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

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1998

                                 ---------------

                                       OR

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

    For the transition period from ________________ to __________________

                          Commission File Number 1-9900

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

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


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>
     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, 1998 were
$981,082.

     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 23, 1999,  was  approximately  $6,665,281.  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 23, 1999
           100   shares of Class B Common Stock outstanding on March 23, 1999

                       DOCUMENTS INCORPORATED BY REFERENCE

     Materials from the registrant's Proxy Statement relating to the 1998 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 24
                                                                  Total pages 26
<PAGE>
                                TABLE OF CONTENTS
                                                                            Page

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

PART II...................................................................... 5
     ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....... 5
     ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...... 6
     ITEM 7.  FINANCIAL STATEMENTS........................................... 9
     ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE........................... 23

PART III..................................................................... 23
     ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
               PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.... 23
     ITEM 10. EXECUTIVE COMPENSATION......................................... 23
     ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT................................................ 23
     ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 23

PART IV...................................................................... 24
     ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................... 24


                                       i
<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 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 purchased  only one First Mortgage Loan,
and has  had to  institute  foreclosure  proceedings  with  respect  to  certain
properties  securing other First Mortgage Loans. See "Investment  Objectives and
Criteria" below. See also Note 4 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 1998 fiscal year,  the Company  declared and paid four cash
distributions.  The  first  distribution  was for $.10 per share and was paid on
April  15,  1998 to  shareholders  of  record  on  April  7,  1998.  The  second
distribution  was  for  $.10  per  share  and  was  paid  on  July  15,  1998 to
shareholders of record on July 1, 1998. The third  distribution was for $.10 per
share and was paid on October 15, 1998 to  shareholders  of record on October 1,
1998.  The fourth  distribution  was for $.10 per share and was paid on December
31, 1998 to shareholders of record on December 17, 1998.

         NO  PRESENT  INTENTION  TO  DISSOLVE.  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% of the aggregate  outstanding
loan balance of the First Mortgage Loan until the First Mortgage Loan is sold or
repaid.
<PAGE>
         QUALIFICATION  AS A REAL  ESTATE  INVESTMENT  TRUST.  The  Company  has
qualified for 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  continue,  if it so  chooses,  REIT  status  for the tax year ended
December  31,  1998.  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 meet
a series of qualifications  including:  (i) restrict its investments principally
to assets that produce  interest  from  mortgage  loans  collateralized  by real
estate or which produce real property  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  capital gains as
dividends to its shareholders;  (iv) hold less than 10% of the voting securities
of any single  issuer;  and (v) 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  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 did not acquire any  additional  First  Mortgage
Loans from 1989 until 1998 (other than refinancings or restructuring of existing
First Mortgage Loans).  However, in 1998 the Company acquired one First Mortgage
Loan identified in footnote four to the Financial Statements as loan number 21.

         MANAGEMENT  ARRANGEMENTS.  The Company has no employees.  The Company's
affairs are managed by its  non-salaried  officers under the  supervision of its
Board of Directors.  The Company and ALI Advisor,  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

                                       2
<PAGE>
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 1998 and 1997, the Company paid the
Advisor a servicing fee of $40,699 and $41,269, 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 1998 or 1997.

         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 1998 or 1997.

         1998   TRANSACTIONS  AND  LOAN   MODIFICATIONS.   Set  forth  below  is
information concerning the transactions and modifications which affect the First
Mortgage  Loans and which  occurred  during  1998.  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 4 and 5 to the  Company's
financial statements set forth in Item 7 hereof.

         1998 LAND SALES. The Company had four land sales during the 1998 fiscal
year, which in the aggregate generated a $199,000 gain on sale of property.  The
first sale was a one acre parcel of property located in Phoenix,  Arizona, which
the Company  acquired  through  foreclosure on loan 17.  Proceeds to the Company
from this sale were  $495,000  cash.  The second  sale was a 635 acre  parcel of
property  located  in Pinal  County,  Arizona,  in which the  Company  had a 80%
interest and had acquired through foreclosure on loan 3. Proceeds to the Company
from this sale were $189,000 cash and an 80% participation in a $1,066,000 note.
The third sale was a 33.5 acre parcel of property located in Chandler,  Arizona,
which the  Company  acquired  through  foreclosure  on loan 2.  Proceeds  to the
Company from this sale were $168,000 cash and a $649,000  note.  The fourth sale
was a 9 acre parcel of property located in Phoenix,  Arizona,  which the Company
acquired through  foreclosure on loan 19. Proceeds to the Company from this sale
were $834,000 cash.

