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, 1997

                                       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 20 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, 1997 were
$719,324.

         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 19, 1998 was approximately $8,858,430. 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 19, 1998
       100      shares of Class B Common Stock outstanding on March 19, 1998
------------------------------------------------------------------------------



                       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 17
                                                                  Total pages 20
                                       2
<PAGE>
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S>      <C>              <C>                                                                   <C>
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..............................................................10
         ITEM 7.           FINANCIAL STATEMENTS...................................................14
         ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                           ACCOUNTING AND FINANCIAL DISCLOSURE....................................15

PART III .........................................................................................15
         ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                           PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                           ACT....................................................................15
         ITEM 10.          EXECUTIVE COMPENSATION.................................................15
         ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                           MANAGEMENT.............................................................15
         ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................16

PART IV  .........................................................................................17
         ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.......................................17

SIGNATURES........................................................................................19
</TABLE>
                                       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 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 1997 fiscal  year,  the Company  declared and paid two cash
distributions.  The first  distribution  of $.25 per share was paid on September
15, 1997 to shareholders of record on September 1, 1997. The second distribution
of $.13 per share was paid on  December  31, 1997 to  shareholders  of record on
December 17, 1997.

         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
                                       4
<PAGE>
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.

         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 believe 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, 1997. 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
                                       5
<PAGE>
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,  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 1997 and 1996, the Company paid the
Advisor a servicing fee of $41,269 and $53,425, 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 1997 or 1996.

         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 1997 or 1996.
                                       6
<PAGE>
         1997 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 1997 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 4 and 5 to the  Company's
financial statements set forth in Item 7 hereof.

         The Company had five land sales during the 1997 fiscal  year,  which in
the aggregate generated a $452,000 gain on sale of property.  The first sale was
a 15 acre parcel of  property  located in  Phoenix,  Arizona,  which the Company
acquired  through  foreclosure on Loan No. 10. Proceeds to the Company from this
sale were $878,000 cash and a note receivable for $956,000.  The second sale was
an 8 acre  parcel  which  had  secured  Loan  No.  17 and was  received  through
foreclosure by the Company. Proceeds to the Company from this sale were $992,000
cash.  The third  sale was a 3.36  acre  parcel of  property  which the  Company
acquired  through  foreclosure on Loan No. 17. Proceeds to the Company from this
sale were  $623,000 in cash.  The fourth sale was of a 2 acre parcel of property
located in Phoenix,  Arizona,  which the Company acquired through foreclosure on
Loan  No.  17.  The  Company  received  $448,000  in cash  from the sale of this
property.  The fifth sale was a 2.42 acre  parcel of  property  located in Pinal
County,  Arizona,  which the Company acquired through foreclosure on Loan No. 6.
Proceeds from this sale to the Company were $5,000 in cash.

         In summary, the Company had five land sales during the 1997 fiscal year
which produced $2,946,000 cash, and $956,000 receivables.

         In addition to the  above-referenced  land  sales,  the Company  closed
sales  subsequent  to year end on two  parcels of land that were in  escrow.  On
January  14,  1998,  the  Company  closed the sale of a one acre  parcel of land
resulting from foreclosure on Loan No. 17. The Company received $456,694 in cash
from this sale. On February 6, 1998,  the Company  closed the sale of a 635 acre
parcel of land which the Company  acquired from  foreclosure  on Loan No. 3. The
Company received a note for $1,066,605 and $188,867 in cash from this sale.

         In January of 1998,  the Company  received a cash payoff of $557,473 on
Loan No. 3. This collection was 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.  No shares
were repurchased during the 1997 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 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 60, 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 55, 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 49, 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. No shares were  repurchased  during
the 1997 fiscal year.

         The  Company's  Class A  Common  Stock is  listed  for  trading  on the
American Stock Exchange ("AMEX"). As of March 19, 1998, there were approximately
81 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 19,  1998 was $5.375 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 1996 and 1997 and the cash
distributions paid per share of Class A Common Stock for such periods.



