                           AND CONTROL PERSONS; COMPLIANCE WITH
                           SECTION 16(a) OF THE EXCHANGE ACT..................28
         ITEM 10.          EXECUTIVE COMPENSATION.............................28
         ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                           OWNERS AND MANAGEMENT..............................28
         ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED
                           TRANSACTIONS.......................................28

PART IV  .....................................................................29

         ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K...................29

SIGNATURES....................................................................31
                                       3
<PAGE>
                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

         Background.  Arizona Land Income  Corporation (the "Company") is a real
estate  investment trust organized as an Arizona  corporation on March 10, 1988.
On that same date, the Company issued 100 shares of the Company's Class B Common
Stock to YSP Holdings,  Inc.,  the Company's  sponsor,  in return for an initial
capital contribution of $1,000.  Operations of the Company commenced on June 13,
1988.

         In June of 1988, the Company began investing in first mortgage loans on
unimproved real property  located in the  metropolitan  Phoenix area. Such loans
included  mortgage loans secured or  collateralized  by first  mortgages,  first
deeds of trust and real property  subject to agreements for sale and subdivision
trusts ("First Mortgage Loans"). From its inception until December 31, 1991, the
Company purchased interests totaling $34,120,000 in twenty First Mortgage Loans.
Since January 1, 1992, the Company has not purchased any additional interests in
any First Mortgage Loans, and has had to institute foreclosure  proceedings with
respect to certain  properties  securing such loans. See "Investment  Objectives
and Criteria"  below.  See also Note 3 to the financial  statements  included in
Item 7 for additional information concerning the Company's First Mortgage Loans.

         The Company's goal has been to pay  distributions  of available cash to
shareholders and to preserve and protect  shareholders' net capital  investment.
The Company pays  extraordinary cash distributions to its shareholders when such
distributions  are warranted  based upon the Company's cash reserves at the time
of the  distribution  as well as the  Company's  projected  need  for  operating
capital.  During the 1996 fiscal  year,  the Company  declared and paid two cash
distributions.  The first  distribution  of $.30 per share was paid on April 15,
1996 to  shareholders  of record on April 1, 1996.  The second  distribution  of
$1.00 per share  was paid on  December  16,  1996 to  shareholders  of record on
December 2, 1996.

         Potential Dissolution. As disclosed in the Company's prospectus used in
connection with the Company's 1988 initial public offering, the Company's intent
at the time of the public  offering was to dissolve within  approximately  eight
years after the date of such  offering.  The Company  currently has no immediate
plans to dissolve  and may not  voluntarily  dissolve  anytime in the  immediate
future.  Any  decision  by the  Company to dissolve  will be  determined  by the
Company's  Board of Directors and will depend upon market  conditions  and other
pertinent factors.  The Company's Board of Directors possesses the discretion to
(i) continue to operate the Company and hold such First  Mortgage  Loans or real
property  until  the  Company's  Board of  Directors  determines  that it is the
Company's  best  interest to dispose of such  investments;  (ii) sell such First
Mortgage Loans or real property on or about the dissolution  date, in which case
the sale  proceeds in excess of monies owed by the Company to creditors  will be
distributed  to the  shareholders  on a pro rata  basis,  or (iii)  issue to the
shareholders  participating  interests  in such  First  Mortgage  Loans  or real
property on a basis  proportionate to their respective stock ownership interests
in  the  Company.   In  the  event  the  Company  issues  to  its   shareholders
participating  interests in a First Mortgage Loan, the Advisor  (defined  below)
will continue to act as servicing  agent for the First Mortgage Loan and will be
paid a quarterly servicing fee equal to 1/16 of 1%
                                       4
<PAGE>
of the aggregate  outstanding  loan balance of the First Mortgage Loan until the
First Mortgage Loan is sold or repaid.

         Qualification  as a Real  Estate  Investment  Trust.  The  Company  has
attained real estate  investment  trust ("REIT")  status for all tax years since
its inception, and management and the Company's Board of Directors believes that
the Company has completed the necessary steps to permit the Company to elect, if
it so chooses, REIT status for the tax year ended December 31, 1996. REIT status
allows the Company to deduct from its federal  taxable income (and not pay taxes
upon) dividends paid to its shareholders.  See Item 6 - Management's  Discussion
and Analysis or Plan of Operation.

         Generally,  if the Company is to maintain its REIT status, it must: (i)
restrict  its  investments  principally  to assets that  produce  interest  from
mortgage  loans  collateralized  by real estate or which produce  rental income;
(ii) pay out at least 95% of its taxable income (excluding capital gains) to its
shareholders;  (iii)  pay  taxes at  corporate  tax  rates on  capital  gains or
distribute at least 95% of capital gains as dividends to its shareholders;  (iv)
realize  less than 30% of its gross  income from the sale of certain  securities
and real estate assets (excluding real property acquired through the foreclosure
proceeding)  held for less than four years; (v) hold less than 10% of the voting
securities of any single issuer; and (vi) have an independent manager or advisor
for its assets.  If the  Company  fails to  maintain  its status as a REIT,  the
Company would not be entitled to deduct from its federal taxable income (and not
pay federal tax upon) dividends paid to shareholders.

         Investment   Objectives   and   Criteria.   In   evaluating   potential
investments,  the Company has  historically  considered such factors as: (i) the
borrower's  cash  investment  in the real property  securing the First  Mortgage
Loan;  (ii) the  loan-to-value  ratio of the  First  Mortgage  Loan;  (iii)  the
maturity date of the First Mortgage Loan;  (iv) the appraised  value, if any, or
past purchase prices of the real property  securing the First Mortgage Loan; (v)
the existence,  if any, of significant  debt junior to the first lien;  (vi) the
potential that the real property will  appreciate in value;  (vii) the identity,
financial  strength and payment history (if any) of the borrower under the First
Mortgage  Loan;  (viii)  the  growth,  tax  and  regulatory  environment  of the
communities in which the  properties  are or will be located;  (ix) the location
and  condition  of the  real  property;  (x) the  supply  of,  and  demand  for,
properties  of similar type in the  vicinity;  (xi) the  prospects for liquidity
through  the sale or  foreclosure  of the real  property;  and (xii)  such other
factors that become relevant in the course of the Company's evaluation process.

         The  Company's  historical  investment  objective  was to locate  First
Mortgage  Loans  which  satisfied  the  foregoing  investment  criteria.  Due to
generally poor economic conditions in Arizona and in metropolitan Phoenix during
the early 1990's,  the Company has not acquired any  additional  First  Mortgage
Loans since 1989 (other than  refinancings  or  restructuring  of existing First
Mortgage Loans).  Although general economic and real estate market conditions in
such  areas  have  improved,  the  Company  does not  anticipate  acquiring  any
additional First Mortgage Loans.