         In summary, the Company had four land sales during the 1998 fiscal year
which produced $1,686,000 cash, and 1,502,000 of receivables.

         In addition to the above  referenced  land sales, in December 1998, the
Company  issued  loan  21 to a  third  party  to fund  the  purchase  of land in
Scottsdale,  Arizona.  The initial  proceeds of $1,579,000  were used in partial
settlement of the purchase price,  including a $53,000  mortgage broker fee paid
to an officer of the Company.  The Company has  committed to fund an  additional
$195,000  to pay for the initial  year of  interest on the loan.  The loan bears
interest at 12% and requires  semi-annual  interest  payments through  maturity.

                                       3
<PAGE>
Balloon payment of the principal and accrued  interest is due December 16, 2002.
The loan also bears contingent interest upon subsequent sale of the property.

         The Company also  received cash payoffs of $557,000 on loan 3, $296,000
on loan 9, and  $53,000 on loan 17-1.  These  collections  were in  addition  to
periodic collections of principal on other notes.

         The Company also  modified two loans during 1998.  The maturity date on
loan 5 was  extended to February 1, 2001,  from  February 1, 1999.  The interest
rate on loan 10 was  increased  to 10% and the  annual  principal  and  interest
payments on loan 10 were reduced to $200,451  from  $341,761.  The maturity date
for the balloon payment of principal and accrued  interest was extended to April
1, 2002, from April 2, 2001.

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 5 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 61, 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 56, 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 50, 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.

                                       4
<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.

         The  Company's  Class A  Common  Stock is  listed  for  trading  on the
American Stock Exchange ("AMEX"). As of March 23, 1999, there were approximately
60 holders of record of the Class A Common Stock.  In the Company's  estimation,
based upon 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  23,  1999 was $5 7/8 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 1997 and 1998 and the cash distributions paid
per share of Class A Common Stock for such periods.

         On March 15, 1994,  the  Company's  Board of Directors  authorized  the
repurchase  of  shares  of the  Company's  Class A Common  Stock in open  market
transactions.  Since  authorizing the repurchase of shares of Common Stock,  the
Company has  repurchased  249,920  shares of Class A Common  Stock.  The Company
intends to continue to  periodically  make open market  purchases of its Class A
Common Stock. No shares were repurchased during the 1998 fiscal year.

                                                      Dividends/Distributions
                                                       Declared Per Share of
Calendar Quarter            High         Low        Class A Common Stock (1)(2)
----------------            ----         ---        ---------------------------
1997
   First Quarter            5 7/8       4 5/8                $0.0
   Second Quarter           5 5/16      4 1/4                 0.0
   Third Quarter            5 3/4       4 7/8                 0.25
   Fourth Quarter           5 5/8       5 3/16                0.13
1998
   First Quarter            7 3/16      5 1/16                0.10
   Second Quarter           7           5 3/14                0.10
   Third Quarter            7           6                     0.10
   Fourth Quarter           6 1/2       5 5/8                 0.10

----------
(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 1998,  the Company  declared and paid four cash
     distributions.  The first  distribution was for $.10 per share and was paid
     on April 15, 1998 to  shareholders  of record on April 7, 1998.  The second
     distribution  was for $.10  per  share  and was  paid on July  15,  1998 to
     shareholders of record on July 1, 1998. The third distribution was for $.10
     per share and was paid on October  15,  1998 to  shareholders  of record on
     October 1, 1998.  The  fourth  distribution  was for $.10 per share and was
     paid on December 31, 1998 to shareholders of record on December 17, 1998.