                             Sales Price          Dividends/Distributions
                       ---------------------       Declared Per Share of
Calendar Quarter        High            Low     Class A Common Stock(1)(2)
----------------        ----            ---     --------------------------
     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

     1997
     ----
First Quarter           5 7/8          4 5/8                -0-
Second Quarter         5 5/16          4 1/4                -0-
Third Quarter           5 3/4          4 7/8                .25
Fourth Quarter          5 5/8         5 3/16                .13

                                       9
<PAGE>
         -----------------

         (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 1997 fiscal year, the Company declared and paid two
                  cash  distributions.  The first distribution of $.25 per share
                  was paid on September  15, 1997 to  shareholders  of record on
                  September 1, 1997. The second  distribution  of $.13 per share
                  was paid on  December  31, 1997 to  shareholders  of record on
                  December 17, 1997.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION.

RESULTS OF OPERATIONS

         Year Ended  December  31, 1997 vs.  1996.  The Company had total income
before the sale of  properties  of  approximately  $719,000 or $.30 per share of
Class A Common Stock,  for the year ended  December 31, 1997,  compared to total
income before the sale of properties of approximately $649,000 or $.26 per share
of Class A Common Stock,  for the year ended  December 31, 1996. The Company had
net income of approximately  $784,000 or $.33 per share of Class A Common Stock,
for the year ended  December 31, 1997,  compared to net income of  approximately
$503,000 or $.20 per share of Class A Common Stock,  for the year ended December
31, 1996.

         The increase in the total income before the sale of properties  and net
income for the year ended  December 31, 1997,  is primarily  attributable  to an
increase in interest income from temporary  investments,  a decrease in property
taxes,  and an increase in gain of sale of property.  Interest income from First
Mortgage Loans decreased to $384,000 in 1997 from $476,000 in 1996. However, due
partly to larger cash balances held by the Company during 1997,  interest income
from temporary  investments increased to $279,000 in 1997 from $128,000 in 1996.
Included in the Company's 1997 interest  income from temporary  investments  are
the  proceeds  of  a  bridge  loan  funded  by  the  Company  during  1997  to a
non-affiliated  third  party.  The Company  received  interest  income from such
bridge loan in the amount of $75,000,  and as consideration  for making the loan
also  received  15,000 shares of  restricted  stock of a NASDAQ listed  company,
which the Company values at $87,000.  The Company's  property taxes decreased to
$29,000 in 1997 from $106,000 in 1996. Gain on the sale of property increased to
$452,000 in 1997 from $138,000 in 1996.
                                       10
<PAGE>
         The Company  had other  income of $56,000  compared to other  income of
$44,000 in 1996.  The other  income  received by the Company in 1997 and 1996 is
primarily  attributable to lease rentals on land received by the Company through
foreclosure actions.

         The Company's  expenses decreased in the aggregate to $179,000 in 1997,
compared  to  $283,000  in  1996.   This   decrease  of  $104,000  is  primarily
attributable to decreases in property taxes.

         The Company did not record a loan loss  reserve in 1997  because of the
stabilization of the Phoenix real estate market.

         Net cash provided by operating activities was $270,000 in 1997 compared
to net cash  provided by  operating  activities  of  $508,000 in 1996.  Net cash
provided by investing activities in 1997 and 1996 was $2,681,000 and $3,386,000,
respectively.  Net  cash  used in  financing  activities  in 1997  and  1996 was
$897,000 and $4,094,000, 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 Impact.  The Company has not yet completed its  evaluation of
the impact the Year 2000 computer problem may have on its business. However, the
Company  does not expect the costs to address the problem to be material  and it
does not expect the  consequences  of incomplete  or untimely  resolution of the
problem to materially impact the operation of its 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
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 during the early 1990's were
in decline and have begun to stabilize  in the last two to three  years.  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
                                       11
<PAGE>
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 1996 and 1997. The Company sold five parcels of land in 1997, and
anticipates that additional parcels will be sold in 1998.  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  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 2, 1996.

