UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K/A
(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, 1999
                                                        OR
         (  )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                                          SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number: 333-11625

                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST


             (Exact name of registrant as specified in its charter)

            Delaware                                            94-3240473
--------------------------------                           -------------------
(State or other Jurisdiction of                              (I.R.S. Employer
  incorporation or organization)                          Identification Number)

         50 California Street
         Suite 2020
         San Francisco, California                                    94111
-----------------------------------------------------             --------------
      (Address of principal executive office)                       (zip code)

                                 (415) 288-9575
              (Registrant's telephone number, including area code)

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

Title of each class                   Name of each exchange on which registered
-------------------                   -----------------------------------------
Common Stock $0.01 par value                     American Stock Exchange


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                    Yes     X                 No       .
                                        --------                 ------

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (P. 229.405 of this chapter) is not contained herein, and will
not 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-K
or any amendment to this Form 10-K.

As of March 31, 2000, the aggregate market value of the  Registrant's  shares of
Common  Stock,  $.01 par value,  held by  nonaffiliates  of the  registrant  was
approximately  $4,454,200.  At that date 1,484,740 shares were outstanding.  The
shares are listed and publicly traded on the American Stock Exchange.

<PAGE>
                                TABLE OF CONTENTS


PART I...................................................................5

     ITEM 1.  BUSINESS...................................................5

              General....................................................5

         MORTGAGE INVESTMENT BUSINESS....................................5

              General....................................................5

              Mortgage Loan Portfolio....................................5

              Financing..................................................6

         MORTGAGE CONDUIT BUSINESS.......................................6

              General....................................................6

              Marketing and Production...................................7

              Underwriting...............................................8

              Whole Loan Sales...........................................9

         WAREHOUSE LENDING BUSINESS......................................9

         HEDGING........................................................10

         SERVICING......................................................10

              Servicing Portfolio.......................................11

              Geographical Distribution.................................11

              Interest..................................................11

              Maturity..................................................11

              Delinquencies.............................................12

         REGULATION.....................................................12

         COMPETITION....................................................13

         EMPLOYEES......................................................13

     ITEM 2.  PROPERTIES................................................13

                                        2

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     ITEM 3.  LEGAL PROCEEDINGS.........................................13

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.......13

     ITEM 5.  MARKET FOR REGISTRANT'S COMMON
         EQUITY AND RELATED STOCKHOLDER MATTERS.........................13

PART II.................................................................16

     ITEM 6.  SELECTED FINANCIAL DATA...................................16

     ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............17

         GENERAL........................................................17

              Predecessors..............................................17

              Organization..............................................17

              Operating Strategy........................................18

              Loan Origination and Loan Servicing.......................18

              Contingencies and Commitments.............................18

         RESULTS OF OPERATIONS..........................................19

         YEAR ENDED DECEMBER 31, 1999
              COMPARED TO YEAR ENDED DECEMBER 31, 1998..................19

         YEAR ENDED DECEMBER 31, 1998
              COMPARED TO YEAR ENDED DECEMBER 31, 1997..................19

         INFLATION .....................................................20

         LIQUIDITY AND CAPITAL RESOURCES................................20

         LIQUIDITY AND CAPITAL RESOURCES
              FOR THE YEAR ENDED DECEMBER 31, 1999......................20

         LIQUIDITY AND CAPITAL RESOURCES
              FOR THE YEAR ENDED DECEMBER 31, 1998......................20

     ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............21


     ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.............22


                                        3

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PART III................................................................23


     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT...........23

         DIRECTORS......................................................23

         EXECUTIVE OFFICERS.............................................24

     ITEM 11.  EXECUTIVE COMPENSATION...................................25

         COMPENSATION OF OFFICERS.......................................25

         COMPENSATION OF DIRECTORS......................................25

              Director Fees.............................................25

              Committee and Other Meeting Fees..........................26

              Reimbursements............................................26

     ITEM 12.  SECURITY OWNERSHIP OF
         CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................26

     ITEM 13.  CERTAIN RELATIONSHIPS
         AND RELATED TRANSACTIONS.......................................27

              Arrangements and Transactions with CAAI...................27

              Investment in Related Mortgage Banking Firms..............27

              Sale and Purchase of Loans................................28

              Other Business Activities.................................28

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

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS
         SCHEDULES, AND REPORTS ON FORM 8-K.............................29

              (a)(1)       Financial Statements.........................29

              (a)(3)       Exhibits.....................................29

         SIGNATURES.....................................................31

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                                     PART I
--------------------------------------------------------------------------------

ITEM 1.  BUSINESS

         General.  Unless  the context  otherwise requires, references herein to
the  "Company"  refer to Capital  Alliance  Income  Trust  Ltd.,  A Real  Estate
Investment  Trust  (the  "Trust"),  and  Capital  Alliance  Funding  Corporation
("CAFC"), collectively.