         Management  Arrangements.  The Company has no employees.  The Company's
affairs are managed by its  non-salaried  officers and Board of  Directors.  The
Company and ALI Advisor,
                                       5
<PAGE>
Inc.  (the  "Advisor")  entered into an advisory and  servicing  agreement  (the
"Advisory Agreement") at the time of the Company's  incorporation.  The Advisory
Agreement  has  expired by its own terms;  however,  the Company and the Advisor
have  agreed to  continue  to  operate  as if the terms  and  conditions  of the
Advisory Agreement are still in effect.

         Pursuant to the Advisor's  agreement  with the Company,  the Advisor is
authorized  to:  (i)  purchase  First  Mortgage  Loans,  subject  to review  and
ratification  by the  Company's  Board of  Directors;  (ii)  serve as  exclusive
investment and financial advisor and provide research,  economic and statistical
data in connection with investments and financial  policies;  (iii) investigate,
select and conduct relations with accountants,  attorneys,  brokers,  investors,
and  others as  necessary;  (iv)  maintain  bank  accounts  and  records  deemed
appropriate  or  requested  by  the  Company's  Board;  (v)  perform  or  obtain
accounting  and other  services;  (vi) collect and remit  principal and interest
payments due on the First Mortgage Loans;  and (vii) perform such other services
as set forth in the Advisory Agreement.

         The Company has agreed to pay the Advisor a servicing fee for servicing
the Company's First Mortgage Loans.  The servicing fee is payable  quarterly and
equals 1/16 of 1% of the sum of (i) the  aggregate  outstanding  loan balance of
the First Mortgage Loans in the Company's mortgage loan portfolio,  and (ii) the
recorded value of property  acquired by the Company through  foreclosure,  as of
the first day of each fiscal quarter. During 1996 and 1995, the Company paid the
Advisor a servicing fee of $53,425 and $52,582, respectively.

         The Company also agreed to pay the Advisor a management  fee for aiding
the Company in developing  investment  policies and  analyzing and  recommending
investments to the Company. The management fee will be paid for each quarter the
shareholders'  cumulative  return on  capital  investment  as of the end of such
quarter  exceeds  12.7%,  and will equal 30% of the Company's  available cash in
excess of that  necessary to provide  shareholders  with a cumulative  return on
capital  investment  in excess of 12.7%.  The  Company  did not  accrue or pay a
management fee to the Advisor in 1996 or 1995.

         The Company also agreed to reimburse  the Advisor  quarterly  for other
expenses  incurred in servicing  the Company's  First  Mortgage  Loans,  such as
legal, accounting and transfer agent fees and copying and mailing costs incurred
in preparing and mailing periodic  reports to shareholders.  The Company did not
reimburse the Advisor for any such expenses in 1996 or 1995.

         1996 Transactions and Loan  Modifications.  Set forth below is a review
of the transactions and modifications  which affect the First Mortgage Loans and
which occurred  during the 1996 fiscal year. The mortgage loan numbers  referred
to below are  identifiers  for  those  loans on the  books  and  records  of the
Company.  Additionally,  these numbers are  identified in the Company's  initial
offering  prospectus  dated  June 6, 1988 and in Notes 3 and 4 to the  Company's
financial statements set forth in Item 7 hereof.

         The Company had three land sales during the 1996 fiscal year,  which in
the aggregate generated a $137,860 gain on sale of property.  The first resulted
from the sale of a  five-acre  parcel of property  located in Phoenix,  Arizona,
which the Company acquired through foreclosure
                                       6
<PAGE>
on Loan No. 17. This sale netted the Company  $412,000 cash. The second sale was
a three-acre  parcel which had secured Loan No. 17. This sale netted the Company
$273,000.  The Company also sold a three-acre portion of its property located at
16th  Street and Bell Road in  Phoenix,  Arizona.  This  property  was  acquired
through  foreclosure on Loan No. 10. The sale closed October 2, 1996, and netted
the Company $691,000.

         In addition to the  above-referenced  three land sales, the Company has
parcels of land resulting from  foreclosure on Loan No. 17. All of these parcels
are in escrow,  currently  scheduled to close in the second  quarter of 1997. If
such sales are  consummated,  the Company  should  receive  $2,400,000  in cash;
however,  there can be no assurance that such sales will be consummated.  In its
endeavor  to sell  the  property  associated  with  Loan  No.  17,  the  Company
anticipates  an  expenditure  of  approximately  $400,000  to  $500,000  to fund
additional  planning/zoning  requirements  of the City of Phoenix  and to access
improvements required by the purchasers.

         In summary,  the  Company  had three land sales  during the 1996 fiscal
year which produced $1,376,000 cash.

         During the second quarter of 1996, the Company  received $78,631 as the
payoff on Loan No. 17-2, which is associated with the sale of property  received
through  foreclosure  on Loan No.  17.  During the third  quarter  of 1996,  the
Company  received  cash in payoffs  for three of its  loans.  Loan No. 1, with a
principal  amount  of  $449,000,  Loan  No.  12,  with  a  principal  amount  of
$1,092,000,  and Loan No. 20, with a principal amount of $128,000, were all paid
off and cash was  received.  During the  fourth  quarter  of 1996,  the  Company
received  $352,000 as a partial  payoff on Loan No. 9, which is associated  with
the  sale of  property  received  through  foreclosure  on  Loan  No.  9.  These
collections  were in addition  to periodic  collections  of  principal  on other
notes.

         Common Stock  Purchases.  On March 15,  1994,  the  Company's  Board of
Directors  authorized the repurchase of shares of the Company's  Common Stock in
open market  transactions.  Since authorizing the repurchase of shares of Common
Stock,  the Company has  repurchased  249,920 shares of Common Stock  including,
172,500  shares that were  repurchased  and retired during the 1996 fiscal year.
The Company  intends to continue to periodically  make open market  purchases of
its Common Stock.
                                       7
<PAGE>
ITEM 2.           DESCRIPTION OF PROPERTY.

         The Company's  principal offices are located at the offices of Peacock,
Hislop, Staley and Given ("PHS&G"),  2999 North 44th Street, Suite 100, Phoenix,
Arizona,  85018. Messrs.  Peacock,  Hislop, Staley and Given are officers and/or
directors  of the  Company,  and  Messrs.  Peacock,  Hislop  and  Staley are the
shareholders  of ALI  Advisor.  The Company  does not pay for the use of PHS&G's
facilities.

         Information  regarding  the  status of real  property  acquired  by the
Company pursuant to the foreclosure of certain First Mortgage Loans is set forth
in Note 4 to the Company's financial Statements contained in Item 7.

ITEM 3.           LEGAL PROCEEDINGS.

         None.


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.


EXECUTIVE OFFICERS OF THE COMPANY.

         Barry W. Peacock,  age 59, has served as the Company's  President  from
its inception in 1988. Mr. Peacock is Chairman of the Board of Peacock,  Hislop,
Staley and Given  ("PHS&G"),  a position he has held since the inception of that
Company in June 1989. Mr. Peacock served as a senior executive with Young, Smith
& Peacock, Inc. ("YSP") from 1964 until June 1989, and most recently as Managing
Director--Municipal Bonds.