         During  the  1997  fiscal  year  the  Company  declared  and  paid  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 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

                         ARIZONA LAND INCOME CORPORATION

                         FINANCIAL STATEMENTS
                         AS OF DECEMBER 31, 1997 AND 1996
                         TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS



                                       14
<PAGE>
                                      INDEX

                                                                  Page

Report of Independent Public Accountants                          F-2

Financial Statements-

   Balance Sheet - December 31, 1997                              F-3

   Statements of Operations - For the Years Ended December 31,
     1997 and 1996                                                F-4

   Statements of Stockholders' Equity - For the Years Ended
     December 31, 1997 and 1996                                   F-5

   Statements of Cash Flows - For the Years Ended December 31,
     1997 and 1996                                                F-6

Notes to Financial Statements - December 31, 1997                 F-7

        Certain schedules are omitted as the information is not required.
                                      F-1
<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, 1997, and the related
statements of  operations,  stockholders'  equity and cash flows for each of the
two years in the period ended December 31, 1997. 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, 1997,  and the results of its  operations  and its cash flows
for each of the two years in the period ended  December 31, 1997,  in conformity
with generally accepted accounting principles.


ARTHUR ANDERSEN LLP

Phoenix, Arizona,
   January 30, 1998.
                                      F-2
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                                  BALANCE SHEET

                                DECEMBER 31, 1997

                                     ASSETS

ASSETS:
   Cash and cash equivalents                                    $  3,246,825
                                                                ------------
   Investments-
     Accrued interest receivable                                     255,061
     Mortgage notes receivable (Note 4)                            5,119,885
     Investment in partnership                                       378,755
     Other investments                                                87,188
     Land held for sale (Note 5)                                   7,176,410
                                                                ------------
                                                                  13,017,299
     Less- Reserve for losses                                     (1,513,953)
                                                                ------------
                  Total investments, net                          11,503,346
                                                                ------------
                                                                $ 14,750,171
                                                                ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Accounts payable and other liabilities                       $     68,718
   Accrued property taxes                                             37,211
   Deferred tax liability (Note 2)                                   120,000
                                                                ------------
                  Total liabilities                                  225,929
                                                                ------------
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                            (9,502,848)
                                                                ------------
                  Total stockholders' equity                      14,524,242
                                                                ------------
                                                                $ 14,750,171
                                                                ============
       The accompanying notes are an integral part of this balance sheet.
                                      F-3
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                            STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                1997         1996
                                                             ----------   ----------
<S>                                                          <C>          <C>
INCOME:
   Interest on mortgages                                     $  384,203   $  476,215
   Interest on temporary investments                            278,825      128,194
   Other income                                                  56,296       44,216
                                                             ----------   ----------
                  Total income before sale of properties        719,324      648,625
                                                             ----------   ----------


EXPENSES:
   Property taxes                                                28,709      106,476
   Professional services                                         56,138       61,849
   Advisory fees to related party (Note 6)                       41,269       53,425
   Administration and general                                    28,275       32,874
   Directors' fees                                               22,400       23,200
   Interest expense                                               2,662        5,287
                                                             ----------   ----------
                  Total expenses before sale of properties      179,453      283,111
                                                             ----------   ----------


INCOME BEFORE GAIN ON SALE OF PROPERTIES                        539,871      365,514

GAIN ON SALE OF PROPERTIES, net                                 451,666      137,860
                                                             ----------   ----------