         Capital Alliance Income Trust Ltd., A Real Estate Investment Trust is a
specialty mortgage finance company which, together with its subsidiary, operates
a mortgage  banking concern with three divisions which are referred to herein as
(1) the Mortgage Investment Business, (2) the Mortgage Conduit Business, and (3)
the  Warehouse  Lending  Business.  The Trust  directly  conducts  its  Mortgage
Investment   Business,    which   invests   for   the   Trust's   portfolio   of
collateral-oriented,  high-yielding,  non-conforming  residential mortgage loans
and home equity loans and its Warehouse  Lending Business which provides secured
warehouse and repurchase  financing to CAFC and an affiliated  mortgage  banker.
The Mortgage  Conduit  Business,  which  originates and purchases as a wholesale
mortgage  banker,  non-conforming  mortgage  loans is conducted  through CAFC in
which the Trust  holds a 99%  economic  interest.  Both the Company and CAFC are
externally advised by Capital Alliance Advisors, Inc. ("CAAI").

         The Trust resulted from the  consolidation in April 1996 of two private
affiliated mortgage lending firms  ("Predecessors").  The Trust was incorporated
in Delaware in 1995.  The  Predecessors  to the Trust were formed and managed by
CAAI. On September 30, 1998 the Trust  concluded an initial  public  offering of
its  Common  Stock for  $11,877,92  (1,484,740  shares  at $8.00 per share  with
warrants to purchase 148,474 additional shares of Common Stock).

         References  to  financial  information  of the Trust for the year ended
1998 and 1999,  reflect the  financial  operations of the Trust and its Mortgage
Investment and Mortgage Warehouse  businesses and the Trust's equity interest in
the  Mortgage  Conduit  Business  conducted  by CAFC.  References  to  financial
information  of the  Trust  for the  year  ended  1996,  reflect  the  financial
operations of the Trust and its Predecessors.

         MORTGAGE INVESTMENT BUSINESS

         General. The Trust, through its Mortgage Investment Business,  acquires
mortgage loans which are principally  nonconforming  residential  mortgage loans
with a maximum 75% combined  loan-to-value ratio for long-term  investment.  The
Mortgage  Investment  Business  invests in both first and second mortgage loans.
Income is earned  principally from the net interest income received by The Trust
on mortgage  loans held in its  portfolio  and from fees  received in connection
with their  origination.  Such  acquisitions  are financed with a portion of the
Trust's  capital.  Loans,  other than  warehouse  lines of credit and repurchase
financing  obtained by CAFC,  are  restricted by the Trust's  Bylaws to four (4)
times the Trust's total shareholders' equity. (See "Mortgage Conduit Business.")

                  Mortgage  Loan  Portfolio.  The Trust (a)  through its Manager
originates  mortgage  loans,  through  its  Advisor's  executive  office  in San
Francisco  and its branch  offices in Laguna  Hills,  San Diego,  and Los Gatos,
California and through its network of mortgage brokers and  correspondents,  and
(b) invests a substantial  portion of its portfolio in non-conforming  first and
second mortgage  loans.  The Trust also purchases such loans from third parties,
including   CAFC,   for   long-term   investment.   Management   believes   that
non-conforming  mortgage  loans provide an attractive  net earnings  profile and
produce higher yields without  commensurately  higher credit risks when compared
with conforming mortgage loans. As a matter of investment policy, all loans held
for the Trust's portfolio have a loan-to-value, at the time of

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origination,  of 75% or less.  This is verified  by  independent  appraisal.  At
December 31, 1999 the Trust's loan portfolio totaled $10,807,644 with an average
loan size of $131,801 an average  weighted yield of 12.15%,  an average maturity
of  22.57  months  and a  combined  loan-to-value  ratio of  63.88%.  53% of the
portfolio  were first  deeds of trust and 47% were  second  deeds of trust.  The
highest  concentration of non conforming  mortgage loans originated or purchased
by the  Trust  relates  to  properties  located  in  California  because  of the
generally higher property values and mortgage loan balances prevalent there.

         Financing.  The Mortgage Investment Business is financed principally by
the Trust's total  shareholders'  equity.  The Trust's  recently  amended Bylaws
restrict  the  encumbrance  of the Trust's  assets to four (4) times the Trust's
total shareholders'  equity. The Trust's portfolio of mortgage loans at December
31, 1999 was partially encumbered by a $2,000,000 bank line of credit,  although
increased amounts of leverage are currently being  negotiated.  Such restriction
does not apply to CAFC which utilizes  warehouse lines of credit from commercial
lenders.

         The Trust does not currently plan to issue Mortgage-Backed  Securities,
such as Collateralized  Mortgage Obligations  ("CMOs") or mortgage  pass-through
certificates  representing  an  undivided  interest in pools of  mortgage  loans
formed  by the  Trust.  There is no  assurance  that the  Trust  will not  adopt
financing   strategies  in  the  future  which  will  include  the  issuance  of
mortgage-backed  securities as an alternative  for the financing of its Mortgage
Investment  Business.  Similarly,  the investment  policies of the Trust for its
Mortgage Investment Business and its Bylaws may be modified by the Trust's Board
of Directors.