                                       5
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

RESULTS OF OPERATIONS

         YEAR ENDED  DECEMBER 31, 1998 VS.  1997.  The Company had net income of
approximately  $981,000 or $.42 per share of Class A Common Stock,  for the year
ended  December 31, 1998,  compared to net income of  approximately  $784,000 or
$.33 per share of Class A Common  Stock,  for the year ended  December 31, 1997.
The  increase  in the net  income  for the year  ended  December  31,  1998,  is
primarily  attributable to the increase in income from investment in partnership
interests on mortgages  and the decrease in the tax  provision  from prior year.
Interest  income from First  Mortgage  Loans  increased to $464,000 in 1998 from
$384,000  in 1997.  Gain on the sale of property  decreased  to $199,000 in 1998
from $452,000 in 1997.

         The Company had other income of approximately  $83,000 in 1998 compared
to other income of $56,000 in 1997. The other income  received by the Company in
1998 is primarily  attributable to lease rentals on land received by the Company
through foreclosure actions.

         The Company's  expenses increased in the aggregate to $189,000 in 1998,
compared to $179,000 in 1997. This increase of $10,000 is primarily attributable
to increases in the cost of professional services.

         The Company did not record a loan loss  reserve in 1998  because of the
stabilization of the Phoenix real estate market.

         Net cash provided by operating activities was approximately $415,000 in
1998 compared to net cash provided by operating  activities of $270,000 in 1997.
Net cash  provided by investing  activities  in 1998 and 1997 was  approximately
$1,387,000 and $2,681,000,  respectively.  Net cash used in financing activities
in 1998 and 1997 was approximately $944,000 and $897,000, 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.

         YEAR 2000.  The Company has  discussed  and  considered  the  potential
effects of Year 2000 compliance internally, and with key advisors and suppliers.
Management  believes that the Company has adequately  addressed potential issues
as related to this problem and that no significant  disruptions  related to Year
2000  compliance  will occur in the  Company's  computer  hardware  and software
systems.  Company  management  believes that the Company's Year 2000 exposure is
limited  because  the  Company's  primary  computer  inter-connect  is with  its
financial  institution;  however,  any  failure  of our  computer  system or the
systems of third parties to achieve Year 2000 compliance  could adversely affect
our business.

         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
property during the early 1990's. First, the shortage of available financing for

                                       6
<PAGE>
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 4
and 5 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 1997 and 1998. The Company sold four parcels of land in 1998, and
anticipates that additional parcels will be sold in 1999.  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.

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

                                       7
<PAGE>
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

         In 1997, the Board declared two extraordinary cash  distributions.  The
first  distribution was for $.25 per share and was paid on September 15, 1997 to
shareholders  of record on September 1, 1997.  The second  distribution  was for
$.13 per share and was paid on December  31, 1997 to  shareholders  of record on
December 17, 1997.

         In  1998,  the  Company  declared  and  paid  four  extraordinary  cash
distributions.  The  first  distribution  was for $.10 per share and was paid on
April  15,  1998 to  shareholders  of  record  on  April  7,  1998.  The  second
distribution  was  for  $.10  per  share  and  was  paid  on  July  15,  1998 to
shareholders of record on July 1, 1998. The third  distribution was for $.10 per
share and was paid on October 15, 1998 to  shareholders  of record on October 1,
1998.  The fourth  distribution  was for $.10 per share and was paid on December
31, 1998 to shareholders of record on December 17, 1998.

         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.

                                       8
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

                                      INDEX

                                                                           Page
                                                                           ----

Report of Independent Public Accountants                                    10

Financial Statements-

  Balance Sheet - December 31, 1998                                         11

  Statements of Operations - For the Years Ended December 31,
    1998 and 1997                                                           12

  Statements of Stockholders' Equity - For the Years Ended
    December 31, 1998 and 1997                                              13

  Statements of Cash Flows - For the Years Ended December 31,
    1998 and 1997                                                           14

Notes to Financial Statements - December 31, 1998                           15



        Certain schedules are omitted as the information is not required.