NET INCOME BEFORE TAXES                                         991,537      503,374

PROVISION FOR INCOME TAXES                                      207,300         --
                                                             ----------   ----------
                  Net income                                 $  784,237   $  503,374
                                                             ==========   ==========
INCOME PER COMMON SHARE                                      $      .33   $      .20
                                                             ==========   ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING                                                2,360,080    2,521,160
                                                             ==========   ==========
</TABLE>
        The accompanying notes are an integral part of these statements.
                                      F-4
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                       STATEMENTS OF STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 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, 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
   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
                                      ===========  ===========    ==============     =============     ==============
</TABLE>
        The accompanying notes are an integral part of these statements.
                                      F-5
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                               1997          1996
                                                                           -----------    -----------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                              $   784,237    $   503,374
   Adjustments to reconcile net income to net cash provided by
     operating activities-
       Gain on sale of properties                                             (451,666)      (137,860)
       Unrealized gain on investments and other non-cash income                (87,188)          --
       Changes in certain assets and liabilities affecting operating
         activities-
           Decrease in other assets, net                                          --           64,418
           (Increase) decrease in accrued interest receivable                  (48,397)        96,815
           Increase (decrease) in accounts payable and other liabilities         6,578        (33,271)
           (Decrease) increase in accrued property taxes                       (53,085)        14,437
           Increase in deferred tax liability                                  120,000           --
                                                                           -----------    -----------
                  Net cash provided by operating activities                    270,479        507,913
                                                                           -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Partnership investments                                                        --          (72,000)
   Principal payments received under mortgage notes receivable                 199,954      2,360,026
   Proceeds from sales of properties                                         2,946,295      1,375,610
   Land improvements                                                          (464,926)      (284,064)
   Purchase of bonds                                                              --         (906,959)
   Proceeds from redemption of bonds                                              --          913,674
                                                                           -----------    -----------
                  Net cash provided by investing activities                  2,681,323      3,386,287
                                                                           -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payment of dividends                                                       (896,830)    (3,282,356)
   Repurchase of Class A common stock                                             --         (811,348)
                                                                           -----------    -----------
                  Net cash used in financing activities                       (896,830)    (4,093,704)
                                                                           -----------    -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             2,054,972       (199,504)

CASH AND CASH EQUIVALENTS, beginning of year                                 1,191,853      1,391,357
                                                                           -----------    -----------
CASH AND CASH EQUIVALENTS, end of year                                     $ 3,246,825    $ 1,191,853
                                                                           ===========    ===========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   New mortgages related to sales of properties                            $   956,171    $      --

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid                                                           $     2,662    $     5,287

   Income taxes paid                                                       $    87,300    $      --
</TABLE>
        The accompanying notes are an integral part of these statements.
                                       F-6
<PAGE>
                         ARIZONA LAND INCOME CORPORATION


                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


(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, 1997, cash equivalents  consist of
U.S. Treasury Notes of $3,195,173 which matured in February 1998.

         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 1997 and 1996 was $0 and $64,448, respectively.
                                      F-7
<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 (IRC) 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.

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  has been  provided  and paid at a rate of 35% on the 1997
net gains on an income  tax basis  from sales of  foreclosure  property.  During
1997,  an  additional  $120,000  federal  income tax  provision  was recorded to
reflect the  cumulative  book to tax  difference on  foreclosure  property sales
through December 31, 1997.  Approximately $50,000 of this provision was recorded
to reflect  this change in  estimate,  when it was  determined  during 1997 that
sales in 1996 would be taxable.

For income tax purposes,  certain expenses for financial  reporting purposes are
not allowed as tax deductions.  The Company may take certain  deductions related
to their investment in Pinnacle Peak  Office/Resort  Investors (see Note 2) that
are not expenses for  financial  reporting  purposes.  In addition,  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. Accordingly, 1997 taxable
income  totaled  approximately  $777,000  and the  taxable  income  for 1996 was
approximately  $474,000.  Net operating  losses for federal  income tax purposes
available to offset future  taxable  income  totaled  $2,243,089 at December 31,
1997,  and all benefits  from these  losses will expire  through the year ending
2010.

The balance of $120,000 at December 31, 1997 in deferred income taxes represents
the  estimated  future tax to be paid when the gains are reflected in the income
tax returns.

         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.
                                      F-8
<PAGE>
         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.