         The Trust is negotiating  for  additional  lines of credit secured by a
portion  of the  Trust's  mortgage  loan  portfolio  and at the  rates  that are
consistent with its financing  objectives  described herein. The Trust,  through
CAFC, has obtained warehouse financing with a third-party  commercial lender, at
interest  rates that are  consistent  with its  financing  objectives  described
herein,  as needed by CAFC for a  specified  period  of time.  CAFC's  warehouse
financings  are  guaranteed  by the Trust.  The Trust also  extends a  warehouse
reverse  repurchase  facility  to CAFC which at  December  31,  1999  aggregated
$2,140,360.  A reverse repurchase  agreement,  although structured as a sale and
repurchase obligation,  acts as a financing vehicle under which CAFC effectively
pledges its mortgage loans as collateral to secure a short-term loan. Generally,
the  other  party  to the  agreement  makes  the  loan in an  amount  equal to a
percentage of the market value of the pledged collateral.

         MORTGAGE CONDUIT BUSINESS

         General.  CAFC was  organized  on April 15, 1997 and began its mortgage
origination and whole loan sales operations on a start-up basis in August, 1997.
The Mortgage  Conduit  Business  consists  primarily of the  origination and the
purchase and sale of mortgage  loans with a complete  spectrum of credit  grades
secured  by  first  liens  and  second  liens  on  single  (one-to-four)  family
residential  properties that are originated in accordance with its  underwriting
guidelines.  The Trust's Mortgage Conduit Business acts as a conduit between the
originators  of such  mortgage  loans and  permanent  investors  in such  loans.
Capital Alliance  Advisors,  Inc. contracts with CAFC for its management and for
its mortgage origination, loan processing and underwriting,  and secondary sales
services.  The Trust's  Manager  owns a 1% economic  interest and 100% of the of
voting control of CAFC.

         The  Management  believes  that  non-conforming  credit-rated  mortgage
loans, when properly  underwritten,  provide an attractive net earnings profile,
producing  higher  yields  without  disproportionately  higher credit risks when
compared  to mortgage  loans that  qualify  for  purchase by FNMA or FHLMC.  The
Trust's policy for its Mortgage Investment Business,  which limits the financing
or  leveraging of its mortgage  loan  portfolio,  does not apply to its Mortgage
Conduit  Business  since such mortgage loans are generally held in CAFC for less
than sixty days prior to their sale to permanent investors who securitize

                                        6
<PAGE>
such  loans in the  secondary  market  and their  acquisition  or  funding  will
generally  be  facilitated  through  a  warehouse  line  of  credit  or  reverse
repurchase agreement.

         Correspondents originate and close mortgage loans under CAFC's mortgage
loan programs on a loan-by-loan basis.  Correspondents  include mortgage bankers
and mortgage  brokers.  During the years ended December 31, 1998 and 1999,  CAFC
acquired mortgage loans from its correspondents  (primarily mortgage brokers) or
funded directly (through its Manager) $6,580,685 and $25,695,513 respectively.

         All non-conforming loans purchased or originated by CAFC which meet the
Trust's  underwriting  guidelines,  including  its  75%  Combined  Loan-to-Value
limitation, are made available for sale to the Trust at fair market value at the
date of sale and  subsequent  transfer to the Trust.  Loans not purchased by the
Trust for its Mortgage  Investment Business will be sold in the secondary market
through whole loan sales.

         The Mortgage Conduit  Business  acquires all of the servicing rights on
loans it  originates  or purchases  and such  servicing  rights will normally be
relinquished when loans are sold into the secondary market. The Mortgage Conduit
Business  generally  has no on-going  risk of loss after a whole loan sale other
than liability with respect to normal  warranties and  representations  given in
such sales and for fraud in the origination process.

         The  Trust's  Mortgage  Conduit  Business  does not  currently  plan to
directly   securitize  the  loans   originated  and  purchased  by  it  as  such
securitization  generally  requires a mortgage portfolio of at least $50 million
together with substantial  reserves to fund defaults in the portfolio.  There is
no assurance that in the future,  if the Mortgage  Conduit  Business had a large
enough  portfolio and sufficient  reserves it would not  securitize  such loans,
either  directly or indirectly,  (as a participant  with other mortgage  banking
firms in a multiple party securitization program).

         Marketing and Production.  CAFC's competitive  strategy in its Mortgage
Conduit  Business is, through its Mortgage Loan Origination  Services  Agreement
with CAAI,  to be a substantial  originator,  through a mortgage loan broker and
correspondent  network,  of the complete  spectrum of  credit-grade  residential
mortgage loans to be sold in the secondary  market  network.  This should enable
CAFC to shift the high fixed  costs of  interfacing  with the  homeowner  to the
correspondents  and brokers.  The  marketing  strategy for the Mortgage  Conduit
Business is designed to accomplish three objectives: (1) attract a diverse group
of loan  originators  and  loan  correspondents  throughout  California  and the
western  United  States,  (2)  establish  relationships  with such  brokers  and
correspondents  and,  (3)  originate  and/or  purchase  the  loans  on  both  an
individual and bulk basis and sell them into the secondary market or, where they
meet the Trust's  underwriting  standards,  to the Trust's  Mortgage  Investment
Business. To accomplish these objectives,  the Mortgage Conduit Business intends
to expand its reach,  geographically,  to develop  and  provide  responsive  and
consistent  underwriting  and  funding  services  to  the  mortgage  broker  and
correspondent networks which it plans to develop.