                                       9
<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, 1998, and the related
statements of  operations,  stockholders'  equity and cash flows for each of the
two years in the period ended December 31, 1998. 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, 1998,  and the results of its  operations  and its cash flows
for each of the two years in the period ended  December 31, 1998,  in conformity
with generally accepted accounting principles.


                                                  ARTHUR ANDERSEN LLP


Phoenix, Arizona, February 3, 1999.

                                       10
<PAGE>
                         ARIZONA LAND INCOME CORPORATION

                                  BALANCE SHEET

                                DECEMBER 31, 1998


                                     ASSETS

ASSETS:
 Cash and cash equivalents                                         $  4,105,346
                                                                   ------------
 Investments-
  Accrued interest receivable                                           287,185
  Mortgage notes receivable (Note 4)                                  7,153,207
  Investment in partnership (Note 2)                                    333,472
  Land held for sale (Note 5)                                         3,912,576
                                                                   ------------
                                                                     11,686,440
  Less - reserve for losses                                          (1,082,286)
                                                                   ------------

      Total investments, net                                         10,604,154
                                                                   ------------

                                                                   $ 14,709,500
                                                                   ============
                   LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
 Accounts payable and other liabilities                            $     18,919
 Accrued property taxes                                                   9,289
 Deferred tax liability (Note 2)                                        120,000
                                                                   ------------

      Total liabilities                                                 148,208

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                                 (9,465,798)
                                                                   ------------

                Total stockholders' equity                           14,561,292
                                                                   ------------

                                                                   $ 14,709,500
                                                                   ============

       The accompanying notes are an integral part of this balance sheet.

                                       11
<PAGE>
                         ARIZONA LAND INCOME CORPORATION

                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



                                                        1998             1997
                                                     ----------       ----------
INCOME:
 Interest on mortgages                              $   464,233       $  384,203
 Interest on temporary investments                      222,620          278,825
 Income from investment in partnership                  183,792               --
 Other income                                            82,786           56,296
                                                    -----------       ----------
      Total income before gain on sale
        of properties                                   953,431          719,324
                                                    -----------       ----------

EXPENSES:
 Property taxes                                          22,739           28,709
 Professional services                                   65,612           56,138
 Advisory fees to related party (Note 6)                 40,699           41,269
 Administration and general                              36,350           28,275
 Directors' fees                                         23,200           22,400
 Interest expense                                           458            2,662
                                                    -----------       ----------
      Total expenses before gain on
       sale of properties                               189,058          179,453
                                                    -----------       ----------

INCOME BEFORE GAIN ON SALE OF PROPERTIES                764,373          539,871

GAIN on sale of properties, net                         198,923          451,666
                                                    -----------       ----------

NET INCOME BEFORE TAXES                                 963,296          991,537

INCOME TAX (BENEFIT) PROVISION                          (17,786)         207,300
                                                    -----------       ----------

      Net income                                    $   981,082       $  784,237
                                                    ===========       ==========

INCOME PER COMMON SHARE                             $       .42       $      .33
                                                    ===========       ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
 OUTSTANDING                                          2,360,080        2,360,080
                                                    ===========       ==========

        The accompanying notes are an integral part of these statements.

                                       12
<PAGE>
                         ARIZONA LAND INCOME CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1996     2,360,180    $236,018    $23,791,072    $(9,390,255)    $14,636,835
     Dividends paid                   --          --           --         (896,830)       (896,830)
     Net Income                       --          --           --          784,237         784,237
                               ---------    --------    -----------    -----------     -----------

BALANCE, December 31, 1997     2,360,180    $236,018    23,791,072      (9,502,848)     14,524,242
     Dividends paid                   --          --           --         (944,032)       (944,032)
     Net income                       --          --           --          981,082         981,082
                               ---------    --------    -----------    -----------     -----------

BALANCE, December 31, 1998     2,360,180    $236,018    $23,791,072    $(9,465,798)    $14,561,292
                               =========    ========    ===========    ===========     ===========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       13
<PAGE>
                         ARIZONA LAND INCOME CORPORATION