(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, 1997, 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,  1997,  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.
                                      F-9
<PAGE>
Mortgage notes receivable consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
                                                                                                   The Company's
                                                                                                   Participation
                                                                                                   Interest as a    The Company's
Original                                                Final                                       of Current   Participation at
  Loan   Collateral, Property           Stated        Maturity                 Periodic             Principal      December 31,
 Number      Location and Size       Interest Rate      Date                 Payment Terms           Balance           1997
-------- ------------------------  ----------------- --------- ----------------------------------- ------------- ----------------
  <S>    <C>                             <C>         <C>       <C>                                   <C>           <C>
  3)     70 acres - West side of         8.25%       08/05/04  On October 29,1996, the loan was      76.36%        $    557,473
         Hawes Road (84th                                      modified for the borrower to make
         Street) - 1/2 mile                                    monthly interest and principal
         north of Thomas Road                                  payments of $15,000 until the 1996
         Mesa, Arizona                                         annual payment of $125,550 is paid
                                                               in full. Interest on the modified
                                                               payments is accruing at 11%. On
                                                               January 29, 1997, another modifica-
                                                               tion was made to further change the
                                                               payment schedule to add 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 mile           9.00%       02/01/99  Semi-annual principal payments of       100%             571,664
         east of Pima Road and                                 $25,000 plus accrued interest
         1/4 mile South of Bell                                through August 1, 1998.  Balloon
         Road - Scottsdale,                                    payment consisting of the unpaid
         Arizona                                               principal plus accrued interest
                                                               due February 1, 1999. Loan is
                                                               current.

  6)     29 lots in Hidden          9.00% - 12.30%   05/01/98  Multiple borrowers (36) - monthly     85.29%             114,457
         Valley Ranch, Pinal                         07/01/05  payments of principal and interest
         County, Arizona.  12                                  of varying payment amounts.
         parcels in either                                     Approximately $74,000 of these
         Bellflower Ranch or                                   loans are late or in default.
         Butterfield Ranch in
         Cochise County,
         Arizona

  9)     19.24 acres - Southwest         7.50%       03/30/02  Annual payments of principal          81.35%             295,533
         corner of Union Hills                                 and interest of $83,221. Loan is
         Drive and 91st Avenue -                               current.
         Peoria, Arizona

 10)     7.47 acres - 16th Street  6.0% until 4/1/98 4/02/01   Annual principal payments of             80%             956,170
         and Bell Road             7.5% until 4/2/99           $341,761 and accrued interest.
         Phoenix, Arizona          8.5% until 4/2/00           Loan is current.
                                   9.5% until 4/2/01

 15)     50.85 acres - South of          8.00%       08/30/00  Quarterly payments of principal and     100%             535,931
         the Southwest Corner                                  interest of $18,700 through May 30,
         of Hawes and Brown                                    2000.  Balloon payment consisting
         Road - Mesa, Arizona                                  of the unpaid principal plus
                                                               accrued interest due August 30,
                                                               2000.  Loan is current.

 16)     20 acres - West side of         9.00%       09/12/02  Annual payments of principal and        100%             200,305
         I-17; approximately                                   interest of $20,583 through
         2-3/4 miles north of                                  September 12, 2001.  Balloon
         Happy Valley Road -                                   payment consisting of unpaid
         Maricopa County,                                      principal plus accrued interest
         Arizona                                               due September 12, 2002.  Loan is
                                                               current.

 17-1)   .95 acres (Lot 6, Phoenix       9.00%       03/01/08  Monthly payments of principal and       100%              52,839
         International Science                                 interest of $659.  Loan is current.
         Center) I-17 and Deer
         Valley Road, Phoenix,
         Arizona

 17-3)   2.11 acres (Lots 4 and 5,       8.00%       04/15/08  Monthly payments of principal and       100%              84,641
         Phoenix International                                 interest of $993.  Loan is current.
         Science Center) I-17 and
         Deer Valley Road,
         Phoenix, Arizona

 18)     153.63 acres - Southwest        7.00%       03/27/10  Annual payments of principal and        100%           1,750,872
         Corner of Pecos Road                                  interest of $144,258 through March
         and Val Vista Drive -                                 27, 2009.  Balloon payment
         Maricopa County,                                      consisting of unpaid principal
         Arizona                                               plus accrued interest due March 27,
                                                               2010.  Loan is current.
                                                                                                                   ------------
                                                                                                                   $  5,119,885
                                                                                                                   ============
</TABLE>
                                      F-10
<PAGE>
Scheduled principal repayments of mortgage notes receivable at December 31, 1997
are as follows:

                    Year                                Amount
                 -----------                       --------------
                  1998                             $      611,564
                  1999                                    999,664
                  2000                                    831,719
                  2001                                    392,203
                  2002                                    396,559
                  Thereafter                            1,888,176
                                                   --------------
                                                   $    5,119,885

In January 1998, loan 3 was paid in full.