         CAFC  and the  Trust  emphasize  flexibility  in  their  mortgage  loan
products  to  attract  correspondents  and  establish  relationships.  CAFC also
maintains  relationships  with  numerous  end-investors  so that it may  develop
products that they may be interested in as market  conditions  change,  which in
turn may be offered through the correspondent  network.  As a consequence,  CAFC
and  the  Trust  have  acquired  increasing  volumes  of  non-conforming  loans.
Additionally,  in  response  to the needs of its  non-conforming  mortgage  loan
correspondents,  CAFC's marketing strategy offers efficient response time in the
origination  and  purchase  process,  and direct and  frequent  contact with its
correspondents.

         A  substantial  portion  of the  mortgage  loans  to be  originated  or
purchased  through the Mortgage  Conduit  Business are  non-conforming  mortgage
loans.  Such  non-conforming  loans may involve some greater risk as a result of
underwriting and product guidelines which will differ from those applied by

                                        7
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FNMA and FHLMC  primarily with respect to loan size,  borrower  income or credit
history,  required documentation,  interest rates, and borrower occupancy of the
mortgaged  property.  The Mortgage Conduit Business generally will not originate
or acquire  mortgage  loans with  principal  balances  above $450,000 since such
loans  generally  entail  greater credit risks than other  non-conforming  loans
although it is not precluded from doing so.

         In general, non-conforming residential mortgage loans made to borrowers
with lower credit  ratings than  borrowers of higher  quality,  or so called "A"
grade  mortgage  loans,  are  normally  subject  to  higher  rates  of loss  and
delinquency than the other  non-conforming loans to be purchased by the Mortgage
Conduit  Business.  As a result,  these  loans  normally  bear a higher  rate of
interest,  and may be subject to higher fees (including  greater prepayment fees
and late payment penalties), than non-conforming loans of "A" quality.

         It is  anticipated  that mortgage  loans  originated or acquired by the
Mortgage Conduit Business will generally be secured by first liens and/or second
liens on single (one-to-four) family residential properties with either fixed or
adjustable  interest rates.  Fixed-rate  mortgage loans have a constant interest
rate  over the life of the loan,  which is  generally  15,  20 or 30 years.  The
interest rate on an adjustable  rate  mortgage  ("ARM") is typically  tied to an
index (such as LIBOR) and is adjusted  periodically at various  intervals.  Such
mortgage loans are typically subject to lifetime interest rate caps and periodic
interest  rate and/or  payment  caps.  The interest  rates on ARMs are typically
lower than the average  comparable fixed rate loan initially,  but may be higher
than average  comparable fixed rate loans over the life of the loan.  Management
anticipates that substantially all mortgage loans purchased or originated by the
Mortgage Conduit Business will fully amortize over their remaining terms.

         The Mortgage  Conduit  Business'  planned focus on the  origination and
acquisition of non- conforming credit mortgage loans may affect CAFC's financial
performance. For example, the origination and purchase market for non-conforming
loans has typically  provided for higher  interest  rates,  thereby  potentially
enhancing the interest income earned by the Mortgage Conduit Business during the
accumulation  phase  for loans  held for sale.  However,  the  Mortgage  Conduit
Business  will assume the  potential  risk of any  increased  delinquency  rates
and/or credit losses as well as interest rate risk in the event there is a delay
in the sale of such loans to permanent investors. Normally, such on-going risks,
upon the sale of a loan will pass to the purchaser  without recourse to CAFC and
are  reduced  by the  relatively  short  period  that  such  loans  are held and
accumulated prior to sale to permanent investors.

         The Mortgage Conduit Business' loan purchase activities are expected in
the future to focus on those  Western  states of the United  States where higher
volumes of non-conforming  mortgage loans are originated,  including California,
Nevada, Utah, Colorado, Oregon, Arizona and Washington.

         The Trust's  Manager,  through its  correspondent  and broker  network,
accounted for 100% of the total  mortgage loans acquired by the Trust during the
year ended  December  31,1999,  and together with CAFC (which is also managed by
CAAI) for 100% of the total mortgage loans acquired by the Trust during the year
ended  December 31, 1999.  CAFC and the Trust's  Manager are  affiliates  of the
Trust.

         Underwriting. The Trust's Manager, CAAI, provides documentation for the
origination or purchase of mortgage loans and performs the underwriting function
for all of the  Trust's  loans on a contract  basis with the Trust.  The Trust's
Manager also  performs a full credit  review and  analysis to ensure  compliance
with its loan eligibility requirements. This review specifically includes, among
other things,  an analysis of the underlying  property and associated  appraisal
and an examination of the credit, employment and income history of the borrower.
Under all of these  methods,  loans  are  originated  or  purchased  only  after
completion of a legal documentation and eligibility criteria review.