         Larry P. Staley,  age 54, has served as the  Company's  Vice  President
from the Company's inception. Mr. Staley is Vice-Chairman of the Board of PHS&G,
a position he has held since June 1989. Prior to that date, Mr. Staley served in
various  capacities  with YSP,  where he was employed  from 1973 until he joined
PHS&G in 1989.

         David W. Miller,  age 48, has served as Secretary of the Company  since
his election to such office on  September  22,  1988.  Mr.  Miller has served as
Senior  Vice  President,  Chief  Financial  Officer and a member of the Board of
Directors of PHS&G since June 1989.  Prior to that date,  Mr.  Miller  served in
various  capacities  with YSP,  where he was employed  from 1971 until he joined
PHS&G.
                                       8
<PAGE>
                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS.

         The Company has two classes of common equity securities, Class A Common
Stock and Class B Common Stock.  All 100 shares of the Company's  Class B Common
Stock were  purchased by YSP  Holdings,  Inc.  ("YSP  Holdings"),  the Company's
sponsor, in connection with the formation of the Company and are currently owned
by YSP  Holdings.  The  Company's  Class B  Common  Stock is not  traded  on any
exchange.

         On March 15, 1994,  the  Company's  Board of Directors  authorized  the
repurchase of shares of the Company's Common Stock in open market  transactions.
Since  authorizing  the  repurchase of shares of Common  Stock,  the Company has
repurchased  249,920 shares of Common Stock including,  172,500 shares that were
repurchased  and retired  during the 1996 fiscal  year.  The Company  intends to
continue to periodically make open market purchases of its Common Stock.

         The  Company's  Class A  Common  Stock is  listed  for  trading  on the
American Stock Exchange ("AMEX"). As of March 18, 1997, there were approximately
79 holders of record of the Class A Common Stock.  In the Company's  estimation,
based upon  reliable  information  available to the Company,  there are over 600
beneficial  owners of the Company's  Class A Common  Stock.  The market price of
Class A Common  Stock at the close of trading  on March 18,  1997 was $5.125 per
share.  The  following  table  sets forth the high and low prices on AMEX of the
Class A Common  Stock  for each  quarterly  period in 1995 and 1996 and the cash
distributions paid per share of Class A Common Stock for such periods.
                                       9
<PAGE>


                                 Sales Price            Dividends/Distributions
                                 -----------             Declared Per Share of
Calendar Quarter            High            Low       Class A Common Stock(1)(2)
----------------            ----            ---       --------------------------
     1995
     ----
First Quarter               6 1/4         4 3/16                  .75
Second Quarter              5 1/4          4 1/2                 - 0 -
Third Quarter                 5           4 11/16                - 0 -
Fourth Quarter                5            4 3/4                 - 0 -
     1996
     ----
First Quarter                 6            4 3/4                  -0-
Second Quarter             5 5/16          4 7/8                  .30
Third Quarter               5 1/2          4 7/8                  -0-
Fourth Quarter              6 1/4         4 7/16                 1.00
         -----------------

(1)      See Note 7 to the financial statements included in Item 7.

(2)      The Company pays  extraordinary  cash distributions to its shareholders
         when such  distributions  are warranted  based upon the Company's  cash
         reserves  at the  time of the  distribution  as  well as the  Company's
         projected need for operating capital.  During the 1996 fiscal year, the
         Company   declared   and  paid  two  cash   distributions.   The  first
         distribution  of  $.30  per  share  was  paid  on  April  15,  1996  to
         shareholders  of record on April 1, 1996.  The second  distribution  of
         $1.00 per share was paid on December 16, 1996 to shareholders of record
         on December 2, 1996.
                                       10
<PAGE>
ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION.

RESULTS OF OPERATIONS

         Year Ended  December 31, 1996 vs.  1995.  The Company had net income of
approximately  $503,000 or $.20 per share of Class A Common Stock,  for the year
ended  December 31, 1996,  compared to net income of  approximately  $465,000 or
$.18 per share of Class A Common  Stock,  for the year ended  December 31, 1995.
The  increase  in the net  income  for the year  ended  December  31,  1996,  is
primarily  attributable  to an increase in interest income as well as a decrease
of $45,000  in  property  taxes.  Interest  income  from  First  Mortgage  Loans
decreased  to $476,000  in 1996 from to  $480,000  in 1995.  Gain on the sale of
property decreased to $138,000 in 1996 from $204,000 in 1995.

         Income  from  temporary  investments  increased  to  $128,000  in  1996
compared to $64,000 in 1995 due to larger cash balances held by the Company. The
Company had other income of $44,000 compared to other income of $50,000 in 1995.
The  other  income  received  by the  Company  in 1996  and  1995  is  primarily
attributable   to  lease  rentals  on  land  received  by  the  Company  through
foreclosure actions.

         The Company's  expenses decreased in the aggregate to $283,000 in 1996,
compared to $333,000 in 1995. This decrease of $50,000 is primarily attributable
to decreases in porperty taxes.

         The Company did not record a loan loss  reserve in 1996  because of the
stabilization of the Phoenix real estate market.

         Net cash provided by operating activities was $508,000 in 1996 compared
to net cash used in operating  activities of $68,000 in 1995.  Net cash provided
by  investing  activities  in 1996  and  1995  was  $3,386,000  and  $3,169,000,
respectively.  Net  cash  used in  financing  activities  in 1996  and  1995 was
$4,094,000 and $2,025,000, respectively.



OUTLOOK.

         Forward-Looking   Statements.   The   following   discussion   contains
forward-looking  statements,  as well as a discussion of risks and uncertainties
that could affect the Company. Due to the risks and uncertainties, the Company's
actual  results  may  differ  materially  from  the  results  discussed  in  the
forward-looking statements.

         Real Estate Investment Outlook.  Refinancing of the loan or sale of the
underlying  real  property  serves as a principal  method for borrowers to repay
mortgage loans on unimproved  real property such as the Company's First Mortgage
Loans.  In Arizona in general,  and in  metropolitan  Phoenix in  particular,  a
number of factors  have  combined to  negatively  impact  borrowers'  ability to
refinance their loans on unimproved real property or sell the underlying
                                       11
<PAGE>
property during the early 1990's. First, the shortage of available financing for
real estate  development and improvement  reduced the demand for unimproved real
property,  causing a lack of  liquidity in the market for  unimproved  property.
Second, real estate values in metropolitan  Phoenix had been in decline and only
recently  have begun to stabilize.  Third,  the lack of liquidity and decline in
values  resulted in a large number of defaults on mortgage  loans on  unimproved
real property.  In turn,  this resulted in the  acquisition of large real estate
portfolios by Arizona financial institutions. These financial institutions, some
of which are under government  supervision,  have contributed to the illiquidity
in the market by holding their portfolios for extended periods of time.

