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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(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, 2005

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



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ARIZONA LAND
INCOME CORPORATION

(Exact name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Arizona                                                        |  | 86-0602478                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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



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Securities registered under
Section 12(b) of the Exchange Act:



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

Securities registered under Section 12(g) of the Exchange Act:

None

(Title of Class)



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Check whether
the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ̈

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 ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.):    Yes ̈No  x

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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, 2005 were $385,000.

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the registrants
Class A Common Stock as reported by the American Stock Exchange on March 15, 2006, was approximately $6,500,000. Shares of voting stock held by each executive 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

State the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.

1,851,025 shares of Class A Common Stock outstanding on March 15, 2006

100           shares of Class B Common Stock outstanding on March 15, 2006

DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.

Transitional Small Business Disclosure Format (check one):    Yes ̈No  x



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TABLE OF CONTENTS



|         |  |                                                                                                                |  |   
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | --
|         |  | Page                                                                                                          
|PART I   |  |                                                                                                                |  | 3 
|ITEM 1.  |  | Description of Business                                                                                        |  | 6 
|ITEM 2.  |  | Description of Property                                                                                        |  | 6 
|ITEM 3.  |  | Legal Proceedings                                                                                              |  | 6 
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                            |  | 6 
|         |  |                                                                                                               
|PART II  |  |                                                                                                                |  | 7 
|ITEM 5.  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities |  | 7 
|ITEM 6.  |  | Managements Discussion and Analysis or Plan of Operation                                                      |  | 8 
|ITEM 7.  |  | Financial Statements                                                                                           |  | 10
|ITEM 8.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                           |  | 19
|ITEM 8A. |  | Controls and Procedures                                                                                        |  | 19
|ITEM 8B. |  | Other Information                                                                                              |  | 19
|         |  |                                                                                                               
|PART III |  |                                                                                                                |  | 20
|ITEM 9.  |  | Directors and Executive Officers of the Registrant                                                             |  | 20
|ITEM 10. |  | Executive Compensation                                                                                         |  | 21
|ITEM 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 |  | 21
|ITEM 12. |  | Certain Relationships and Related Transactions                                                                 |  | 22
|ITEM 13. |  | Exhibits and Reports on Form 8-K                                                                               |  | 23
|ITEM 14  |  | Principal Accountant Fees and Services                                                                         |  | 24



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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 its Class B Common Stock to YSP Holdings, Inc. (YSP Holdings), the
Companys sponsor, in return for an initial capital contribution of $1,000. Operations of the Company commenced on June 13, 1988, the date on which the Company completed its initial public offering.

In June 1988, the Company began investing in first mortgage loans on unimproved real property located primarily 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 two First Mortgage Loans, 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 has not identified any opportunities to make new loans; therefore, in the event of a loan maturity or sale of property, the Company currently intends to distribute the proceeds, beyond what is needed for day-to-day operations of
the Company, to its shareholders.

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 2005 fiscal year, the Company declared and paid four cash distributions. The first distribution was for $.10 per share and was paid on April 15, 2005 to shareholders of record
on April 1, 2005. The second distribution was for $.10 per share and was paid on July 15, 2005 to shareholders of record on July 1, 2005. The third distribution was for $.10 per share and was paid on October 14, 2005 to
shareholders of record on September 30, 2005. The fourth distribution was for $.10 per share and was paid on January 17, 2006 to shareholders of record on January 3, 2006.

Outlook. As disclosed in the prospectus used in connection with our 1988 initial public offering, our intent at the time of the public offering
was to dissolve within approximately eight years after the date of such offering.

For the past several years, we have been liquidating our
loan and land holdings and returning capital to our shareholders through regular and special dividends. In the second quarter ended June 30, 2004, we sold our remaining holdings (with the exception of a small .01 acre parcel) of approximately
280 acres related to Loan No. 6.

In January 2005, we engaged Peacock, Hislop, Staley & Given, Inc., a financial advisor
(PHS&G), to assist in developing and evaluating strategic alternatives available to the Company to enhance shareholder value. Alternatives that were being considered included a change of business plan for the Company, a merger or
sale of the Company, a combination of these, or the decision to take no action other than the completion of the liquidation of the Company. We issued a press release on January 24, 2005 announcing our engagement of PHS&G and the purpose of
the engagement. Our Board of Directors believed that PHS&Gs historic relationship with, and long knowledge of, the Company put it in a unique position to assist in determining the best course of action for the Company to take.

Our engagement of PHS&G entailed an effort by PHS&G to locate a possible merger, partner or acquirer for the Company that would result in
enhanced shareholder value. Our agreement with PHS&G calls for the Company to pay PHS&G a fee of four percent of the transaction value (but in no event more than $250,000) only upon the successful completion of its efforts.

In connection with PHS&Gs receipt of certain offers from interested parties relating to a potential transaction with the Company, our Board met
in March 2005 for the purpose of forming a special committee composed of qualified independent directors (the Special Committee). The Special Committee was tasked with investigating and negotiating a potential business disposition,
liquidation or other strategic transaction regarding the Company. We issued a press release on March 28, 2005 announcing that we would postpone the date of our 2005 annual meeting of shareholders to allow management and the Board additional
time to consider strategic alternatives available to the Company. In connection with the postponement, our Board amended the Companys Bylaws to give the Board discretionary authority to determine the date and time of our annual meeting of
shareholders and to allow the board to postpone any previously scheduled annual meeting of shareholders.



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The Special Committee developed a set of criteria for any proposed strategic transaction to meet in order
to be considered for a positive recommendation to the Companys shareholders. The criteria were as follows:



| |  |  | an acknowledgment that the cash held by the Company immediately prior to closing any proposed recapitalization and management change will be paid out to current Company shareholders
in the form of a dividend;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an understanding that the proposed new management or advisor will purchase for cash or with acceptable assets new Company shares at: (i) a premium to the then book value per
share, as determined in accordance with generally accepted accounting principles and not reflecting a discounted value of the note receivable held by the Company; (ii) in an amount such that the total premium to book value is at least $500,000;
and (iii) the total proceeds not be less than $1 million;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the proposed new management or advisor will have demonstrated experience in the real estate or REIT industry in general and/or experience managing the asset class described in the
proposed business plan;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the proposed new management or advisor will be able to demonstrate to the satisfaction of the Special Committee the capability to provide or raise the capital necessary to finance
the proposed business plan; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any consideration paid directly to Company shareholders to acquire any of their shares be paid in cash.
| | - |  | -------------------------------------------------------------------------------------------------------

PHS&G contacted over 50 possible candidates and ultimately recommended that discussions continue with three potential acquirers. Two of these
candidates withdrew when they were apprised of the criteria the Special Committee required. The final candidate entered into a meaningful discussion to formulate a final letter of intent. Ultimately, discussions were terminated when it became
apparent that the candidate could not fund the acquisition in a manner acceptable to the Special Committee.

To date, our Board of
Directors has not received a credible proposal relating to a potential transaction and we have paid no fees to PHS&G.

In light of the
Special Committees findings, it is the Boards intention to work toward the ultimate dissolution of the Company and liquidation of its assets. Nevertheless, our Board of Directors retains the discretion to indefinitely continue the
operations of the Company if it determines that such continuation is in the best interest of the Company and its shareholders.

While our
Board intends to work toward liquidation, we have secured an agreement with PHS&G to continue to review any and all proposals regarding an acquisition of the Company by a third party or any other strategic transaction that could enhance
shareholder value. Under our agreement with PHS&G, we will pay no fees to PHS&G unless and until an offer is accepted and the deal has closed.

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 believe 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, 2005. REIT status allows the Company to deduct from its federal
taxable income (and not pay taxes upon) qualified 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) restricting its investments principally to assets that produce interest from mortgage loans
collateralized by real estate or that produce real property rental income; (ii) paying out at least 90% of its taxable income (excluding capital gains) to its shareholders; (iii) paying taxes at corporate tax rates on capital gains or
distributing capital gains as dividends to its shareholders; (iv) holding less than 10% of the voting securities of any single issuer; and (v) having 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



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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 that satisfied the foregoing investment criteria. Due to generally poor economic conditions in Arizona and in metropolitan Phoenix
during the early 1990s, the Company did not acquire any additional First Mortgage Loans from 1989 until 1998 (other than refinancing or restructuring of existing First Mortgage Loans). The Company received a First Mortgage Loan of approximately
$5,230,000 as a result of a sale of real property in 2004.