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         Under  all  of  the  Trust's  and  CAFC's  underwriting  methods,  loan
documentation  requirements for verifying the borrowers'  income and assets vary
according  to  loan-to-value  ratios,  credit  ratings and other  factors.  This
variation is  necessary to be  competitive  and  responsive  to the needs of the
non-conforming  mortgage loan sellers.  Generally, as the standards for required
documentation  are lowered,  borrowers' down payment  requirements are increased
and the required  loan-to-value ratios are decreased.  These types of loans with
less documentation are reviewed on a risk analysis  underwriting basis.  Reduced
documentation  loans require the borrower to have a stronger  credit history and
larger cash reserves and the appraisal of the property is validated by either an
enhanced desk or field review. The underwriters utilize a risk analysis approach
to determine the  borrower's  ability and  willingness  to repay the debt and to
determine if the property taken as security has sufficient  value to recover the
debt in the event that the loan defaults. Each loan is reviewed for compensating
factors (i.e.,  credit reports,  sufficient  assets,  appraisal,  job stability,
ability to repay the loan),  and overall  compensating  factors are  reviewed to
fully analyze the risk.

         CAAI reviews each loan prior to the Trust's  commitment to originate or
purchase a mortgage  loan to ensure  that the  mortgage  loans meet its  quality
standards.  The type and extent of the  quality  control  review  depends on the
nature of the  seller and the  characteristics  of the loans.  In  performing  a
quality  control  review  on a  loan,  CAAI  analyzes  the  underlying  property
appraisal  and  examines  the  credit and income  history  of the  borrower.  In
addition, all documents submitted in connection with the origination or purchase
of the loans,  including insurance policies,  title policies,  deeds of trust or
mortgages and promissory notes, are examined for compliance with the Trust's and
CAFC's guidelines and to ensure compliance with state and federal regulations.

         Whole Loan Sales.  The  Mortgage  Conduit  Business  conducted  by CAFC
primarily  uses a reverse  repurchase  financing  from the  Trust and  warehouse
financing  from  commercial  warehouse  lender to  finance  the  origination  or
acquisition  of mortgage  loans from  correspondents.  Although  CAFC from time-
to-time makes sales of mortgage  loans on a  loan-by-loan  or "flow"  basis,  it
generally seeks to accumulate a sufficient  volume of mortgage loans  (generally
packages of $1 million to $2 million) with similar  characteristics  for sale to
investors  at a premium in whole loan sale  transactions  on a  service-released
basis.

         Neither the Trust nor CAFC currently plans to sell senior  interests in
its loans in the secondary market through a  securitization  program under which
it could retain a residual interest in each loan securitization. While the pools
of loans sold by the Trust's Mortgage Conduit Business will generally be sold on
a non-resource  basis with respect to economic interest and rate risk, such bulk
whole loan sales will generally be made pursuant to agreements  that provide for
recourse by the purchaser  against the Trust's  Mortgage Conduit Business in the
event of a breach of any representation or warranty made by the Trust's Mortgage
Conduit  Business,  any fraud or  misrepresentation  during  the  mortgage  loan
origination  process or upon early default on such mortgage  loans.  The Trust's
Mortgage  Conduit  Business  will  generally  try to limit the  remedies of such
purchasers to the remedies the Trust's Mortgage  Conduit Business  receives from
the persons from whom the Trust's Mortgage Conduit Business  purchases a portion
of such mortgage  loans.  However,  in some cases,  the remedies  available to a
purchaser of mortgage  loans may be broader than those  available to the Trust's
Mortgage Conduit Business  against its seller,  and should a purchaser  exercise
its remedies and rights against it, the Mortgage Conduit Business may not always
be able to enforce whatever remedies it may have against its sellers.

         WAREHOUSE LENDING BUSINESS

         The Trust's third line of business is its Warehouse  Lending  Business.
Such  operations  consist  primarily of financing  for its  affiliated  mortgage
bankers,  including  CAFC and Sierra Capital  Funding,  LLC, all of which act as
correspondents of the Trust. The non-conforming mortgage loans funded with

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such  financing are acquired by the Trust for its portfolio when such loans meet
its investment criteria. These facilities provide reverse financing for mortgage
loans  from  the  time of  closing  the  loan to the  time of its  sale or other
settlement with the pre-approved investor. The Trust's financing is non-recourse
and the Trust can only look to the sale or  liquidation of the mortgage loans as
a source of repayment or repurchase.  Any claim of the Trust as a secured lender
in a bankruptcy  proceeding may be subject to adjustment  and delay.  Borrowings
under these  facilities  are  presented on the Trust's  balance  sheet as "Notes
receivables from related party."

         The Trust provides a $3 million  reverse  repurchase  facility to CAFC.
The  CAFC  financing  balance  outstanding  on  the  Trust's  balance  sheet  is
structured  to  qualify  under  the REIT  asset  tests  and to  generate  income
qualifying  under the 75% gross income test.  The terms of the line are based on
the rate of the Mortgage Note plus a fee of $50 or such other fee (not to exceed
$500) as the  parties  may  agree and with an  advance  rate of 100% of the fair
value of the mortgage loans outstanding.