         The Company  believes these and other factors have negatively  impacted
borrowers'  ability  to pay on their  First  Mortgage  Loans.  Because  interest
payments on First  Mortgage  Loans  constitute  the Company's  primary source of
income,  borrowers'  failure  to pay on their  First  Mortgage  Loans have had a
significant  adverse impact on the Company's  operating results.  In appropriate
circumstances,  the Company has modified a First Mortgage Loan at the request of
the borrower.  These  modifications have included the deferral by the Company of
principal due, the deferral of interest and, in certain instances, a decrease in
the interest rate paid by the borrower. In other circumstances,  the Company has
instituted  foreclosure  and other legal  proceedings to protect its interest in
the First Mortgage Loan and the underlying  property.  As a result,  the Company
now owns,  and is attempting to sell, a number of  properties.  See also Notes 3
and 4 to the financial statements, included in Item 7 for additional information
concerning  the Company's  First Mortgage  Loans and for  information  regarding
properties held for sale.

         The Company  believes that the market for  unimproved  real property in
Phoenix  has begun to improve as  evidenced  by the number of land sales for the
Company  during 1995 and 1996.  The Company sold three  parcels of land in 1996,
and  anticipates  that  additional  parcels  will be sold in 1997.  However,  no
assurance can be made that such sales will occur.

         Potential Dissolution. As disclosed in the Company's prospectus used in
connection with the Company's 1988 initial public offering, the Company's intent
at the time of the public  offering was to dissolve within  approximately  eight
years after the date of such  offering.  The Company  currently has no immediate
plans to dissolve  and may not  voluntarily  dissolve  anytime in the  immediate
future.  Any  decision  by the  Company to dissolve  will be  determined  by the
Company's  Board of Directors and will depend upon market  conditions  and other
pertinent factors.  The Company's Board of Directors possesses the discretion to
(i) continue to operate the Company and hold such First  Mortgage  Loans or real
property  until  the  Company's  Board of  Directors  determines  that it is the
Company's  best  interest to dispose of such  investments;  (ii) sell such First
Mortgage Loans or real property on or about the dissolution  date, in which case
the sale  proceeds in excess of monies owed by the Company to creditors  will be
distributed  to the  shareholders  on a pro rata  basis,  or (iii)  issue to the
shareholders  participating  interests  in such  First  Mortgage  Loans  or real
property on a basis  proportionate to their respective stock ownership interests
in  the  Company.   In  the  event  the  Company  issues  to  its   shareholders
participating  interests in a First  Mortgage Loan, the Advisor will continue to
act as servicing  agent for the First Mortgage Loan and will be paid a quarterly
servicing fee equal to 1/16 of 1% of the aggregate  outstanding  loan balance of
the First Mortgage Loan until the First Mortgage Loans is sold or repaid.
                                       12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.

         The Company believes that the funds generated from the payment of First
Mortgage Loans as well as the sale of its properties  will be sufficient to meet
the  Company's  working  capital  requirements  and to  finance  any  additional
investments.  No other arrangements,  such as lines of credit, have been made to
obtain external  sources of liquidity.  However,  the Company believes that such
arrangements could be obtained by the Company, if necessary.

         The Company  currently  has no  commitments  for any  material  capital
expenditures  and does not anticipate any such  expenditures  in the foreseeable
future.

DIVIDENDS.

         During the 1995 fiscal year, the Board declared one extraordinary  cash
distribution of $.75 per share, which was paid on April 18, 1995 to shareholders
of record on March 31, 1995.

         During  the  1996  fiscal  year  the  Company  declared  and  paid  two
extraordinary cash distributions.  The first distribution was for $.30 per share
and was paid on April 15, 1996 to  shareholders  of record on April 1, 1996. The
second distribution was for $1.00 per share and was paid on December 16, 1996 to
shareholders of record on December 1, 1996.

         In order for the Company to maintain its status as a qualified REIT, it
must, among other requirements, pay out in the form of dividends at least 95% of
its taxable income (excluding  capital gains) to shareholders and must pay taxes
at corporate  tax rates on capital  gains or  distribute at least 95% of capital
gains as dividends to shareholders.  If the Company fails to maintain its status
as a REIT,  the  Company  would no longer be entitled to deduct from its federal
taxable income (and not pay federal taxes on) dividends paid to shareholders.
                                       13
<PAGE>
Item 7.  FINANCIAL STATEMENTS



                                      INDEX


                                                                            Page



Report of Independent Public Accountants                                      15

Financial Statements-

   Balance Sheet - December 31, 1996                                          16

   Statements of Operations - For the Years Ended December 31,
     1996 and 1995                                                            17

   Statements of Stockholders' Equity - For the Years Ended
     December 31, 1996 and 1995                                               18

   Statements of Cash Flows - For the Years Ended December 31,
     1996 and 1995                                                            19

Notes to Financial Statements - December 31, 1996 and 1995                    20

        Certain schedules are omitted as the information is not required.

                                       14


<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Arizona Land Income Corporation:

We  have  audited  the  accompanying   balance  sheet  of  ARIZONA  LAND  INCOME
CORPORATION  (an Arizona  corporation)  as of December 31, 1996, and the related
statements of  operations,  stockholders'  equity and cash flows for each of the
two years in the period ended December 31, 1996. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Arizona Land Income Corporation
as of December 31, 1996,  and the results of its  operations  and its cash flows
for each of the two years in the period ended  December 31, 1996,  in conformity
with generally accepted accounting principles.


/s/ Arthur Andersen LLP

Phoenix, Arizona,
   February 25, 1997.
                                       15

<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                                  BALANCE SHEET

                                DECEMBER 31, 1996





                                     ASSETS

ASSETS:
   Cash and cash equivalents                                     $    1,191,853
                                                                 --------------
   Investments-
     Accrued interest receivable                                        206,664
     Mortgage notes receivable (Note 4)                               4,363,668
     Investment in partnership                                          378,755
     Land held for sale (Note 5)                                     10,162,284
                                                                 --------------
                                                                     15,111,371
     Less- Reserve for losses                                        (1,513,953)
                                                                 --------------

                  Total investments, net                             13,597,418
                                                                 --------------

                                                                 $   14,789,271
                                                                 ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Accounts payable and other liabilities                        $       62,140
   Accrued property taxes                                                90,296
                                                                 --------------

                  Total liabilities                                     152,436
                                                                 --------------

COMMITMENTS AND CONTINGENCIES (Note 2)

STOCKHOLDERS' EQUITY (Notes 1 and 8):
   Class A common stock, $.10 stated value, 10,000,000 shares
     authorized, 2,360,080 shares issued and outstanding                236,008
   Class B common stock, $.10 stated value, 10,000 shares
     authorized, 100 shares issued and outstanding                           10
   Additional paid-in capital                                        23,791,072
   Distributions in excess of earnings                               (9,390,255)
                                                                 --------------

                  Total stockholders' equity                         14,636,835
                                                                  --------------

                                                                 $   14,789,271
                                                                 ==============