The Company has not identified any opportunities to make new loans; therefore,
in the event of a loan maturity or sale of property, the Company currently intends to distribute the proceeds, beyond what is needed for day-to-day operations of the Company, to its shareholders.

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 the 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 2005 and 2004, the Company paid the Advisor a servicing fee of approximately $10,345 and $17,437 respectively.

The Company also agreed to pay the Advisor a management fee for assisting 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 2005 or 2004.

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 2005 or 2004.

2004 Land
Sales. In the second quarter ended June 30, 2004, the Company sold its remaining holdings (with the exception of a small .01 acre parcel described in Note 8 to the financial statements) of approximately 280 acres in Maricopa County, Arizona
associated with Loan No. 6. The transaction was effected through cash and a note receivable due from the buyer. The Companys proportionate share of the net purchase price (given the Companys 86.47% participation in Loan No. 6)
was approximately $6,824,000. The carrying value of the property was approximately $2,176,000, resulting in a gain of $4,648,000. The Company received cash of $1,588,000 and a note of $5,229,000. Because the mortgage note receivable calls for
interest only payments, those scheduled payments do not meet the level annual payment that would be needed to pay the principal and interest on the unpaid balance over 20 years using a fair interest rate. Therefore, a portion of the gain has been
deferred using the installment method of accounting. Of the $4,648,000 gain, $3,567,000 has been deferred and $1,081,000 was recognized in the year ended December 31, 2004. No further gain will be recognized until principal balances of the note
are paid, which are not scheduled until the maturity date of May 2009. The deferred gain is recorded in the accompanying balance sheet at December 31, 2005 as a contra balance against the mortgage note receivable. The terms of the note are for
interest-only monthly installments commencing June 2004 through May 2009 when the full principal balance becomes due and payable. The note bears interest at the floating prime lending rate. The mortgage receivable is collateralized by the underlying
property.

In connection with the sale of the property, the broker agreed to defer payment of 50% of the commission due under the
brokers agreement. There is a note payable to the broker with a face value of $252,000, the Companys proportionate share of which is $218,000 at December 31, 2005. The promissory note payable has terms identical to that of the
mortgage



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note receivable. It calls for interest only payments at the prime rate and is due in full in May 2009. Payments on the
note payable are due only from proceeds of the payments from the mortgage note receivable. As a result, the balance of the promissory note payable is netted against the gross balance of the note receivable.

During the fourth quarter ended December 31, 2004, the Company received a distribution in the amount of $1,169,126 from Pinnacle Peak Office/Resort
Investors, LP upon the sale by the limited partnership of certain real properties. This distribution represented the Companys partnership interest in the limited partnership. The Company anticipates that any further distributions from this
entity will be minimal.

Note Regarding Forward-Looking Statements

Our disclosure and analysis in this Report on Form 10-KSB contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which include information relating to future
events, future financial performance, strategies, expectations, risks and uncertainties. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. These
forward-looking statements include, without limitation, statements regarding: projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; statements regarding
strategic transactions such as mergers or acquisitions or a possible dissolution of the Company; and statements of managements goals and objectives and other similar expressions. Such statements give our current expectations or forecasts of
future events; they do not relate strictly to historical or current facts. Words such as believe, may, will, should, could, would, predict, potential,
continue, plan, anticipate, estimate, expect, intend, objective, seek, strive and similar expressions, as well as statements in future tense,
identify forward-looking statements.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have
been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects in our Form 10-QSB and 8-K reports to the Securities and Exchange Commission.

ITEM 2. DESCRIPTION OF PROPERTY.

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

ITEM 3. LEGAL PROCEEDINGS.

Not applicable.

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

The Company held its 2005 Annual Meeting of
Shareholders on December 16, 2005. Thomas Hislop, Burton Freireich, Robert Blackwell and David Miller were elected directors of the Company at the 2005 Annual Meeting. Tabulation of the voting was as follows:.



|                 |  |           |  |                |  |                
|---------------- |  | --------- |  | -------------- |  | ---------------
|Directors:       |  | Votes For |  | Votes Withheld |  | Broker Nonvotes
|Thomas Hislop    |  | 1,694,627 |  | 21,530         |  |               
|Burton Freireich |  | 1,697,970 |  | 17,587         |  |               
|Robert Blackwell |  | 1,698,162 |  | 17,395         |  |               
|David Miller     |  | 1,693,964 |  | 21,593         |  |               



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PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

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, 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 15, 2006, there were approximately 52 holders of record of the Class A Common
Stock. In the Companys estimation, based upon information available to the Company, there are approximately 1,487 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 15, 2006 was $4.44 per share.

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 758,975 shares of Class A Common Stock. The Company did
not purchase any shares during the 2005 fiscal year. The Company intends to continue to periodically make open market purchases of its Class A Common Stock.

The following table sets forth the range of high and low sales prices per share for the Companys Class A Common Stock, as reported by the American Stock Exchange, and cash distributions paid by the Company
per share of Class A Common Stock for the periods indicated.



|                 |  |      |  |      |  |                                                                          
|---------------- |  | ---- |  | ---- |  | -------------------------------------------------------------------------
|CALENDAR QUARTER |  | HIGH |  | LOW  |  | DIVIDENDS/DISTRIBUTIONS DECLARED PER SHARE OF CLASS A COMMON STOCK (1)(2)
|2004             |  |      |  |      |  |                                                                          
|First Quarter    |  | 5.10 |  | 4.25 |  | 0.10                                                                     
|Second Quarter   |  | 4.96 |  | 4.50 |  | 0.10                                                                     
|Third Quarter    |  | 5.75 |  | 4.55 |  | 0.10                                                                     
|Fourth Quarter   |  | 9.05 |  | 5.03 |  | 1.10                                                                     
|2005             |  |      |  |      |  |                                                                          
|First Quarter    |  | 5.65 |  | 4.10 |  | 0.10                                                                     
|Second Quarter   |  | 7.62 |  | 4.15 |  | 0.10                                                                     
|Third Quarter    |  | 6.04 |  | 4.62 |  | 0.10                                                                     
|Fourth Quarter   |  | 5.00 |  | 4.23 |  | 0.10                                                                     

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|(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 2005, the Company declared and paid four cash distributions. The first distribution
was for $.10 per share and was paid on April 15, 2005 to shareholders of record on April 1, 2005. The second distribution was for $.10 per share and was paid on July 15, 2005 to shareholders of record on July 1, 2005. The third
distribution was for $.10 per share and was paid on October 14, 2005 to shareholders of record on September 30, 2005. The fourth distribution was for $.10 per share and was paid on January 17, 2006 to shareholders of record on
January 3, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

You should read the following
discussion together with the financial statements and the related notes included elsewhere in this Report on Form 10-KSB. This discussion contains forward-looking statements that are based on managements current expectations, estimates and
projections about the Companys business and operations. The Companys actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including
those discussed in this Report on Form 10-KSB.

Results of Operations

Year Ended December 31, 2005 vs. 2004

The Company had net income of approximately $39,316 or $0.02 per share of Class A Common Stock for the year ended December 31, 2005, compared to net income of approximately $1,938,289 or $1.05 per share of Class A Common
Stock for the year ended December 31, 2004. The decrease in net income for the year ended December 31, 2005 was primarily attributable to a gain on sale of property of $1,081,262 and income from the sale of an investment in partnership of
$817,641 in the prior year.

The Companys expenses increased in the aggregate to approximately $220,000 in 2005, as compared to
approximately $167,000 in 2004. This increase was the result of an increase of approximately $47,000 in professional services and an increase in general and administration expenses of approximately $17,000. The increases in professional services and
general and administration expenses can be attributed to expenses associated with compliance with the Sarbanes-Oxley Act of 2002 and professional fees incurred in connection with the development and evaluation of strategic alternatives available to
the Company. These increases were partially offset by a $7,000 decrease in advisory fees.