         Utilizing  reverse  repurchase  agreements,  at December 31, 1999,  the
Trust had  outstanding  balances  of  $2,140,360  to CAFC,  $428,250  to SCA and
$620,707 to Equity 1-2-3,  divisions of SCF/LLC, all affiliated mortgage banking
companies. The Trust finances its Warehouse Lending Business through equity.

         HEDGING

         The  Mortgage  Conduit  Business to date has  originated  or  purchased
primarily  fixed-rate  mortgage  loans.  The mortgage loans held by the Mortgage
Investment   Business  mostly  carry  fixed  rates  and  have  relatively  short
maturities.  As the  production of  fixed-rate  mortgage  loans  increases or if
maturities  increase,  it is anticipated that various hedging strategies will be
implemented to provide  protection  against  interest rate risks. The nature and
quantity of hedging  transactions  will be  determined  by the Manager  based on
various  factors,  including market  condition,  the expected volume of mortgage
loan  originations  and  purchases and the period of time required to accumulate
and to sell mortgage loans.

         However,  an  effective  hedging  strategy  is  complex  and no hedging
strategy  can  completely  insulate the  Mortgage  Conduit  Business or Mortgage
Investment  Business  from interest rate risks.  In addition,  hedging  involves
transaction and other costs, and such costs could increase as the period covered
by the  hedging  protection  increases  or in period of rising  and  fluctuating
interest rates. Therefore,  the Mortgage Conduit Business or Mortgage Investment
Business  may be prevented  from  effectively  hedging its interest  rate risks,
without significantly reducing its return on equity.

         SERVICING

         As the  Trust or CAFC  originates  mortgage  loans,  they  acquire  the
servicing  rights.  The  Trust  and  CAFC  subcontract  all of  their  servicing
obligations  under such loans to CAAI, the Trust's Manager.  Servicing  includes
collecting and remitting loan payments, making required advances, accounting for
principal  and  interest,  holding  escrow  or  impound  funds  for  payment  of
improvement  holdbacks,  interest,  taxes and insurance,  if applicable,  making
required inspections of the mortgaged property,  contacting delinquent borrowers
and  supervising   foreclosures  and  property  dispositions  in  the  event  of
unremedied defaults in accordance with the Trust's guidelines.

                                       10
<PAGE>
     Servicing  Portfolio.  The following tables sets forth certain  information
regarding the Trust's servicing portfolio of loans for the years ended
<TABLE>
<CAPTION>
                                               December 31, 1997      December 31, 1998      December 31, 1999
                                               -----------------      -----------------      -----------------
<S>                                            <C>                    <C>                    <C>
Beginning servicing portfolio                       $4,696,238            $4,915,186           $8,968,645
Loans added to the servicing portfolio              $3,254,256           $10,342,300            7,452,006

Loans sold, servicing released and principal
    paydowns (1)                                    $3,035,308            $6,270,841            5,630,987

Ending servicing portfolio                          $4,915,186            $8,986,645           10,807,644

Number of loans serviced                                    45                    72                   82
Average loan size                                     $109,226              $124,815              131,801
<FN>
     (1) Includes normal loan payoffs, principal amortization, prepayments, less
reserves and foreclosures.
</FN>
</TABLE>

     Geographical  Distribution.  The following  table sets forth the geographic
distribution of the Trust's servicing portfolio at the dates presented:
<TABLE>
<CAPTION>

                  December 31, 1997              December 31, 1998             December 31, 1999
           -----------------------------   ---------------------------  ---------------------------
              Number           % of        Number             %of            Number          %of
  State      of Loans        Portfolio     of Loans        Portfolio        of Loans      Portfolio
  -----      --------        ---------     --------        ---------        --------      ---------
<S>          <C>             <C>           <C>             <C>              <C>           <C>
   CA           45             100%              69           95%              80            97%
   OR            0               0%               1            1%               0             0%
   UT            0               0%               2            4%               2            3%
</TABLE>
         Interest.  The weighted average  interest for the Trust's  portfolio of
loans in its Mortgage  Investment  Business at December 31, 1999 was 12.15%,  at
December 31, 1998 it was 12.43%, and at December 31, 1997 it was 12.43%.