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                         1998           1997
                                                      ----------     ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                          $   981,082    $   784,237
 Adjustments to reconcile net income to net cash
  provided by operating activities-
  Gain on sale of properties                            (198,923)      (451,666)
  Unrealized gain on investments and other
    non-cash income                                      (73,464)       (87,188)
  Income on investment in partnership                   (183,792)            --
  Changes in certain assets and liabilities
   affecting operating activities-
    Increase in accrued interest receivable              (32,124)       (48,397)
    Decrease (increase) in accounts payable and
     other liabilities                                   (49,799)         6,578
    Decrease in accrued property taxes                   (27,922)       (53,085)
    Increase in deferred tax liability                        --        120,000
                                                     -----------    -----------

      Net cash provided by operating activities          415,058        270,479
                                                     -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Return on partnership investment                        229,075             --
 Principal payments received under mortgage
  notes receivable                                     1,072,247        199,954
 Proceeds from sales of properties                     1,685,978      2,946,295
 Land improvements                                            --       (464,926)
 Issuance of mortgage notes receivable                (1,579,744)            --
 Cash purchases of land and mortgage interest           (180,713)            --
 Proceeds from sale of investment in equity
  securities                                             160,652             --
                                                     -----------    -----------

      Net cash provided by investing activities        1,387,495      2,681,323
                                                     -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Payment of dividends                                   (944,032)      (896,830)
                                                     -----------    -----------
INCREASE IN CASH AND CASH EQUIVALENTS                    858,521      2,054,972

CASH AND CASH EQUIVALENTS, beginning of year           3,246,825      1,191,853
                                                     -----------    -----------

CASH AND CASH EQUIVALENTS, end of year               $ 4,105,346    $ 3,246,825
                                                     ===========    ===========
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
 New mortgages related to sales of properties        $ 1,502,939    $   956,171

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
 Interest paid                                       $       458    $     2,662

 Income taxes paid (refunds received)                $   (17,786)   $    87,300

        The accompanying notes are an integral part of these statements.

                                       14
<PAGE>
                         ARIZONA LAND INCOME CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


(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,  1998,  cash
equivalents  consisted of U.S.  Treasury  Notes of  $3,004,000  which matured in
February 1999.

         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
recorded  income  under the equity  method of $183,792  and received a return on
capital related to this investment of $229,075 in 1998.

         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.

                                       15
<PAGE>
         INCOME TAXES AND REIT STATUS

         The Company has elected  treatment  as a real estate  investment  trust
(REIT) under Internal  Revenue Code (IRC) Sections  856-860.  A REIT is taxed in
the same manner as any corporation except that it may deduct  distributions made
to  shareholders  and reduce or  eliminate  any  potential  income  taxes.  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.

         The Company  previously  elected to treat certain qualified property as
foreclosure property under IRC Section 856(e)(5).  Accordingly,  current federal
income tax of $87,300 was  provided  and paid on the 1997 net gains on an income
tax basis  from  sales of  foreclosure  property.  During  1997,  an  additional
$120,000  deferred  federal  income tax  provision  was  recorded to reflect the
cumulative book to tax difference on foreclosure property sales through December
31, 1997 and the expected  future taxes to be paid when the gains are  reflected
in the income tax returns. There was no change in this deferred tax liability in
1998. During 1998, a refund of $17,786 was received and recorded as income.

         For income tax  purposes,  certain  expenses or reserves for  financial
reporting  purposes are not allowed as current tax  deductions.  Similarly,  the
Company  may take  certain  current  deductions  for tax  purposes  that are not
current  expenses for financial  reporting  purposes.  For example,  the Company
recognized gain on the sale of property for financial  reporting  purposes which
is in excess of the  current  taxable  gain on the  sales.  As a result of these
cumulative  differences,  1998 taxable income totaled approximately $970,000 and
the taxable income for 1997 was  approximately  $790,000  before  deductions for
dividends  paid and federal taxes.  Net operating  losses for federal income tax
purposes  available  to offset  future  taxable  income  totaled  $2,240,000  at
December 31, 1998,  and benefits from these losses will expire  through the year
ending 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
1997, and did not have a material effect on the Company's  financial position or
its  results of  operations.  SFAS No. 121  requires  the  Company to  recognize
impairment   losses  for  long-lived   assets  whenever  events  or  changes  in
circumstances  result in the carrying amount of the assets  exceeding the sum of
the expected future cash flows associated with such assets.