       The accompanying notes are an integral part of this balance sheet.
                                       16
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>


                                                                                      1996              1995
                                                                                  -------------    ---------
<S>                                                                               <C>              <C>
INCOME:
   Interest on mortgages                                                          $     476,215    $     480,269
   Interest on temporary investments                                                    128,194           63,619
   Other income                                                                          44,216           50,327
                                                                                  -------------    -------------

                  Total income before sale of properties                                648,625          594,215
                                                                                  -------------    -------------


EXPENSES:
   Property taxes                                                                       106,476          151,118
   Professional services                                                                 61,849           52,700
   Advisory fees to related party (Note 6)                                               53,425           52,582
   Administration and general                                                            32,874           45,351
   Directors' fees                                                                       23,200           27,400
   Interest expense                                                                       5,287            3,761
                                                                                  -------------    -------------

                  Total expenses before sale of properties                              283,111          332,912
                                                                                  -------------    -------------


INCOME BEFORE GAIN ON SALE OF PROPERTIES                                                365,514          261,303

GAIN ON SALE OF PROPERTIES, net                                                         137,860          204,079
                                                                                  -------------    -------------

NET INCOME                                                                        $     503,374    $     465,382
                                                                                  =============    =============

INCOME PER COMMON SHARE                                                              $   .20           $  .18
                                                                                     =======           ======

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING                                                                        2,521,160        2,534,686
                                                                                  =============    =============
</TABLE>
        The accompanying notes are an integral part of these statements.
                                       17
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                       STATEMENTS OF STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>



                                           Common Stock             Additional        Distributions       Total
                                      ------------------------        Paid-in           in Excess      Stockholders'
                                        Shares       Amount           Capital          of Earnings        Equity
                                      -----------  -----------    --------------     -------------     --------------
<S>                                     <C>        <C>            <C>                <C>               <C>
Balance, December 31, 1994              2,562,180  $   256,218    $   24,708,118     $  (5,177,220)    $   19,787,116

     Dividends paid                            -            -                 -         (1,899,435)        (1,899,435)
     Purchase and retirement of
       Class A common stock               (29,500)      (2,950)         (122,948)               -            (125,898)

     Net income                                -            -                 -            465,382            465,382
                                      -----------  -----------    --------------     -------------     --------------

Balance, December 31, 1995              2,532,680      253,268        24,585,170        (6,611,273)        18,227,165

     Dividends paid                            -            -                 -         (3,282,356)        (3,282,356)
     Purchase and retirement of
       Class A common stock              (172,500)     (17,250)         (794,098)               -            (811,348)

     Net income                                -            -                 -            503,374            503,374
                                      -----------  -----------    --------------     -------------     --------------

Balance, December 31, 1996              2,360,180  $   236,018    $   23,791,072     $  (9,390,255)    $   14,636,835
                                      ===========  ===========    ==============     =============     ==============
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       18
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                                                    1996              1995
                                                                                -------------    ---------
<S>                                                                             <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                   $     503,374    $      465,382
   Adjustments to reconcile net income to net cash provided by (used in)
     operating activities-
       Gain on sale of properties                                                    (137,860)         (204,079)
       Accretion of loan discounts                                                         -               (885)
       Changes in certain assets and liabilities affecting operating
         activities-
           Decrease in other assets, net                                               64,418            19,019
           (Increase) decrease in accrued interest receivable                          96,815          (127,672)
           Increase (decrease) in accounts payable and other liabilities              (33,271)           25,615
           Increase (decrease) in accrued property taxes                               14,437          (245,265)
                                                                                -------------    --------------

                  Net cash provided by (used in) operating activities                 507,913           (67,885)
                                                                                -------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Partnership investments                                                            (72,000)          (80,000)
   Principal payments received under mortgage notes receivable                      2,360,026           279,802
   Proceeds from sales of properties                                                1,375,610         2,968,972
   Land improvements                                                                 (284,064)               -
   Purchase of bonds                                                                 (906,959)               -
   Proceeds from redemption of bonds                                                  913,674                -
                                                                                -------------    -------------

                  Net cash provided by investing activities                         3,386,287         3,168,774
                                                                                -------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payment of dividends                                                            (3,282,356)       (1,899,435)
   Repurchase of Class A common stock                                                (811,348)         (125,898)
                                                                                -------------    --------------

                  Net cash used in financing activities                            (4,093,704)       (2,025,333)
                                                                                -------------    --------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     (199,504)        1,075,556

CASH AND CASH EQUIVALENTS, beginning of year                                        1,391,357           315,801
                                                                                -------------    --------------

CASH AND CASH EQUIVALENTS, end of year                                          $   1,191,853    $    1,391,357
                                                                                =============    ==============


SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   New mortgages related to sales of properties                                 $          -     $    3,289,340


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid                                                                $       5,287    $        3,761
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       19
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1996




(1)   ORGANIZATION AND OPERATIONS:

Arizona Land Income  Corporation  (the Company) was incorporated in the State of
Arizona on March 10, 1988 as a wholly owned subsidiary of YSP Holdings, Inc. and
completed an initial  public  offering on June 13, 1988. The net proceeds of the
initial  public  offering  of  $25,808,600  were used to acquire  and  originate
mortgage  loans  secured by  unimproved  real  property  located in the  Phoenix
metropolitan  area.  The Company has two  classes of common  stock,  Class A and
Class B. The  Class A shares  are  listed  for  trading  on the  American  Stock
Exchange.

The current  capitalization  of the Company and minimal  cash flow  requirements
afford the  Company  the ability to hold the  properties  and to finance  future
sales with a cash downpayment and terms.

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Cash and Cash Equivalents

Investments  with an original  maturity of less than 90 days when  purchased are
considered cash equivalents.  At December 31, 1996, cash equivalents  consist of
reverse  repurchase  agreements  in U.S.  Treasury  Notes of  $1,194,000,  which
matured in January of 1997.

         Mortgage Notes Receivable

Mortgage  notes  receivable  are presented at cost in the  accompanying  balance
sheet.  It is the Company's  policy to  discontinue  the accrual of interest for
notes in default as of the default date. In management's opinion, mortgage notes
receivable are stated at amounts not in excess of net realizable value.

         Investment in Partnership

During  1991,  the Company  purchased a 21.6%  limited  partnership  interest in
Pinnacle  Peak  Office/Resort  Investors,  the borrower on Loan 1. The Company's
semi-annual contributions are netted with the portion of interest income related
to the Company's  ownership of Pinnacle Peak  Office/Resort  Investors.  The net
amount  invested  in 1996  and  1995  was  $64,448  and  $66,675,  respectively.
Additionally,  the  Company  has a  commitment  to fund  $66,166 of  additional,
noninterest bearing subscriptions.
                                       20
<PAGE>
         Revenue Recognition

Revenue from land sales is recognized in accordance  with Statement of Financial
Accounting Standards (SFAS) No. 66, Accounting for Sale of Real Estate, when the
parties  to the  sale  are  bound  by  the  terms  of a  contract,  an  adequate
downpayment  is  received,  a  reasonable  likelihood  exists  that any  related
receivable  will be collected and all  conditions  precedent to the closing have
been performed.