         Maturity.  The weighted  average  maturity of the Trust's  portfolio of
loans in its Mortgage Investment Business at December 31, 1999 was 22.57 months,
at  December  31, 1998 was 14.06  months and at  December  31, 1997 it was 18.75
months.  The  following  table shows the Trust's  loan  maturities  at the dates
presented.
<TABLE>
<CAPTION>
                            December 31, 1997                   December 31, 1998                December 31, 1999
                     -------------------------------     -------------------------------    ------------------------------
       Terms              Amount           % of               Amount           % of            Amount            %of
     of Loans            of Loans        Portfolio           of Loans       Portfolio         of Loans         Portfolio
     --------            --------        ---------           --------       ---------         --------         ---------

<S>                      <C>              <C>                <C>                 <C>            <C>            <C>
 0-12 months               $2,651,900          54%           $5,530,300            62%          6,548,777         61%
13-24 months                  896,412          18%            1,429,900            16%          1,365,577         13%
25-36 months                  636,349          13%              824,712             9%            587,213          5%
37-48 months                     None           0%                 None             0%               None          0%
Over 48                       730,525          15%            1,201,733            13%          2,306,077         21%
months                   ------------         ----            ---------           ----          ---------        ----
                           $4,915,186         100%           $8,986,645           100%         10,807,644        100%
</TABLE>

                                       11
<PAGE>
     Delinquencies. The following table shows the Trust's delinquency statistics
for its servicing portfolio at the dates presented.
<TABLE>
<CAPTION>

                              December 31, 1997             December 31, 1998               December 31, 1999
                        -----------------------------   -------------------------     ----------------------------
        Loans                   Number      % of           Number      % of               Number           % of
   Delinquent For:            of Loans    Portfolio      of Loans     Portfolio          of Loans        Portfolio
   --------------             --------    ---------      --------     ---------          --------        ---------

<S>                           <C>         <C>            <C>          <C>                <C>           <C>
31-60 days                           6          7%                 6           5%              3            3%
61-90 days                           2          3%                 2           2%              2            4%
                                                                                                           5%%
91 days+                             2          6%                 3           3%              7            8%
                                   ---         ---               ---         ----            ---           ---
Totals:                             10         16%                11          10%             12           15%
</TABLE>

         REGULATION

         The Trust at all times  intends to conduct  its  business  so as not to
become  regulated as an  investment  Trust under the  Investment  Trust Act. The
Investment  Trust  Act  exempts  entities  that are  "primarily  engaged  in the
business of purchasing or otherwise  acquiring  mortgages and other liens on and
interests  in  real   estate"   ("Qualifying   Interest").   Under  the  current
interpretation  of the staff of the  Commission,  in order to  qualify  for this
exemption,  the Trust  must  maintain  at least 55% of its  assets  directly  in
mortgage loans,  and certain other Qualifying  Interests in real estate.  If the
Trust fails to qualify for exemption from  registration as an investment  Trust,
its  ability  to use  leverage  in its  Mortgage  Investment  Business  would be
substantially  reduced,  and it would be  unable  to  conduct  its  business  as
described  herein.  The Trust has not  requested a legal  opinion  from  counsel
indicating that, it will be exempt from the Investment Trust Act.

         Because the Trust's business is highly  regulated,  the laws, rules and
regulations  applicable  to the Trust are subject to regular  modifications  and
change.  There are currently proposed various laws, rules and regulations which,
if  adopted,  could  impact  the  Trust.  There can be no  assurance  that these
proposed laws, rules and regulations,  or other such laws, rules or regulations,
will not be  adopted  in the  future  which  could  make  compliance  much  more
difficult or  expensive,  restrict  the Trust's  ability to  originate,  broker,
purchase or sell loans,  further  limit or restrict  the amount of  commissions,
interest and other charges earned on loans  originated,  brokered,  purchased or
sold by the Trust,  or otherwise  affect the business or prospects of the Trust.
Also,  members  of  Congress  and  government  officials  have from time to time
suggested the elimination of the mortgage interest  deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Trust's loans are made to borrowers for
the purpose of  consolidating  consumer debt or financing  other consumer needs,
the  competitive  advantages  of tax  deductible  interest,  when  compared with
alternative  sources of financing,  could be eliminated or seriously impaired by
such government action.  Accordingly,  the reduction or elimination of these tax
benefits  could  have a material  adverse  effect on the demand for loans of the
kind offered by the Trust.

         Additionally,  there are various  state and local laws and  regulations
affecting  the  Mortgage  Conduit  Business.  CAFC is licensed  in those  states
requiring such a license.  Mortgage operations also may be subject to applicable
state usury  statutes.  The Trust is presently in material  compliance  with all
material rules and regulations to which it is subject.


                                       12
<PAGE>
         COMPETITION

         The Trust  believes that it will continue to be able to compete in both
its Mortgage  Investment Business and its Mortgage Conduit Business on the basis
of  providing  prompt and  responsive  service  and  flexible  underwriting  for
independent mortgage brokers and correspondents to offer to their customers.

         Continued  consolidation  in the  mortgage  banking  industry  may also
reduce the number of current  correspondents  to the Mortgage Conduit  Business,
thus  reducing the Trust's  potential  customer  base,  resulting in CAFC or the
Trust purchasing a larger  percentage of mortgage loans from a smaller number of
sellers. Such changes could negatively impact the Mortgage Conduit Business.

         The Trust faces  competition  in its Mortgage  Investment  Business and
Mortgage Conduit Business from other financial  institutions,  including but not
limited to banks and  investment  banks.  At  present  such  competition  is not
material to the Trust's Warehouse Lending  Operations.  Many of the institutions
with which the Trust competes have  significantly  greater  financial  resources
than the Trust.