Net cash provided by operating activities in
2005 totaled approximately $85,600 as contrasted to approximately $2,400 in 2004. Net cash provided by investing activities in 2005 and 2004 were approximately $2,356,464 and $1,685,000, respectively. Net cash used for financing activities in 2005
and 2004 were approximately $2,591,000 and $1,481,000, respectively.

Year Ended December 31, 2004 vs. 2003.

The Company had net income of approximately $1,938,289 or $1.05 per share of Class A Common Stock, for the year ended December 31, 2004,
compared to net income of approximately $1,044,246 or $.56 per share of Class A Common Stock, for the year ended December 31, 2003. The increase in net income for the year ended in December 31, 2004 was primarily attributable to gains
on sale of land and gains on the sale of investments in partnership and was offset by a modest increase of approximately $6,000 in expenses. Interest income on mortgages increased by approximately $110,000, and income on trading securities increased
by approximately $32,000. These increases are attributable to a new mortgage received by the Company on its sale of the property associated with Loan No. 6 and additional funds available to invest in trading securities as a result of the
referenced sale.

The Companys expenses increased in the aggregate to approximately $167,000 in 2004, compared to approximately
$161,000 in 2003. This increase was the result of an increase of approximately $8,000 in professional services, an increase in general and administration expenses of approximately $12,000, and an increase in Directors fees of approximately
$14,000. In 2003, the Company recorded a nonrecurring bad debt expense of $25,285. The increases in professional services, general and administration, and Directors fees can be attributed to expenses associated with compliance to the
Sarbanes-Oxley Act of 2002.

Net cash provided by operating activities in 2004 totaled approximately $2,400 as contrasted to cash used in
operating activities in 2003 of approximately $1,146,000. Net cash provided by investing activities in 2004 and 2003 were approximately $1,685,000 and $2,243,000 respectively. Net cash used for financing activities in 2004 and 2003 were
approximately $1,480,000 and $1,203,000 respectively.



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Outlook

Potential Dissolution. As disclosed in the Companys prospectus used in connection with its 1988 initial public offering and in its subsequent annual reports on Form 10-KSB, the Companys intent at the time of the public
offering was to dissolve within approximately eight years after the date of such offering.

For the past several years, we have been
liquidating our loan and land holdings and returning capital to our shareholders through regular and special dividends. In the second quarter ended June 30, 2004, we sold our remaining holdings (with the exception of a small .01 acre parcel) of
approximately 280 acres related to Loan No. 6.

In January 2005, we engaged Peacock, Hislop, Staley & Given, Inc., a
financial advisor (PHS&G) to assist in developing and evaluating strategic alternatives available to the Company to enhance shareholder value. Alternatives that were being considered included a change of business plan for the
Company, a merger or sale of the Company, a combination of these, or the decision to take no action other than the completion of the liquidation of the Company. We issued a press release on January 24, 2005 announcing our engagement of
PHS&G and the purpose of the engagement. Our Board of Directors believed that PHS&Gs historic relationship with, and long knowledge of, the Company put it in a unique position to assist in determining the best course of action for the
Company to take.

Our engagement of PHS&G entailed an effort by PHS&G to locate a possible merger, partner or acquirer for the
Company that would result in enhanced shareholder value. Our agreement with PHS&G calls for the Company to pay PHS&G a fee of 4% of the transaction value (but in no event more than $250,000) only upon the successful completion of its
efforts.

In connection with PHS&Gs receipt of certain offers from interested parties relating to a potential transaction with
the Company, our Board met in March 2005 for the purpose of forming a special committee composed of qualified independent directors (the Special Committee). The Special Committee was tasked with investigating and negotiating a potential
business disposition, liquidation or other strategic transaction regarding the Company. We issued a press release on March 28, 2005 announcing that we would postpone the date of our 2005 annual meeting of shareholders to allow management and
the Board additional time to consider strategic alternatives available to the Company. In connection with the postponement, our Board amended the Companys Bylaws to give the Board discretionary authority to determine the date and time of our
annual meeting of shareholders and to allow the board to postpone any previously scheduled annual meeting of shareholders.

The Special
Committee developed a set of criteria for any proposed strategic transaction to meet in order to be considered for a positive recommendation to the Companys shareholders. The criteria were as follows:



| |  |  | an acknowledgment that the cash held by the Company immediately prior to closing any proposed recapitalization and management change will be paid out to current Company shareholders
in the form of a dividend;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an understanding that the proposed new management or advisor will purchase for cash or with acceptable assets new Company shares at: (i) a premium to the then book value per
share, as determined in accordance with generally accepted accounting principles and not reflecting a discounted value of the note receivable held by the Company; (ii) in an amount such that the total premium to book value is at least $500,000;
and (iii) the total proceeds not be less than $1 million;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the proposed new management or advisor will have demonstrated experience in the real estate or REIT industry in general and/or experience managing the asset class described in the
proposed business plan;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the proposed new management or advisor will be able to demonstrate to the satisfaction of the Special Committee the capability to provide or raise the capital necessary to finance
the proposed business plan; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any consideration paid directly to Company shareholders to acquire any of their shares be paid in cash.
| | - |  | -------------------------------------------------------------------------------------------------------

PHS&G contacted over 50 possible candidates and ultimately recommended that discussions continue with three potential acquirers. Two of these
candidates withdrew when they were apprised of the criteria the Special Committee required. The final candidate entered into a meaningful discussion to formulate a final letter of intent. Ultimately, discussions were terminated when it became
apparent that the candidate could not fund the acquisition in a manner acceptable to the Special Committee.



9



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##### Table of Contents

To date, our Board of Directors has not received a credible proposal relating to a potential transaction
and we have paid no fees to PHS&G.

In light of the Special Committees findings, it is the Boards intention to work toward
the ultimate dissolution of the Company and liquidation of its assets. Nevertheless, our Board of Directors retains the discretion to indefinitely continue the operations of the Company if it determines that such continuation is in the best interest
of the Company and its shareholders.

While our Board intends to work toward liquidation, we have secured an agreement with PHS&G to
continue to review any and all proposals regarding an acquisition of the Company by a third party or any other strategic transaction that could enhance shareholder value. Under our agreement with PHS&G, we will pay no fees to PHS&G unless
and until an offer is accepted and the deal has closed.

Liquidity and Capital Resources

The Company believes that the funds generated from mortgage interest, trading securities and the sale of its remaining property 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.

As disclosed above, the Companys Board of Directors, acting in
consultation with the Special Committee of the Board of Directors intends to work toward the ultimate dissolution of the Company and liquidation of its assets. To date, the Board has not made a decision regarding the dissolution of the Company and
will continue to review with its financial advisor any and all proposals regarding a possible acquisition at the Company or other strategic transaction that could enhance shareholder value.

Critical Accounting Estimates

The Company estimates
the carrying value of its mortgages receivable, land held for sale and certain other investments. The Company has determined that the carrying value of the mortgage interest of approximately $5,229,690 received in 2004 is not impaired. There is no
impairment allowance on the remaining land held for sale.

Dividends

During the 2005 fiscal year, the Company declared and paid four cash distributions. The first distribution was for $.10 per share and was paid on April 15, 2005 to shareholders of record on April 1, 2005.
The second distribution was for $.10 per share and was paid on July 15, 2005 to shareholders of record on July 1, 2005. The third distribution was for $.10 per share and was paid on October 14, 2005 to shareholders of record on
September 30, 2005. The fourth distribution was for $.10 per share and was paid on January 17, 2006 to shareholders of record on January 3, 2006.

In 2004, the Company declared and paid four cash distributions. The first distribution was for $.10 per share and was paid on April 15, 2004 to shareholders of record on April 1, 2004. The second
distribution was for $.10 per share and was paid on July 15, 2004 to shareholders of record on July 1, 2004. The third distribution was for $.10 per share and was paid on October 15, 2004 to shareholders of record on October 1,
2004. The fourth distribution was for $1.10 per share and was paid on January 17, 2005 to shareholders of record on January 3, 2005.