         Income Taxes and REIT Status

The Company has elected treatment as a real estate investment trust (REIT) under
Internal  Revenue Code Sections  856-860.  A REIT is taxed in the same manner as
any  corporation  except  that  it may  deduct  and  not  pay  income  taxes  on
distributions made to shareholders. This distribution deduction must be at least
95% of the REIT's taxable income.  For all years presented,  the Company has met
the 95% distribution requirement. Therefore, no income tax provision is included
in the accompanying financial statements.

For income tax purposes,  certain expenses  (principally related to reserves for
losses) for financial reporting purposes are not allowed as tax deductions until
realized  upon sale of the property.  In addition,  the Company may take certain
deductions related to their investment in Pinnacle Peak Office/Resort  Investors
(see Note 2) that are not allowed for book purposes.  Accordingly,  1996 taxable
income  totaled  approximately  $474,000  and the  taxable  loss  for  1995  was
approximately  $435,000.  Net operating  losses for federal  income tax purposes
available to offset future  taxable  income  totaled  $1,800,000 at December 31,
1996, and all benefits from these losses will expire through 2010.

         Income Per Common Share

Income per common share is computed  based upon the weighted  average  number of
shares of common stock outstanding  during the year. There are no stock options,
warrants or other common stock equivalents.

         Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from these estimates.

         Long-Lived Assets

SFAS No.  121,  Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived  Assets to be Disposed of, was adopted by the Company in fiscal 1996,
and did not have a material  effect on the Company's  financial  position or its
results of operations.
                                       21
<PAGE>
(3)   CONCENTRATIONS OF CREDIT RISK:

The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of short-term investments and mortgage notes receivable.

The Company's short-term investments are in high-quality  securities placed with
a  major  bank.  The  Company's   investment   policy  limits  its  exposure  to
concentrations of credit risk.

The  Company's  mortgage  notes  receivable  result  primarily  from the sale of
property to a broad base of borrowers  although  several loans are a significant
portion of total assets (see Note 4).
                                       22
<PAGE>
(4)   MORTGAGE NOTES RECEIVABLE:

Management  determines  the rate and related  terms on its  individual  mortgage
notes  receivable  based  on  the  underlying  collateral,  the  quality  of the
borrower,  and the down payment  received.  The  majority of the mortgage  notes
receivable outstanding at December 31, 1996, were originated within the last 2-4
years and in management's  opinion,  the factors used to determine the rates and
related terms have not changed significantly. Based on this, management believes
that the fair market values of its mortgage notes receivable  approximate  their
carrying  amounts.  As of  December  31,  1996,  the  majority  of the loans are
current,  and all  noncurrent  loans are stated at amounts  not in excess of net
realizable  value.   Therefore,  no  additional  adjustment  for  impairment  is
necessary.

Mortgage notes receivable consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
                                                                                                  The Company's
                                                                                                  Participation
                                                                                                  Interest as a       The Company's
  Original                              Stated          Final                                     % of Current      Participation at
    Loan      Collateral, Property     Interest       Maturity              Periodic                Principal         December 31,
   Number        Location and Size       Rate           Date              Payment Terms              Balance              1996
-----------   ----------------------  -----------  -------------  ---------------------------  -----------------    ----------------

    <S>       <C>                           <C>       <C>         <C>                                     <C>       <C>
    3)        70 acres - West side          8.25%     08/05/04    On October 29,1996, the                 76.36%    $    563,456
              of Hawes Road                                       loan was modified for
              (84th Street) - 1/2                                 the borrower to make
              mile north of                                       monthly interest and
              Thomas Road -                                       principal payments of
              Mesa, Arizona                                       $15,000 until the 1996
                                                                  annual payment of
                                                                  $125,550 is paid in  full.
                                                                  Interest    on the   modified
                                                                  payments is accruing at 11%.
                                                                  On January 29, 1997, another
                                                                  modification was made to
                                                                  further change the payment
                                                                  schedule to biweekly interest
                                                                  and principal payments of
                                                                  $5,000 until the 1996 payment
                                                                  is paid in full. Interest is
                                                                  accruing at 15% on this second
                                                                  modification. Loan is current
                                                                  according to this latest
                                                                  modification.

    5)        18.8 acres - 1/2              9.00%     02/01/99    Semi-annual principal                     100%         621,664
              mile east of Pima                                   payments of $25,000 plus
              Road and 1/4 mile                                   accrued interest through
              South of Bell Road -                                August 1, 1998.  Balloon
              Scottsdale, Arizona                                 payment consisting of
                                                                  the unpaid principal plus
                                                                  accrued interest due
                                                                  February 1, 1999.  Loan
                                                                  is current.

    6)        29 lots in Hidden            9.00%-     03/15/97    Multiple borrowers                      85.29%         155,120
              Valley Ranch, Pinal          12.30%     07/01/05    (37) - monthly payments
              County, Arizona.                                    of principal and interest
              12 parcels in either                                of varying payment
              Bellflower Ranch                                    amounts.  Certain of
              or Butterfield Ranch                                these loans are in default.
              in Cochise County,
              Arizona

    9)        19.29 acres - Southwest       7.50%     03/30/02    Annual payments of                      81.35%         337,887
              corner of Union Hills                               principal and interest
              Drive and 91st Avenue -                             of $83,221.  Loan is
              Peoria, Arizona                                     current.
</TABLE>
                                       23
<PAGE>
<TABLE>
<CAPTION>
                                                                                                  The Company's
                                                                                                  Participation
                                                                                                  Interest as a       The Company's
  Original                              Stated          Final                                     % of Current      Participation at
    Loan      Collateral, Property     Interest       Maturity              Periodic                Principal         December 31,
   Number        Location and Size       Rate           Date              Payment Terms              Balance              1996
-----------   ----------------------  -----------  -------------  ---------------------------  -----------------    ----------------
   <S>        <C>                           <C>       <C>         <C>                                       <C>      <C>

   15)        50.85 acres - South of        8.00%     08/30/00    Quarterly payments of                     100%          566,322
              the Southwest Corner                                principal and interest of
              of Hawes and Brown                                  $18,700 through May 30,
              Road - Mesa, Arizona                                2000.  Balloon payment
                                                                  consisting of the unpaid
                                                                  principal plus accrued
                                                                  interest due August 30,
                                                                  2000.  Loan is current.

   16)        20 acres - West side          9.00%     09/12/02    Annual payments of                        100%          202,649
              of I-17; approximately                              principal and interest
              2-3/4 miles north of                                of $20,583 through
              Happy Valley Road -                                 September 12, 2001.
              Maricopa County,                                    Balloon payment
              Arizona                                             consisting of unpaid
                                                                  principal plus accrued
                                                                  interest due September 12,
                                                                  2002.  Loan is current.