                                       16
<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).

(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, 1998, were originated within the last 1-5
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,  1998,  the  majority  of the loans are
current,  and all  noncurrent  loans are stated at amounts  not in excess of net
realizable value of the collateral securing the loans.  Therefore, no additional
adjustment for impairment is necessary.

                                       17
<PAGE>
         Mortgage  notes  receivable  consist of the  following  at December 31,
1998:
<TABLE>
<CAPTION>
                                                                                       The Company's
                                                                                       Participation
                                                                                       Interest as a    The Company's
Original                             Stated     Final                                   % of Current   Participation at
  Loan      Collateral, Property    Interest  Maturity                                   Principal       December 31,
 Number      Location and Size        Rate      Date     Periodic Payment Terms           Balance           1998
-------      -----------------        ----      ----     ----------------------           -------           ----
<S>      <C>                          <C>    <C>       <C>                                <C>          <C>
   2)    33.5 acres - Queen Creek      8%     07/15/03   Annual principal and interest       100%         $649,155
         and Gilbert Roads -                             payments of $96,743 through
         Chandler, Arizona                               July 2002. Balloon payment
                                                         consisting of the unpaid
                                                         principal balance plus accrued
                                                         interest due July 15, 2003.
                                                         Loan is current and was
                                                         collected in full on January
                                                         24,1999.

 3-1)    635 acres - Section 9,        8%     02/05/11   Annual interest payments             80%          853,285
         Township 6 South Range 3                        through February 2001, then
         East of the Gila and Salt                       annual principal and interest
         River Base and Meridian -                       payments of $158,955 through
         Pinal County, Arizona                           maturity. Loan is current.

   5)    18.8 acres - 1/2 mile         9%     02/01/99   In 1998, the loan was modified      100%          521,664
         east of Pima Road and 1/4                       for the borrower to make
         mile South of Bell Road -                       annual principal payments of
         Scottsdale, Arizona                             $25,000 plus semi-annual
                                                         accrued interest payments
                                                         through August 1, 2000.
                                                         Balloon payment consisting of
                                                         the unpaid principal plus
                                                         accrued interest due February
                                                         1, 2001. Loan is current.

   6)    29 lots in Hidden Valley   9%-12.3%  07/01/05   Multiple borrowers (26)-          86.47%           83,936
         Ranch, Pinal County,                            monthly payments of principal
         Arizona. 12 parcels in                          and interest of varying
         either Bellflower Ranch                         payment amounts. Approximately
         or Butterfield Ranch in                         $45,000 of these loans are
         Cochise County, Arizona                         late or in default but are
                                                         fully collateralized.


  10)    7.47 acres - 16th Street     10%     04/01/02   On April 1, 1998, the loan was       80%           956,170
         and Bell Road Phoenix,                          modified to annual principal
         Arizona                                         and interest payments of
                                                         $200,451 through April 1,
                                                         2001. Balloon payment
                                                         consisting of the unpaid
                                                         principal plus accrued
                                                         interest due April 1, 2002.
                                                         Loan is current.

  15)    50.85 acres - South of        8%     08/30/00   Quarterly payments of               100%           503,035
         the Southwest Corner of                         principal and interest of
         Hawes and Brown Road -                          $18,700 through May 30, 2000.
         Mesa, Arizona                                   Balloon payment consisting of
                                                         the unpaid principal plus
                                                         accrued interest due August
                                                         30, 2000. Loan is current.
</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>
<S>      <C>                          <C>    <C>       <C>                                <C>          <C>
  16)    20 acres - West side of       9%     09/12/02   Annual payments of principal        100%           197,749
         I-17; approximately 2-3/4                       and interest of $20,583
         miles north of Happy                            through September 12, 2001.
         Valley Road - Maricopa                          Balloon payment consisting of
         County, Arizona                                 unpaid principal plus accrued
                                                         interest due September 12,
                                                         2002. Loan is current.