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.

ITEM 7. FINANCIAL STATEMENTS.

INDEX



|                                                                                    |  |     
|----------------------------------------------------------------------------------- |  | ----
|                                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm                             |  | 11  
|                                                                                    | 
|Financial Statements                                                                |  |     
|                                                                                    | 
|Balance Sheet at December 31, 2005                                                  |  | 12  
|                                                                                    | 
|Statements of Operations  For the Years Ended December 31, 2005 and 2004           |  | 13  
|                                                                                    | 
|Statements of Stockholders Equity  For the Years Ended December 31, 2005 and 2004 |  | 14  
|                                                                                    | 
|Statements of Cash Flows  For the Years Ended December 31, 2005 and 2004           |  | 15  
|                                                                                    | 
|Notes to Financial Statements                                                       |  | 16  



10



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of
Directors of

Arizona Land Income Corporation:

We have audited the accompanying balance sheet of Arizona Land Income Corporation as of December 31, 2005 and the related statements of operations, stockholders equity and cash flows for each of the two years in the period then
ended. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 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, 2005, and the results of its operations and cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States.



|                                    
|------------------------------------
|/s/ EPSTEIN, WEBER & CONOVER, P.L.C.
|Scottsdale, Arizona                 
|March 14, 2006                      



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##### Table of Contents

ARIZONA LAND INCOME CORPORATION

BALANCE SHEET

DECEMBER 31, 2005



|                                                                                                               |  |   |             |  
|-------------------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|ASSETS:                                                                                                        |  |   |             |  
|Cash and cash equivalents                                                                                      |  | $ | 71,116      |  
|                                                                                                               |  |   |             |  
|Investments                                                                                                    |  |   |             |  
|Trading securities                                                                                             |  |   | 1,330,660   |  
|Accrued interest receivable                                                                                    |  |   | 42,542      |  
|Mortgage note receivable, net of deferred gain on real estate sale                                             |  |   | 1,661,989   |  
|Land held for sale                                                                                             |  |   | 55,890      |  
|                                                                                                               |  |   |             |  
|Total investments                                                                                              |  |   | 3,091,081   |  
|                                                                                                               |  |   |             |  
|TOTAL ASSETS                                                                                                   |  | $ | 3,162,197   |  
|                                                                                                               |  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                          |  |   |             |  
|Accounts payable and other liabilities                                                                         |  | $ | 20,228      |  
|Dividends payable                                                                                              |  |   | 185,103     |  
|                                                                                                               |  |   |             |  
|Total liabilities                                                                                              |  |   | 205,331     |  
|                                                                                                               |  |   |             |  
|STOCKHOLDERS EQUITY:                                                                                          |  |   |             |  
|Class A common stock, $.10 stated value, 10,000,000 shares authorized, 1,851,025 shares issued and outstanding |  |   | 185,103     |  
|Class B common stock, $.10 stated value, 10,000 shares authorized, 100 shares issued and outstanding           |  |   | 10          |  
|Additional paid-in capital                                                                                     |  |   | 21,670,997  |  
|Distributions in excess of earnings                                                                            |  |   | (18,899,244 | )
|                                                                                                               |  |   |             |  
|Total stockholders equity                                                                                     |  |   | 2,956,866   |  
|                                                                                                               |  |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  | $ | 3,162,197   |  
|                                                                                                               |  |   |             |  

The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

ARIZONA LAND INCOME CORPORATION

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004



|                                                                |  |      |           |      |   |          
|--------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                |  | 2005 |           | 2004
|INCOME:                                                         |  |      |           |      |   |          
|Interest income on mortgages                                    |  | $    | 325,268   |      | $ | 149,691  
|Income on trading securities                                    |  |      | 60,152    |      |   | 56,613   
|Sale of investment in partnership                               |  |      |          |      |   | 817,641  
|                                                                |  |      |           |      |   |          
|Total income                                                    |  |      | 385,420   |      |   | 1,023,945
|                                                                |  |      |           |      |   |          
|EXPENSES:                                                       |  |      |           |      |   |          
|Property taxes                                                  |  |      | 8         |      |   | 2,509    
|Professional services                                           |  |      | 97,587    |      |   | 51,048   
|Advisory fees to related party                                  |  |      | 10,345    |      |   | 17,437   
|General and administration                                      |  |      | 77,045    |      |   | 60,324   
|Directors fees                                                 |  |      | 34,800    |      |   | 35,600   
|                                                                |  |      |           |      |   |          
|Total expenses                                                  |  |      | 219,785   |      |   | 166,918  
|                                                                |  |      |           |      |   |          
|INCOME BEFORE GAIN ON SALE OF PROPERTIES AND INCOME TAX EXPENSE |  |      | 165,635   |      |   | 857,027  
|                                                                |  |      |           |      |   |          
|GAIN ON SALE OF PROPERTIES, net                                 |  |      |          |      |   | 1,081,262
|                                                                |  |      |           |      |   |          
|INCOME BEFORE INCOME TAXES                                      |  |      | 165,635   |      |   | 1,938,289
|INCOME TAXES                                                    |  |      | 126,319   |      |   |         
|                                                                |  |      |           |      |   |          
|NET INCOME                                                      |  | $    | 39,316    |      | $ | 1,938,289
|                                                                |  |      |           |      |   |          
|NET INCOME PER SHARE:                                           |  | $    | 0.02      |      | $ | 1.05     
|                                                                |  |      |           |      |   |          
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                     |  |      | 1,851,125 |      |   | 1,851,125
|                                                                |  |      |           |      |   |          

The accompanying notes are an integral part of these financial statements.



13



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##### Table of Contents

ARIZONA LAND INCOME CORPORATION

STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004



|                           |  |              |  |                            |         |                                     |   |            |       |   |             |   |  |   |            |  
|-------------------------- |  | ------------ |  | -------------------------- | ------- | ----------------------------------- | - | ---------- | ----- | - | ----------- | - |  | - | ---------- | -
|                           |  | Common Stock |  | Additional Paid-in Capital |         | Distributions in Excess of Earnings |   |            | Total |  
|                           |  | Shares       |  | Amount                     |         |                                     |  
|BALANCE, December 31, 2003 |  | 1,851,125    |  | $                          | 185,113 |                                     | $ | 21,670,997 |       | $ | (17,544,989 | ) |  | $ | 4,311,121  |  
|Dividends declared         |  |             |  |                            |        |                                     |   |           |       |   | (2,591,448  | ) |  |   | (2,591,448 | )
|Net income                 |  |             |  |                            |        |                                     |   |           |       |   | 1,938,289   |   |  |   | 1,938,289  |  
|                           |  |              |  |                            |         |                                     |   |            |       |   |             |   |  |   |            |  
|BALANCE, December 31, 2004 |  | 1,851,125    |  | $                          | 185,113 |                                     | $ | 21,670,997 |       | $ | (18,198,148 | ) |  | $ | 3,657,962  |  
|Dividends declared         |  |             |  |                            |        |                                     |   |           |       |   | (740,412    | ) |  |   | (740,412   | )
|Net income                 |  |             |  |                            |        |                                     |   |           |       |   | 39,316      |   |  |   | 39,316     |  
|                           |  |              |  |                            |         |                                     |   |            |       |   |             |   |  |   |            |  
|BALANCE, December 31, 2005 |  | 1,851,125    |  | $                          | 185,113 |                                     | $ | 21,670,997 |       | $ | (18,899,244 | ) |  | $ | 2,956,866  |  
|                           |  |              |  |                            |         |                                     |   |            |       |   |             |   |  |   |            |  

The accompanying notes are an integral part of these financial statements.