   17-1)      .95 acres (lot 6, Phoenix     9.00%     03/01/08    Monthly payments                          100%           55,846
              International Science                               of principal and
              Center) I-17 and Deer                               interest of $659.
              Valley Road, Phoenix,                               Loan is current.
              Arizona

   17-3)      2.11 acres (lots 4 and 5,     8.00%     04/15/08    Monthly payments                          100%           89,575
              Phoenix International                               of principal and
              Science Center), I-17 and                           interest of $993.
              Deer Valley Road,                                   Loan is current.
              Phoenix, Arizona

   18)        153.63 acres - Southwest      7.00%     03/27/10    Annual payments of                        100%        1,771,149
              Corner of Pecos Road                                principal and interest
              and Val Vista Drive -                               of $144,258 through
              Maricopa County,                                    March 27, 2009.  Balloon
              Arizona                                             payment consisting of
                                                                  unpaid principal plus
                                                                  accrued interest due
                                                                  March 27, 2010.  Loan
                                                                  is current.

                                                                                                                     ------------
                                                                                                                     $  4,363,668
                                                                                                                     ============
</TABLE>
                                       24
<PAGE>
Scheduled principal repayments of mortgage notes receivable at December 31, 1996
are as follows:

                 Year                                  Amount
               --------                           --------------

               1997                               $      286,260
               1998                                      251,846
               1999                                      726,254
               2000                                      639,719
               2001                                      174,854
               Thereafter                              2,284,735
                                                  --------------
                                                  $    4,363,668
                                                  ==============

(5)   LAND HELD FOR SALE:

The Company has  received  land as a result of  foreclosures  on several  loans.
Interest accrual ceases at the date of default. The mortgage receivable balance,
related accrued interest and foreclosure  costs are transferred to land held for
sale at cost on the date the title is transferred. In management's opinion, land
held for sale is stated at amounts not in excess of net realizable value.

The following land is owned by the Company at December 31:
<TABLE>
<CAPTION>
   Original                                                                  The Company's
     Loan                                                                    Participation
    Number                                                                     Interest                 1996
   --------                                                                  -------------        --------------
<S>             <C>                                                              <C>              <C>

     2)         33.5 acres - Queen Creek and Gilbert
                Roads - Chandler, Arizona.                                        91.15%          $      982,296

     3)         635 acres - Section 9, Township
                6 South Range 3 East of the Gila and
                Salt River Base and Meridian -
                Pinal County, Arizona.                                            76.36%                 925,691

     6)         354.5 acres - Southwest corner of
                Warner and Sossaman Roads -
                Maricopa County, Arizona.                                         85.29%               3,023,531

                57 acres - Pinal County.                                          85.29%                 100,648

    10)         14.47 acres - Southwest corner
                Bell Road and 16th Street -
                Phoenix, Arizona.                                                 80.00%               1,499,226

    11)         8.4 acres - Corner of 95th and Olive
                Avenues - Peoria, Arizona.                                       100.00%                 693,565
</TABLE>
                                       25
<PAGE>
<TABLE>
<CAPTION>
   Original                                                                  The Company's
     Loan                                                                    Participation
    Number                                                                     Interest                 1996
   --------                                                                  -------------        --------------
<S>             <C>                                                              <C>              <C>
    17)         16.411 acres - Southwest corner of
                I-17 and Deer Valley Road -
                Phoenix, Arizona.                                                100.00%               2,029,954

    19)         9.11 acres - Lots 4, 5, and 7, Paradise
                Valley Auto Park at 20th Street and
                Bell Road - Phoenix, Arizona.                                    100.00%                 907,373
                                                                                                  --------------

                                                              Total                               $   10,162,284
                                                                                                  ==============
</TABLE>
(6)   RELATED PARTY TRANSACTIONS:

The Company is a party to the following agreements with affiliates:

          Affiliate                                 Agreement
     -----------------------    ------------------------------------------------

     ALI Advisor, Inc.          Management  fees of 30% of  available  cash,  as
                                defined,  will be paid in any  quarter  when the
                                cumulative  return to  investors is in excess of
                                12.7%.  A servicing fee for  servicing  loans of
                                1/16 of 1% of total assets, as defined,  will be
                                paid  quarterly.  In  addition,   certain  other
                                overhead expenses will also be paid.

     PHS Mortgage, Inc.         All loans made  after the  initial  purchase  at
                                June  13,  1988  have  been  originated  by  the
                                mortgage  company and origination fees were paid
                                by the borrowers.

     Peacock, Hislop, Staley    The Company utilizes PHS&G on certain investment
     & Given (PHS&G)            transactions  involving excess cash. No fees are
                                paid for such services.

(7)   DIVIDENDS PAID:

Distributions related to Class A dividends for 1996 are as follows:

                                                      Amount
Date Declared    Record Date        Date Paid        Per Share      Total Amount
-------------    -----------     -------------     -------------    ------------

     03/21/96       04/01/96        04/15/96           $  .30         $  759,774
     10/28/96       12/02/96        12/16/96             1.00          2,522,582
                                                       ------         ----------

                                                       $ 1.30         $3,282,356
                                                       ======         ==========

Approximately 15% of the dividends per share in 1996 represent  distributions of
ordinary  taxable  income.  The  remaining  distributions  represent a return of
capital or capital gain income.
                                       26
<PAGE>
Distributions related to Class A dividends for 1995 are as follows:

                                                      Amount
Date Declared    Record Date        Date Paid        Per Share      Total Amount
-------------    -----------     -------------     -------------    ------------

     03/23/95       03/31/95        04/18/95            $ .75         $1,899,435
                                                        =====         ==========

Dividends  per share in 1995  represent  a return of  capital  or  capital  gain
income.

(8)   RETIREMENT OF CLASS A COMMON STOCK:

During 1996, the Company paid $811,348 to repurchase 172,500 shares of its Class
A common stock which were then  retired.  In  addition,  during 1995 the Company
paid $125,898 to repurchase 29,500 shares of its Class A common stock which were
then retired.
                                       27
<PAGE>
ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.

         None.


                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT.

         Information responsive to this item is incorporated herein by reference
to the "Information  Concerning Directors and Nominees" section contained in the
Company's Proxy Statement  relating to its 1997 Annual Meeting of  Shareholders,
which will be filed with the  Securities  and Exchange  Commission in accordance
with Rule 14a-6(c)  promulgated  under the Securities  Exchange Act of 1934 (the
"1997 Proxy  Statement").  With the exception of the foregoing  information  and
other information  specifically  incorporated by reference into this Form 10-KSB
Report,  the Company's 1997 Proxy Statement is not being filed as a part hereof.
Information  respecting executive officers of the Company who are not continuing
directors or nominees is set forth at Part I of this Report.

         No disclosure  is required with respect to Item 405 of Regulation  S-B,
"Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 10.          EXECUTIVE COMPENSATION.