(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                 1997
-------------                                                -------------        --------------
<S>  <C>        <C>                                         <C>                   <C>
     2)         33.5 acres - Queen Creek and Gilbert
                Roads - Chandler, Arizona.                    91.15%              $      982,295

     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

                54.58 acres - Pinal County.                   85.29%                      96,376

    11)         8.4 acres - Corner of 95th and Olive
                Avenues - Peoria, Arizona.                   100.00%                     693,565
</TABLE>
                                      F-11
<PAGE>
<TABLE>
<CAPTION>
   Original                                                        The Company's
     Loan                                                          Participation
    Number                                                           Interest                 1997
-----------                                                        -------------        --------------
<S> <C>         <C>                                               <C>                  <C>
    17)         1.01 acres - Southwest corner of
                I-17 and Deer Valley Road -
                Phoenix, Arizona.                                  100.00%                     547,580

    19)         9.11 acres - Lots 4, 5, and 7, Paradise
                Valley Auto Park at 20th Street and
                Bell Road - Phoenix, Arizona.                      100.00%                     907,372
                                                                                        --------------
                                                          Total                         $    7,176,410
                                                                                        ==============
</TABLE>

In January  1998,  the Company sold one acre of the Original Loan Number 17 land
for book value totaling $491,694.

(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
     & Given (PHS&G)               investment   transactions   involving  excess
                                   cash. No fees are paid for such services.

(7)   DIVIDENDS PAID:

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      09/1/97     09/15/97       $.25         $      590,020
       12/09/97     12/17/97     12/31/97        .13                306,810
                                                ----         --------------

                                                $.38         $      896,830
                                                ====         ==============
                                      F-12
<PAGE>
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.

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
                                                 ====         ===============

Dividends  per share in 1996  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.
                                      F-13
<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 1998 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
"1998 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 1998 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, 1997.  Additional  information
responsive to this item is  incorporated  herein by reference to the  "Executive
Compensation" section of the Company's 1998 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 1998 Proxy Statement.
                                       15
<PAGE>
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 1998
Proxy Statement.


                                       16
<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.

                                                                    Page or
                                                                Method of Filing
]                                                               ----------------
Report of Independent Public Accountants                            Page F-2
Financial Statements:
    Balance Sheet - December 31, 1997                               Page F-3
    Statements of Operations - For the Years Ended December         Page F-4
    31, 1997 and 1996
    Statements of Stockholders' Equity - For the Years Ended        Page F-5
    December 31, 1997 and 1996
    Statements of Cash Flows - For the Years Ended                  Page F-6
    December 31, 1997 and 1996
    Notes to Financial Statements - December 31, 1997               Page F-7


(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>
                                       17
<PAGE>
<TABLE>
<CAPTION>
    Exhibit                                                                Page or
    Number       Description                                            Method of Filing
    ------       -----------                                            ----------------
<S>   <C>        <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
                 Arizona limited partnership (Loan 1).                  Company's 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 by
                 Horseman's Park Limited  Partnership  III, an Arizona  10-F to the 1990
                 limited partnership (Loan 5b).                         Form 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 1997,  the Company  filed no reports on Form
8-K.
                                       18
<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 27th
day of March, 1998.

                                               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 27, 1998
------------------------------
Barry W. Peacock

/s/ Thomas R. Hislop                  Chairman of the Board, Vice                    March 27, 1998
------------------------------        President, Treasurer, Chief Executive
Thomas R. Hislop                      Officer and Chief Financial Officer


/s/ Larry P. Staley                   Vice President                                 March 27, 1998
------------------------------
Larry P. Staley

/s/ Robert Blackwell                  Unaffiliated Director                          March 27, 1998
------------------------------
Robert Blackwell

/s/ Burton P. Freireich
------------------------------
Burton P. Freireich                   Unaffiliated Director                          March 27, 1998
</TABLE>
                                       19