14



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##### Table of Contents

ARIZONA LAND INCOME CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004



|                                                                                         |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                         |  | 2005 |            |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |      |            |   |      |   |            |  
|Net income                                                                               |  | $    | 39,316     |   |      | $ | 1,938,289  |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |      |            |   |      |   |            |  
|Equity in net (income) loss of investment in partnership                                 |  |      |           |   |      |   | (817,641   | )
|Gain on sale of land                                                                     |  |      |           |   |      |   | (1,081,262 | )
|Changes in assets and liabilities:                                                       |  |      |            |   |      |   |            |  
|Trading securities                                                                       |  |      | (9,473     | ) |      |   | 29,593     |  
|Accrued interest receivable                                                              |  |      | 50,549     |   |      |   | (69,074    | )
|Accounts payable and other liabilities                                                   |  |      | 5,223      |   |      |   | 2,525      |  
|                                                                                         |  |      |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                      |  |      | 85,615     |   |      |   | 2,430      |  
|                                                                                         |  |      |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |      |            |   |      |   |            |  
|Purchase of trading securities                                                           |  |      | (3,524,296 | ) |      |   | (6,881,175 | )
|Proceeds from sale of trading securities                                                 |  |      | 5,880,760  |   |      |   | 5,800,896  |  
|Proceeds from sale of land                                                               |  |      |           |   |      |   | 1,595,800  |  
|Proceeds from sale of partnership investment                                             |  |      |           |   |      |   | 1,169,126  |  
|                                                                                         |  |      |            |   |      |   |            |  
|Net cash provided by investing activities                                                |  |      | 2,356,464  |   |      |   | 1,684,647  |  
|                                                                                         |  |      |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |      |            |   |      |   |            |  
|Payment of dividends                                                                     |  |      | (2,591,447 | ) |      |   | (1,480,804 | )
|                                                                                         |  |      |            |   |      |   |            |  
|Net cash used for financing activities                                                   |  |      | (2,591,447 | ) |      |   | (1,480,804 | )
|                                                                                         |  |      |            |   |      |   |            |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |      | (149,368   | ) |      |   | 206,273    |  
|CASH AND CASH EQUIVALENTS, beginning of year                                             |  |      | 220,484    |   |      |   | 14,211     |  
|                                                                                         |  |      |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS, end of year                                                   |  | $    | 71,116     |   |      | $ | 220,484    |  
|                                                                                         |  |      |            |   |      |   |            |  
|SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                 |  |      |            |   |      |   |            |  
|Dividends declared in excess of dividends paid                                           |  | $    |           |   |      | $ | 1,110,644  |  
|                                                                                         |  |      |            |   |      |   |            |  
|Note receivable taken in sale of land                                                    |  | $    |           |   |      | $ | 5,229,690  |  
|                                                                                         |  |      |            |   |      |   |            |  
|INCOME TAXES PAID                                                                        |  | $    | 126,319    |   |      | $ |           |  
|                                                                                         |  |      |            |   |      |   |            |  

The accompanying notes are an integral part of these financial statements.



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ARIZONA LAND INCOME CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004



|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 primarily in the Phoenix, Arizona 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 properties and finance future sales with a cash down payment and terms.

In January
2005, we engaged Peacock, Hislop, Staley & Given, Inc., a financial advisor (PHS&G) to assist in developing and evaluating strategic alternatives available to the Company to enhance shareholder value. Alternatives that were being
considered included a change of business plan for the Company, a merger or sale of the Company, a combination of these, or the decision to take no action other than the completion of the liquidation of the Company. Our engagement of PHS&G has
entailed an effort by PHS&G to locate a possible merger, partner or acquirer for the Company that would result in enhanced shareholder value. Our agreement with PHS&G calls for the Company to pay PHS&G a fee of 4% of the transaction
value (but in no event more than $250,000) only upon the successful completion of its efforts. To date, our Board of Directors has not received a credible proposal relating to a potential transaction and we have paid no fees to PHS&G.



|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.

Trading
Securities:U.S. Treasury Notes and debt securities of other governmental agencies with original maturities of 120 days or more are classified as trading securities upon acquisition and recorded at fair value. Gains and losses are included in
income on trading securities in the accompanying statements of operations. Substantially all income from trading securities for the years ended December 31, 2005 and 2004 resulted from interest earned on debt securities. These securities are
presented at the amortized cost which approximates market. Approximately $807,000 of these securities mature in January 2006, $330,000 in November 2006 and $200,000 in July 2007.

Mortgage Note Receivable: Mortgage note receivable is presented at its unpaid principal balance 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 note receivable is stated at an amount not in excess of net realizable value.

Investment in Partnership: The Company had owned a 19.46% limited partnership interest in Pinnacle Peak Office/Resort Investors. The Company
accounted for this investment under the equity method. The Company sold its interest in the partnership in the year ended December 31, 2004.

Revenue Recognition: Revenue from land sales is recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate, which requires that there is a valid sales
contract, an adequate down payment, a reasonable likelihood that any related receivable will be collected and that all conditions precedent to the closing have been performed.

Interest income from mortgage notes receivable is recognized using the interest method. Accrual of interest income is suspended when a loan is
contractually delinquent for ninety days or more. The accrual is resumed when the loan becomes current, and past-due interest income is recognized at that time. In addition, a detailed review of commercial loans will cause earlier suspension of
interest accrual if collection is deemed doubtful. The Company has no material mortgage notes receivable in default or impaired at December 31, 2005.



16



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##### Table of Contents

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 certain qualifying distributions made to shareholders and reduce or eliminate any potential income taxes. This
distribution deduction must be at least 90% of the REITs taxable income. The Company has met the distribution requirement for all years presented.

In the year ended December 31, 2005, the Company made distributions deemed to be a return of capital to the Companys shareholders. In doing so, the Company was able to utilize net operating loss carryforwards
for federal income tax purposes. However, due to expirations of state income tax net operating loss carryforwards, there were not sufficient carryforwards to offset income taxes for state purposes, resulting in state income taxes of $126,319 in the
year ended December 31, 2005.

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. As a result of these differences, taxable income before deductions for dividends paid
totaled approximately $575,000 and $1,876,000 in the years ended December 31, 2005 and 2004, respectively. The most significant book/tax difference in the year ended December 31, 2004 is the installment method accounting for the land sale
for tax purposes. Net operating losses for federal income tax purposes available to offset future taxable income totaled approximately $422,000 at December 31, 2005 and 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 outstanding at December 31, 2005 and 2004.

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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impairment of Long-lived Assets: The Company assesses long-lived assets for impairment in accordance with the provisions of SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that the Company assess the value of a long-lived asset whenever there is an indication that its carrying amount may not be recoverable. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the net book value of
the asset and its estimated fair value. For purposes of these tests, long-lived assets must be grouped with other assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. No
long-lived assets were impaired during the years ended December 31, 2005 and 2004.

Recently Issued Accounting Pronouncements:



17



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##### Table of Contents

In December 2004, the FASB issued a revised Statement 123 (SFAS 123R), Accounting for Stock-Based
Compensation requiring public entities to measure the cost of employee services received in exchange for an award of equity instruments based on grant date fair value. The cost will be recognized over the period during which an employee is
required to provide service in exchange for the award  usually the vesting period. The effective date for SFAS 123R is as of the first interim period that begins after June 15, 2005. The Company is evaluating the impact of this new
pronouncement and does not expect the effect of implementation will have a significant impact on the Companys financial statements.

In December 2004, the FASB issued Staff Position No. FAS 109-1 (FAS 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004. FSP 109-1 clarifies SFAS No. 109s guidance that applies to the new tax deduction for qualified domestic production activities. FAS 109-1 was adopted at the beginning of 2005. This standard did not
have a material impact on the Companys consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3, which replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle, and also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company
does not currently believe that the adoption of SFAS No. 154 will have a material impact on its consolidated financial statements.

In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assetsan amendment of APB Opinion No. 29. APB No. 29 requires a nonmonetary exchange of assets to be accounted for at fair value, recognizing any
gain or loss, if the exchange meets a commercial substance criterion and fair value is determinable. The commercial substance criterion is assessed by comparing the entitys expected cash flows immediately before and after the exchange. SFAS
No. 153 eliminates the similar productive assets exception, which accounts for the exchange of assets at book value with no recognition of gain or loss. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company does not currently believe that the adoption of SFAS No. 153 will have a material impact on its consolidated financial statements.