         The  Company  did not  compensate  its  executive  officers  for  their
services in the fiscal year ending  December  31, 1996.  Additional  information
responsive to this item is  incorporated  herein by reference to the  "Executive
Compensation" section of the Company's 1997 Proxy Statement.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         Information  concerning the Class A Common Stock  beneficially owned by
each director of the Company,  by all officers and directors of the Company as a
group and by each shareholder known by the Company to be the beneficial owner of
more than 5% of the outstanding  Class A Common Stock is incorporated  herein by
reference to the "Security  Ownership of Principal  Shareholders and Management"
section of the Company's 1997 Proxy Statement.


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information responsive to this item is incorporated herein by reference
to the "Certain  Transactions and  Relationships"  section of the Company's 1997
Proxy Statement.
                                       28
<PAGE>
                                     PART IV


ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

         The  following is a list of the  financial  statements  of Arizona Land
Income Corporation included at Item 7 of Part II.

Financial Statements.
<TABLE>
<CAPTION>

                                                                                                Page or
                                                                                            Method of Filing
                                                                                            ----------------
<S>                                                                                             <C>
Report of Independent Public Accountants                                                        Page 15
Financial Statements:
         Balance Sheets - December 31, 1996                                                     Page 16
         Statements of Operations - For the Years Ended December                                Page 17
         31, 1996 and 1995
         Statements of Stockholders' Equity - For the Years Ended                               Page 18
         December 31, 1996 and 1995
         Statements of Cash Flows - For the Years Ended December                                Page 19
         31, 1996 and 1995
         Notes to Financial Statements - December 31, 1996 and                                  Page 20
         1995
</TABLE>

(a)      Exhibits.
<TABLE>
<CAPTION>
    Exhibit                                                                                        Page or
    Number       Description                                                                   Method of Filing
    ------       -----------                                                                   ----------------
<S>   <C>        <C>                                                                         <C>
      3-A        Articles of Incorporation of the Company, as amended.                       Incorporated by
                                                                                             Reference to Exhibit
                                                                                             3-A to Amendment
                                                                                             No. 3 to S-18 No.
                                                                                             33-20625.

      3-B        Bylaws of the Company, as amended.                                          Incorporated by
                                                                                             Reference to Exhibit
                                                                                             3-B to Amendment
                                                                                             No. 3 to S-18 No.
                                                                                             33-20625.
</TABLE>
                                       29
<PAGE>
<TABLE>
<CAPTION>
    Exhibit                                                                                        Page or
    Number       Description                                                                   Method of Filing
    ------       -----------                                                                   ----------------
    <S>          <C>                                                                         <C>
    * 10-A       June 13, 1988 Advisory and Servicing Agreement                              Incorporated by
                 between ALI Advisor, Inc. and the Company.                                  Reference to Exhibit
                                                                                             10-A to the Company's
                                                                                             Annual Report on Form
                                                                                             10-K for the year
                                                                                             ended December 31,
                                                                                             1988.

     10-B        January 17, 1989 Stock Purchase and Sale Agreement                          Incorporated by
                 between Young, Smith & Peacock Holdings, Inc.,                              reference from the
                 Young, Smith & Peacock, Inc., Barry W. Peacock,                             Company's Report on
                 Thomas R. Hislop and Larry P. Staley.                                       Form 8-K dated
                                                                                             January 30, 1989.

     10-C        Modification of Loan Document dated July 21, 1990,                          Incorporated by
                 between ALI Advisor, Inc. and Pinnacle Peak                                 reference to Exhibit
                 Office/Resort Investors Limited Partnership, an                             10-E to the Company's
                 Arizona limited partnership (Loan 1).                                       Annual Report on Form
                                                                                             10-K for the year
                                                                                             ended December 31,
                                                                                             1990 (the "1990 Form
                                                                                             10-K").

     10-D        Modification of Loan Documents dated July 1, 1990,                          Incorporated by
                 between ALI Advisor, Inc. and North Scottsdale                              reference to Exhibit
                 Horseman's Park Limited Partnership III, an Arizona                         10-F to the 1990 Form
                 limited partnership (Loan 5b).                                              10-K.

   * 10-E(1)     Indemnification Agreement dated May 12, 1992                                Incorporated by
                 between Arizona Land Income Corporation and Robert                          Reference to Exhibit
                 Blackwell.                                                                  10-L to the Company's
                                                                                             Annual Report on Form
                                                                                             10-K for the year
                                                                                             ended December 31,
                                                                                             1993.

   * 10-E(2)     Indemnification Agreement dated October 1, 1991                             Incorporated by
                 between Arizona Land Income Corporation and Burton                          reference to the
                 Freireich.                                                                  Company's Annual
                                                                                             Report on Form 10-K
                                                                                             for the year ended
                                                                                             December 31, 1994.

     24          Powers of Attorney                                                          See Signature Page

     27          Financial Data Schedule                                                     Filed Herewith
</TABLE>
         * Indicates management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB

(b)      Reports on Form 8-K

         During the last quarter of 1996,  the Company  filed no reports on Form
8-K.
                                       30
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934,  the Company has duly caused this report on Form 10-KSB to
be signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March, 1997.

                                        ARIZONA LAND INCOME CORPORATION


                                        By:  /s/ Thomas R. Hislop
                                           -------------------------------------
                                                 Thomas R. Hislop
                                                 Vice President and
                                                 Chief Financial Officer

                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints Barry W. Peacock,  Thomas R. Hislop and
Larry P. Staley,  and each of them,  his true and lawful  attorneys-in-fact  and
agents, with full powers of substitution and resubstitution,  for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form  10-KSB  Annual  Report,  and to file the same,  with all  exhibits
thereto,  and other  documents in connection  therewith  with the Securities and
Exchange Commission,  granting unto said  attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and  necessary to be done in and about the  premises,  as fully and to
all intents and purposes as he might or could do in person hereby  ratifying and
confirming  all that said  attorneys-in-fact  and agents,  or his  substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report on Form 10-KSB has been signed  below by the  following  persons on
behalf of the Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature                                   Title                                          Date
---------                                   -----                                          ----
<S>                                         <C>                                            <C>
/s/ Barry W. Peacock                        President                                      March 31, 1997
-------------------------------------------
Barry W. Peacock

/s/ Thomas R. Hislop                        Chairman of the Board, Vice President,         March 31, 1997
-------------------------------------------
Thomas R. Hislop                            Treasurer, Chief Executive Officer and
                                            Chief Financial Officer

/s/ Larry P. Staley                         Vice President                                 March 31, 1997
-------------------------------------------
Larry P. Staley

/s/ Robert Blackwell                        Unaffiliated Director                          March 31, 1997
-------------------------------------------
Robert Blackwell

/s/ Burton P. Freireich                     Unaffiliated Director                          March 31, 1997
-------------------------------------------
Burton P. Freireich
</TABLE>
                                       31
<PAGE>