17-3)    2.11 acres (Lots 4 and 5,     8%     04/15/08   Monthly payments of principal       100%            79,300
         Phoenix International                           and interest of $993. Loan is
         Science Center) I-17 and                        current.
         Deer Valley Road,
         Phoenix, Arizona

  18)    153.63 acres - Southwest      7%     03/27/10   Annual payments of principal        100%         1,729,169
         Corner of Pecos Road and                        and interest of $144,258
         Val Vista Drive -                               through March 27, 2009.
         Maricopa County, Arizona                        Balloon payment consisting of
                                                         unpaid principal plus accrued
                                                         interest due March 27, 2010.
                                                         Loan is current.

  21)    53 acres - Dixileta and      12%     12/16/02   Outstanding balance is a draw       100%         1,579,744
         Scottsdale Roads                                on a total credit facility of
         Scottsdale, Arizona                             $1,775,000. Interest for first
                                                         year to be paid using the
                                                         remainder of the credit
                                                         facility. Semi-annual interest
                                                         payments through maturity.
                                                         Balloon payment of the
                                                         principal balance plus accrued
                                                         interest due December 16,
                                                         2002. Contingent interest
                                                         payable upon certain events
                                                         defined in the note.
                                                                                                         ----------
                                                                                                         $7,153,207
                                                                                                         ==========
</TABLE>
                                       19
<PAGE>
Scheduled principal repayments of mortgage notes receivable at December 31, 1998
are as follows:

                  Year                              Amount
                  ----                              ------
                  1999                           $  223,552
                  2000                              660,063
                  2001                              642,898
                  2002                            2,700,206
                  2003                              549,234
                  Thereafter                      2,377,254
                                                 ----------
                                                 $7,153,207
                                                 ==========

(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 fair  value
less estimated costs to sell.

         The following land is owned by the Company at December 31:

   Original                                       The Company's
     Loan                                         Participation
    Number                                          Interest          1998
    ------                                          --------          ----
     6)      354.5 acres - Southwest corner of
             Warner and Sossaman Roads -
             Maricopa County, Arizona                86.47%        $3,079,197

             54.58 acres - Pinal County.             86.47             83,925

    11)      8.4 acres - Corner of 95th and Olive
             Avenues - Peoria, Arizona.             100.00            693,565

    17)      .01 acres - Southwest corner of
             I-17 and Deer Valley Road -
             Phoenix, Arizona.                      100.00             55,889
                                                                   ----------
                                                                   $3,912,576
                                                                   ==========

                                       20
<PAGE>
(6) RELATED PARTY TRANSACTIONS:

         The Company is a party to the following  agreements with affiliates who
share common management and directors with the Company:

        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.

         In December  1998,  the Company issued Loan 21 to a third party to fund
the purchase of land in Scottsdale,  Arizona. The initial proceeds of $1,579,744
were used in  settlement  of the purchase  price,  including a $53,000  mortgage
broker fee paid to an officer of the Company.  The Company has committed to fund
an additional  $195,256 to pay for the initial year of interest on the loan. The
loan agreement provides for the Company to share in future profits from sales of
collateral parcels via contingent interest  provisions.  Additionally,  the loan
agreement  includes  provisions  for  contingent  service fees to be paid to PHS
Mortgage, Inc. upon certain events defined in the note. There were no contingent
service fees paid to PHS Mortgage, Inc. in 1998.

(7)   DIVIDENDS PAID:

         Distributions related to Class A dividends for 1998 are as follows:

                                                         Amount
         Date Declared      Record Date    Date Paid   Per Share    Total Amount
         -------------      -----------    ---------   ---------    ------------
           03/27/98         04/07/98       04/15/98      $.10         $236,008
           06/19/98         07/01/98       07/15/98       .10          236,008
           09/18/98         10/01/98       10/15/98       .10          236,008
           12/10/98         12/17/98       12/31/98       .10          236,008
                                                         ----         --------

                                                         $.40         $944,032
                                                         ====         ========

         Approximately  100%  of the  dividends  per  share  in  1998  represent
distributions of ordinary taxable income.