Reclassifications: Certain reclassifications have been made to the 2004 financial statements to conform with the 2005 presentation.



|3. | CONCENTRATION OF CREDIT RISK
|-- | ----------------------------

The Companys financial
instruments that are exposed to concentrations of credit risk consist primarily of treasury securities and its mortgage note receivable. The Companys treasury securities are placed with a major bank. The Companys mortgage note receivable
resulted from the sale of property. The mortgage note receivable is collateralized by the underlying real property. The Companys investment policy limits its overall exposure to concentrations of credit risk.



|4. | MORTGAGE NOTE RECEIVABLE
|-- | ------------------------

The mortgage note receivable
which totals $5,229,000 at December 31, 2005 was received as partial consideration for the Companys sale of the property associated with Loan No. 6. The Company sold its remaining holdings of approximately 280 acres in Maricopa
County, Arizona on May 10, 2004. The transaction was effected through cash and a note receivable due from the buyer. The Companys proportionate share of the net purchase price was approximately $6,824,000. The carrying value of the
property was approximately $2,176,000, resulting in a gain of $4,648,000. The Company received cash of $1,588,000 and a note of $5,229,000. The terms of the note are for interest-only monthly installments commencing in June 2004 through May 2009
when the full principal balance becomes due and payable. The face value of the note is $6,300,000 and bears interest at the floating prime lending rate of 7% at December 31, 2005. The Company has recorded its proportionate share of the note as
a receivable at December 31, 2005. The mortgage receivable is collateralized by the underlying property. Because the mortgage note receivable calls for interest only payments, those scheduled payments do not meet the level annual payment that
would be needed to pay the principal and interest on the unpaid balance over 20 years using a fair interest rate. Therefore, a portion of the gain has been deferred using the installment method of accounting. Of the $4,648,000 gain, $3,567,000 has
been deferred and $1,081,000 was recognized in the year ended December 31, 2004. No further gain will be recognized until principal balances of the note are paid, which are not scheduled until the maturity date of May 2009. The deferred gain is
recorded in the accompanying balance sheet at December 31, 2005 as a contra balance against the mortgage note receivable.

In
connection with the sale of the property, the broker agreed to defer payment of 50% of the commission due under the brokers agreement. There is a note payable to the broker with a face value of $252,000, the Companys proportionate share
of which is $218,000 at December 31, 2005. The promissory note payable has terms identical to that of the mortgage note receivable  interest only at the prime rate and due in full in May 2009. Payments on the note payable are only due
from proceeds of the payments from the mortgage note receivable. As a result, the balance of the promissory note payable is netted against the gross balance of the note receivable.



|5. | SALE OF INVESTMENT IN PARTNERSHIP
|-- | ---------------------------------

In October 2004, the
Company sold its 19.46% limited partnership interest in Pinnacle Peak Office/Resort Investors. The Companys proportionate share of the sale proceeds was $1,169,000. The carrying value of the investment was $351,000 resulting in a gain on the
sale of $818,000, which is included in equity in net income from and sale of investment in partnership in the accompanying statement of operations for the year ended December 31, 2004.



|6. | RELATED PARTY TRANSACTIONS
|-- | --------------------------

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

ALI Advisor Inc.  The Company pays a
quarterly advisory fee of 30% of available cash in any quarter in which the cumulative return to investors is in excess of 12.7%. No such fees were paid during the years ended December 31, 2005 and 2004 as the cumulative return requirement was
not met. The Company also pays a quarterly servicing fee for



18



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##### Table of Contents

servicing loans of 1/16 of 1% of total assets, as defined. In addition, certain other overhead expenses
may be paid. Such servicing fees and other overhead costs totaled $10,345 and $17,437 in the years ended December 31, 2005 and 2004, respectively.

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. No such fees were paid in 2005
and 2004 as no new loans were originated.

Peacock, Hislop, Staley & Given, Inc.  The Company utilizes PHS&G on certain
investment transactions involving excess cash. The fees paid for these services have historically been immaterial.

Directors fees
totaling $34,800 and $35,600 for the years ended December 31, 2005 and 2004, respectively were paid to independent directors for board service.



|7. | DIVIDENDS
|-- | ---------

Class A dividends for years ended
December 31, 2005 and 2004 are as follows:



|                  |  |           |      |        |   |          
|----------------- |  | --------- | ---- | ------ | - | ---------
|Date Declared     |  | Per Share |      | Amount
|March 22, 2005    |  | $         | 0.10 |        | $ | 185,103  
|June 2, 2005      |  |           | 0.10 |        |   | 185,103  
|August 22, 2005   |  |           | 0.10 |        |   | 185,103  
|November 15, 2005 |  |           | 0.10 |        |   | 185,103  
|                  |  |           |      |        |   |          
|Total 2005        |  | $         | .40  |        | $ | 740,412  
|                  |  |           |      |        |   |          
|March 23, 2004    |  | $         | 0.10 |        | $ | 185,103  
|May 18, 2004      |  |           | 0.10 |        |   | 185,103  
|September 9, 2004 |  |           | 0.10 |        |   | 185,103  
|December 7, 2004  |  |           | 1.10 |        |   | 2,036,139
|                  |  |           |      |        |   |          
|Total 2004        |  | $         | 1.40 |        | $ | 2,591,448
|                  |  |           |      |        |   |          

Approximately 2% and 4% of dividends declared in the years ended December 31, 2005 and 2004,
respectively, represented distributions of ordinary taxable income. The remainder represented a return of capital or capital gain income.



|8. | LAND HELD FOR SALE
|-- | ------------------

Land held for sale at
December 31, 2005 consisted of the following:



|            |  |                                                                             |  |                         |   |  |                |       
|----------- |  | --------------------------------------------------------------------------- |  | ----------------------- | - |  | -------------- | ------
|Loan Number |  | Property Description                                                        |  | Companys Participation |   |  | Carrying Value
|17          |  | .01 acres  Southwest corner of I-17 and Deer Valley Road, Phoenix, Arizona |  | 100                     | % |  | $              | 55,890
|            |  |                                                                             |  |                         |   |  |                |       

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 8A. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our
reports that we file with or submit to the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There were no changes in our
internal control over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 8B. OTHER INFORMATION.

None.



19



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##### Table of Contents

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Identification of Directors

The Companys Bylaws provide that a majority of the Board of Directors must not be affiliated, directly or indirectly, with ALI Advisor, Inc., the
Companys advisor (the Advisor), and must not perform any other services for the Company, except as a director of the Company (Unaffiliated Directors). Certain information regarding each of the Companys Directors
is set forth below.

Thomas R. Hislop, age 57, has served as Chairman of the Board (and, in that capacity, as Chief Executive
Officer) of the Company since September 22, 1988, and as Vice President, Chief Financial Officer and Treasurer of the Company since its inception. Mr. Hislop is Chief Executive Officer and a director of Peacock, Hislop, Staley &
Given, Inc. (PHS&G), where he has been employed since that companys inception in 1989. Prior to that date, Mr. Hislop was a director of Young, Smith & Peacock, Inc. (YSP), where he was employed from
1967 to 1989.

Robert L. Blackwell, age 83, has served as an Unaffiliated Director of the Company since May 12, 1992.
Mr. Blackwell has extensive experience in managing assets for various trusts, and is currently self-employed as a manager of various trust portfolios. He has been involved with real estate in Arizona for more than twenty-five years.
Mr. Blackwell is a native of Kansas. He is a graduate of the University of Kansas and has resided in Arizona since 1957.

Burton P.
Freireich, age 80, has served as an Unaffiliated Director of the Company since September 9, 1991. Mr. Freireich is currently retired. Prior to retirement, Mr. Freireich was an owner of News-Suns Newspaper from 1960 to 1984.
Mr. Freireich is a graduate of the University of Illinois and has resided in Arizona since 1950.

David W. Miller, age 57, has
served as an Unaffiliated Director of the Company since March 2004. Mr. Miller served as Secretary of the Company from September 22, 1988 to March 2004. Mr. Miller has served as Managing Director, Chief Financial Officer and Secretary
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.

Identification of Executive Officers

Officers are elected annually by the Companys Board of Directors and serve at
the discretion of the Board. Information regarding the Companys current executive officers who are not also Directors of the Company is set forth below.

Barry W. Peacock, age 68, has served as the Companys President since its inception in 1988. Mr. Peacock is Chairman of the Board of PHS&G, a position he has held since the inception of that
company in June 1989. Mr. Peacock served as a senior executive with YSP Holdings from 1964 until June 1989, and most recently as Managing DirectorMunicipal Bonds.

Larry P. Staley, age 63, has served as the Companys Vice President since its inception in 1988 and as its Secretary since March 2004.
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 Holdings, where he was employed from 1973 until he joined PHS&G in
1989.

Involvement in Certain Legal Proceedings

To the best knowledge of the Company, none of the Companys current directors or executive officers has been involved during the past five years in any legal proceedings required to be disclosed pursuant to Item 401(d) of
Regulation S-B.

Audit Committee and Audit Committee Financial Expert

The Company maintains an Audit Committee of the Board of Directors, comprised of the Companys Unaffiliated Directors, Messrs. Freireich, Blackwell and Miller. The Companys Board of Directors has determined
that all of the Unaffiliated Directors are independent under the rules of The American Stock Exchange, as well as the special standards established by the Securities and Exchange Commission for members of audit committees. The
Companys Board has further determined that Mr. Miller is the independent director who meets the qualifications of an audit committee financial expert in accordance with the rules and regulations promulgated by the Securities
and Exchange Commission.



20



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##### Table of Contents

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys directors and executive officers, and persons who own
more than 10% of a registered class of the Companys equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the
Company. Such reports are filed on Form 3, Form 4, and Form 5 under the Exchange Act. Directors, executive officers and greater-than-10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting
persons that no Forms 3, 4, or 5 were required for those persons, the Company believes that all directors, executive officers, and greater-than-10% beneficial owners have complied with all Section 16(a) filing requirements applicable to such
persons or entities during the 2005 fiscal year.

Code of Conduct and Ethics

The Companys Board of Directors has adopted a Code of Business Conduct and Ethics applicable to all Company personnel. In addition, the
Companys Board has adopted a Supplemental Code of Ethics applicable to the Companys Chairman of the Board (who, in that capacity, acts as the Companys Chief Executive Officer) and the Companys senior financial officers. The
Company believes that each code substantially conforms with the code of ethics required by the rules and regulations of the Securities and Exchange Commission. The Company will provide a copy of its Code of Business Conduct and Ethics and/or its
Supplemental Code of Ethics upon request made by writing to the Company at its principal executive offices at 2999 North 44th Street, Suite 100, Phoenix, Arizona 85018.

ITEM 10. EXECUTIVE COMPENSATION.

Compensation of Officers and Directors

The Company has no salaried employees. In return for their services as Unaffiliated Directors of the Company, Messrs. Freireich, Blackwell and Miller
receive an annual fee of $10,000, a meeting fee of $400 for each meeting of the Board of Directors attended, and a fee of $100 for each meeting of the Board conducted by telephone. Mr. Hislop does not receive compensation for his services as a
Director of the Company. The Company reimburses all Directors for expenses incurred in connection with their duties as Directors of the Company.

Executive Compensation

The table below sets forth information concerning the annual and long-term compensation for services
in all capacities to the Company for the fiscal years ended December 31, 2005, 2004 and 2003, of those persons who were, at December 31, 2004 (i) the chief executive officer and (ii) the other four most highly compensated
executive officers of the Company:

Summary Compensation Table



|                                                                                              |  |              |  |                           |                
|--------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | ---------------
|Name and Principal Position                                                                   |  | Year         |  | All Other Compensation(1)
|Thomas R. Hislop Chairman of the Board, Vice President, Chief Financial Officer and Treasurer |  | 200520042003 |  | $$$                       | 3,4145,8124,402

---

|(1) | The Company has no salaried employees. See Compensation of Officers and Directors above. However, under an Advisory Agreement with the Advisor, the Company pays the
Advisor a servicing fee for servicing the Companys First Mortgage Loans. See Certain Relationships and Related Transactions set forth elsewhere in this Report on Form 10-KSB. Mr. Hislop is Treasurer, Vice President and a
director of the Advisor and functions as its Chief Executive Officer. Although Mr. Hislop received no salary from the Advisor in 2005, 2004 or 2003, 33% of the 2005 servicing fee, $10,345, 33% of the 2004 servicing fee, $17,437, and 33% of the
2003 servicing fee, $13,340, have been attributed to Mr. Hislop for disclosure purposes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Securities
Authorized for Issuance Under Equity Compensation Plans

None.



21



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##### Table of Contents

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of March 15, 2006, certain information concerning beneficial ownership of the Companys Class A Common
Stock by (i) each director, (ii) all of the Companys directors and executive officers as a group, and (iii) each person known to the Company to own beneficially more than 5% of the Companys Class A Common Stock:



|                                                            |  |                                              |  |                                |  
|----------------------------------------------------------- |  | -------------------------------------------- |  | ------------------------------ | -
|Name                                                        |  | Amount and Nature of Beneficial Ownership(1) |  | Percent of Class ACommon Stock |  
|Directors and Executive Officers:                           |  |                                              |  |                                |  
|Thomas R. Hislop (2)                                        |  | 7,700                                        |  | *                              |  
|Burton P. Freireich                                         |  | 125,000                                      |  | 6.8                            | %
|Robert L. Blackwell (3)                                     |  | 4,000                                        |  | *                              |  
|David W. Miller (4)                                         |  | 1,500                                        |  | *                              |  
|Barry W. Peacock (5)                                        |  | 35,600                                       |  | 1.9                            | %
|Larry P. Staley (6)                                         |  | 22,700                                       |  | 1.2                            | %
|All directors and executive officers as a group (6 persons) |  | 196,500                                      |  | 10.4                           | %
|                                                            |  |                                             
|5% Holders:                                                 |  |                                              |  |                                |  
|Phillip and Linda Barkdoll (7)                              |  | 189,296                                      |  | 10.2                           | %

---

Unless otherwise noted, the address of each person
named in the table is 2999 North 44th Street, Suite 100, Phoenix, Arizona 85018.

|* | Less than 1%.
|- | -------------

|(1) | The inclusion herein of any shares of common stock does not constitute an admission of beneficial ownership of such shares, but is included in accordance with rules of the
Securities and Exchange Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 1,500 shares held in retirement accounts; 400 shares held in custodian accounts; 4800 shares held in Mr. Hislops personal account; and 1,000 shares held in the
Carol Cain Trust of which Mr. Hislop is trustee.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 2,900 shares held in the Robert L. and Beverly Blackwell Family Trust, and 1,100 shares held in Mr. Blackwells Individual Retirement Account.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 500 shares held in a custodial account for Mr. Millers daughter for which account Mr. Miller serves as custodian.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 35,600 shares held in the Peacock, Hislop, Staley & Given, Inc. Profit Sharing Plan and Trust #1 for the benefit of Mr. Peacock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 2,400 shares held in the Peacock, Hislop, Staley & Given, Inc. Profit Sharing Plan and Trust #4 for the benefit of Mr. Staley; 15,268 shares held by
Mr. Staley and his wife; 100 shares held in the investment account of Mr. Staleys wife; and 4,932 shares held in the Staley Family Trust of which Mr. Staley is co-trustee.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes 175,000 shares held by the Barkdoll Family Trust, of which Mr. and Mrs. Barkdoll are the trustees and sole beneficiaries, and 14,296 shares held in
Mrs. Barkdolls personal IRA account. The address for Phillip and Linda Barkdoll is 12003 S. Montezuma Court, Phoenix, Arizona 85004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Advisory Agreement with ALI Advisor, Inc.