                                       21
<PAGE>
     Distributions related to Class A dividends for 1997 are as follows:

                                                         Amount
         Date Declared      Record Date    Date Paid   Per Share    Total Amount
         -------------      -----------    ---------   ---------    ------------
           08/11/97          09/01/97       09/15/97      $.25       $590,020
           12/09/97          12/17/97       12/31/97       .13        306,810
                                                          ----       --------

                                                          $.38       $896,830
                                                          ====       ========

         Approximately  87%  of  the  dividends  per  share  in  1997  represent
distributions of ordinary taxable income. The remaining  distributions represent
a return of capital or capital gain income.

                                       22
<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 1999 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
"1999 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 1999 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, 1998.  Additional  information
responsive to this item is  incorporated  herein by reference to the  "Executive
Compensation" section of the Company's 1999 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 1999 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 1999
Proxy Statement.

                                       23
<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.

     (a)  Financial Statements.


                                                                  Page or Method
                                                                    of Filing
                                                                    ---------

    Report of Independent Public Accountants                         Page 10
    Financial Statements:
        Balance Sheet - December 31, 1998                            Page 11
        Statements of Operations - For the Years Ended
           December 31, 1998 and 1997                                Page 12
        Statements of Stockholders' Equity - For the Years
           Ended December 31, 1998 and 1997                          Page 13
        Statements of Cash Flows - For the Years Ended
           December 31, 1998 and 1997                                Page 14
        Notes to Financial Statements - December 31, 1998 and 1997   Page 15

     (b)  Exhibits.
<TABLE>
<CAPTION>
Exhibit                                                       Page or Method
Number       Description Method of Filing                       of Filing
------       ----------------------------                     --------------
<S>       <C>                                          <C>
3-A       Articles   of   Incorporation   of   the     Incorporated  by  Reference to
          Company, as amended.                         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.

10-A      June 13,  1988  Advisory  and  Servicing     Incorporated  by  Reference to
          Agreement between ALI Advisor,  Inc. and     Exhibit 10-A to the  Company's
          the Company.                                 Annual Report on Form 10-K for
                                                       the year  ended  December  31,
                                                       1998

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

10-C      Modification of Loan Document dated July     Incorporated  by  Reference to
          21, 1990,  by between ALI Advisor,  Inc.     Exhibit 10-E to the  Company's
          and    Pinnacle    Peak    Office/Resort     Annual Report on Form 10-K for
          Investors   Limited   Partnership,    an     the year  ended  December  31,
          Arizona limited partnership (Loan 1).        1990 ( "1990 Form 10-K")
</TABLE>
                                       24
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                       Page or Method
Number       Description Method of Filing                       of Filing
------       ----------------------------                     --------------
<S>       <C>                                          <C>
10-D      Modification  of  Loan  Documents  dated     Incorporated  by  Reference to
          July 1, 1990,  by between  ALI  Advisor,     Exhibit  10-F to the 1990 Form
          Inc.  and  North  Scottsdale  Horseman's     10-K
          Park Limited Partnership III, an Arizona
          limited partnership (Loan 5b).

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

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

24        Powers of Attorney                           See Signature page

27        Financial Data Schedule                      Filed herewith
</TABLE>

     (c)  Reports on Form 8-K

          During the last quarter of 1998,  the Company filed no reports on Form
     8-K.

                                       25
<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 __th
day of March, 1999.

                                  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.

     Signature                       Title                             Date
     ---------                       -----                             ----

/s/ Barry W. Peacock          President                           March __, 1999
--------------------------
Barry W. Peacock


/s/ Thomas R. Hislop          Chairman of the Board, Vice         March __, 1999
--------------------------    President Treasurer, Chief
Thomas R. Hislop              Executive Officer and Chief
                              Financial Officer


/s/ Larry P. Staley           Vice President                      March __, 1999
--------------------------
Larry P. Staley


/s/ Robert Blackwell
--------------------------
Robert Blackwell


/s/ Burton P. Freireich      Unaffiliated Director               March __, 1999
--------------------------
Burton P. Freireich

                                       26