Mr. Hislop is Vice President, Treasurer and a director of the Advisor. Barry Peacock, the Companys President, is President,
Chief Executive Officer and a director of the Advisor. Larry Staley, the Companys Vice President, is Secretary and a director of the Advisor. Under the Companys Advisory Agreement with the Advisor, the Company pays the Advisor a
servicing fee for servicing the Companys first mortgage loans. Messrs. Hislop, Peacock and Staley collectively own all of the issued and outstanding stock of the Advisor. The servicing fee is payable quarterly and equals 1/16 of 1% 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 2005, the Company paid the Advisor a servicing fee of $10,345.

The Company has also agreed to pay the Advisor an advisory
fee for aiding the Company in developing investment policies and analyzing and recommending investments to the Company. The advisory fee is payable in any quarter at the end of which the shareholders cumulative return on capital investment as
of the end of such quarter exceeds 12.7%. Such advisory fee, when payable, 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%. To
date, the Company has not accrued or paid an advisory fee to the Advisor.



22



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##### Table of Contents

The Company has 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. To date, the Company has not reimbursed the Advisor for any
such expenses.

The Companys Advisory Agreement with the Advisor expired by its own terms on June 13, 1991. 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.

Retention of PHS&G

For the past several years, the Company has been liquidating its loan and land holdings and
returning capital to its shareholders through regular and special dividends. In January 2005, the Company engaged PHS&G to assist in developing and evaluating strategic alternatives available to the Company to enhance shareholder value.
Alternatives may include a change of business plan for the Company, a merger or sale of the Company, a combination of these, or the decision to take no action other than the completion of the liquidation of the Company. The engagement with PHS&G
entails an effort by PHS&G to locate a possible merger, partner or acquirer for the Company that will result in enhanced shareholder value. The Company will pay PHS&G a fee of four percent of the transaction value (but in no event more than
$250,000) only upon the successful completion of its efforts. To date, the Company has not paid a fee to PHS&G.

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 of this Form 10-KSB.



|                                                                                    |  |     
|----------------------------------------------------------------------------------- |  | ----
|                                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm                             |  | 11  
|Financial Statements                                                                |  |     
|Balance Sheet at December 31, 2005                                                  |  | 12  
|Statements of Operations  For the Years Ended December 31, 2005 and 2004           |  | 13  
|Statements of Stockholders Equity  For the Years Ended December 31, 2005 and 2004 |  | 14  
|Statements of Cash Flows  For the Years Ended December 31, 2005 and 2004           |  | 15  
|Notes to Financial Statements                                                       |  | 16  



|(a) | Exhibits
|--- | --------



|            |  |                                                                                                                                                                                                                                      
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                          
|3.1         |  | 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).)                                                                                          
|            | 
|3.2         |  | Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.2 of the Companys Annual Report on Form 10-KSB filed March 31, 2005.)                                                               
|            | 
|10.1        |  | June 13, 1988 Advisory and Servicing Agreement between ALI Advisor, Inc. and the Company. (Incorporated by reference to Exhibit 10.1 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                            
|            | 
|10.2        |  | Indemnification Agreement dated May 12, 1992 between the Company and Robert Blackwell. (Incorporated by reference to Exhibit 10.2 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                               
|            | 
|10.3        |  | Indemnification Agreement dated October 1, 1991 between the Company and Burton Freireich. (Incorporated by reference to Exhibit 10.3 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                            
|            | 
|14.1        |  | Arizona Land Income Corporation Code of Business Conduct and Ethics. (Incorporated by reference to Appendix B to the Companys Definitive Proxy Statement filed November 14,
2005.)                                                  
|            | 
|14.2        |  | Arizona Land Income Corporation Supplemental Code of Ethics for Chief Executive Officer and Senior Financial Officers. (Incorporated by reference to Appendix C to the Companys
Definitive Proxy Statement filed November 14, 2005.)
|            | 
|24.1        |  | Power of Attorney. (Included on signature page.)                                                                                                                                                                                     
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)                                           



23



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##### Table of Contents

|(b) | Reports on Form 8-K
|--- | -------------------

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table presents fees billed for
professional audit services rendered by Epstein, Weber & Conover, P.L.C., the Companys independent auditor, for the fiscal years ended December 31, 2004 and 2005.



|                   |  |      |        |      |   |       
|------------------ |  | ---- | ------ | ---- | - | ------
|CATEGORY           |  | 2005 |        | 2004
|Audit Fees         |  | $    | 18,310 |      | $ | 19,100
|Audit-Related Fees |  |      | 0      |      |   | 0     
|Tax Fees           |  |      | 9,315  |      |   | 6,000 
|All other fees     |  |      | 0      |      |   | 0     
|                   |  |      |        |      |   |       
|Total              |  | $    | 27,625 |      | $ | 25,100
|                   |  |      |        |      |   |       

The tax fees set forth in the above table, which were approved in advance by the Companys
Audit Committee, include tax compliance services provided in relation to U.S. federal, state and local taxes. The policy of the Companys Audit Committee is to approve expenditures for audit or non-audit services at the time such services are
proposed.



24



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March, 2006.



ARIZONA LAND INCOME CORPORATIONBy:

/s/ Thomas R. HislopThomas R. HislopChairman of the Board, Vice President, Chief Financial
Officer and Treasurer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Barry W. Peacock and Thomas R. Hislop, and any of them (with full power to each of them to act alone),
as his true and lawful attorneys-in-fact and agents, with full power 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 Annual Report on Form 10-KSB, 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 to 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 and/or any
of them, 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 Registrant and in the capacities and on the dates indicated.



|                                            |  |                                                                                                                                            |  |               
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                   |  | Title                                                                                                                                      |  | Date          
|                                            |  |                                                                                                                                           
|/s/ Barry W. Peacock Barry W.
Peacock       |  | President                                                                                                                                  |  | March 31, 2006
|                                            |  |                                                                                                                                           
|/s/ Thomas R. Hislop Thomas R.
Hislop       |  | Chairman of the Board, Vice President, Chief Financial
Officer and Treasurer (Principal Executive Officer and Principal Financial Officer) |  | March 31, 2006
|                                            |  |                                                                                                                                           
|/s/ Robert Blackwell Robert
Blackwell       |  | Unaffiliated Director                                                                                                                      |  | March 31, 2006
|                                            |  |                                                                                                                                           
|/s/ Burton P. Freireich Burton P.
Freireich |  | Unaffiliated Director                                                                                                                      |  | March 31, 2006
|                                            |  |                                                                                                                                           
|/s/ David W. Miller David W.
Miller         |  | Unaffiliated Director                                                                                                                      |  | March 31, 2006



25



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##### Table of Contents

Exhibit Index



|            |  |                                                                                                                                                                                                                                      
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                          
|3.1         |  | 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).)                                                                                          
|            | 
|3.2         |  | Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.2 of the Companys Annual Report on Form 10-KSB filed March 31, 2005).                                                               
|            | 
|10.1        |  | June 13, 1988 Advisory and Servicing Agreement between ALI Advisor, Inc. and the Company. (Incorporated by reference to Exhibit 10.1 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                            
|            | 
|10.2        |  | Indemnification Agreement dated May 12, 1992 between the Company and Robert Blackwell. (Incorporated by reference to Exhibit 10.2 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                               
|            | 
|10.3        |  | Indemnification Agreement dated October 1, 1991 between the Company and Burton Freireich. (Incorporated by reference to Exhibit 10.3 of the Companys Annual Report on Form 10-KSB filed
March 31, 2005.)                            
|            | 
|14.1        |  | Arizona Land Income Corporation Code of Business Conduct and Ethics. (Incorporated by reference to Appendix B to the Companys Definitive Proxy Statement filed November 14,
2005.)                                                  
|            | 
|14.2        |  | Arizona Land Income Corporation Supplemental Code of Ethics for Chief Executive Officer and Senior Financial Officers. (Incorporated by reference to Appendix C to the Companys
Definitive Proxy Statement filed November 14, 2005.)
|            | 
|24.1        |  | Power of Attorney. (Included on signature page.)                                                                                                                                                                                     
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)                                           



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