         EMPLOYEES

         The Trust has no employees. The Manager employs and provides all of the
persons  required for the  operation  of the Trust and its  Mortgage  Investment
Business.  At December  31, 1999,  the Manager  employed 15 persons plus several
contract personnel.  Additional employees will be required to staff the Mortgage
Conduit  Business.  None of the  Manager's  employees is subject to a collective
bargaining agreement. The Manager believes that its relations with its employees
are satisfactory.

ITEM 2.  PROPERTIES

         The Trust's and its Manager lease executive and administrative  offices
located at 50 California Street, Suite 2020, San Francisco,  California,  94111,
and consist of approximately 3,000 square feet.

         The  Manager  also leases  space in Los Gatos,  Laguna  Hills,  and San
Diego, California for its branch offices on a short-term basis.

         Management  believes  that  the  terms  of the  leases  are at least as
favorable  as  could  have  been  obtained  from an  unaffiliated  third  party.
Management believes that these facilities are adequate for the Manager's and the
Trust's foreseeable needs and that alternate space at reasonable rental rates is
available, if necessary.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

         No matters  were  submitted to a vote of the Trust's  security  holders
during the last quarter of its fiscal year ended December 31, 1999.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS

         The Trust's  Common Stock was listed and began  trading on the American
Stock  Exchange under the symbol "CAA" on October 1, 1998. The range of high and
low sale prices of the Common Stock as

                                       13
<PAGE>
quoted on the American  Stock Exchange  were:  Fourth  Quarter of 1999:  High- 3
9/16, Low- 2-3/8;  First Quarter of 2000:  High- 3-5/8,  Low- 2-3/8. At December
31, 1999 the Trust had issued and  outstanding  1,484,740  shares of the Trust's
Common  Stock and  warrants to acquire an  additional  148,474  shares of Common
Stock.

         On December 31, 1999,  there were  approximately  202 holders of record
(including  holders who are nominees for an  undetermined  number of  beneficial
owners) of the  Trust's  Common  Stock and 139  holders of record of the Trust's
Preferred Stock which is not publicly traded. The Trust believes that its Common
Stock is beneficially held by an excess of 750 shareholders.

         On March 7, 2000,  the Trust's Board of Directors  authorized the Trust
to  repurchase  up to  $250,000  of the  Trust's  Common  Stock,  in open market
purchases  from time to time at the  discretion of the Trust's  management;  the
timing and extent of the repurchases will depend on market conditions. the Trust
intends to effect such  repurchase  in  compliance  with Rule  10b-18  under the
Securities  Exchange  Act of  1934.  As of April  14,  2000  the  Trust  had not
initiated  purchases under the repurchase  plan due to  restrictions  imposed by
Rule 10b-18 and the level of trading of the Trust's Common Stock.

         To maintain its qualification as a REIT, the Trust has made and intends
during 1999 to make annual  distributions to stockholders of at least 95% of its
taxable  income  (which may not  necessarily  equal net income as  calculated in
accordance with GAAP),  determined without regard to the deduction for dividends
paid and excluding any net capital gains. the Trust declares  regular  quarterly
dividend  distributions.  Any taxable income remaining after the distribution of
the regular  quarterly or other  dividends  will be  distributed  annually on or
prior to the date of the first regular  quarterly  dividends payment date of the
following taxable year. The REIT Rules have been amended (effective beginning in
2001) to reduce to 90% the percentage of the Trust's taxable income that must be
distributed to maintain REIT status.  The dividend policy is subject to revision
at the  discretion of the Board of  Directors.  All  distributions  in excess of
those  required for the Trust to maintain  REIT status will be made by the Trust
at the  discretion  of the Board of  Directors  and will  depend on the  taxable
earnings of CAFC, the financial condition of the Trust and such other factors as
the  Board  of  Directors  deems  relevant.  The  Board  of  Directors  has  not
established a minimum distribution level for the Trust's Common Stock.

         The Trust  omitted its quarterly  dividend on the Trust's  Common Stock
for the  quarter  ended  March 31,  1999 in order to help  finance  its  planned
expansion of the wholesale  loan  origination  capacity of its mortgage  banking
conduit  subsidiary.  The Trust paid  quarterly  dividends on the Trust's Common
Stock for the quarters ending June 30, 1999, September 30, 1999 and December 31,
1999 at $.085 per  share.  The Trust  during  1999 paid 12  consecutive  monthly
dividends  on the  Trust's  Preferred  Stock at an average of $.07 per share per
month.

         Holders of the  Preferred  Shares will be entitled to the  Distribution
Preference  with respect to such  Distributions  as are declared each year equal
to: the lesser of (a) an amount equal to an annualized return on the Net Capital
Contribution  of Preferred  Shares at each dividend record date during such year
(or,  if the  Directors  do not set a record  date,  as of the  first day of the
month) equal to 10.25% or 150 basis points over the Prime Rate  (determined on a
not less than quarterly basis).

         After  declaration for a given quarter of  Distributions to the holders
of Preferred  Shares in the amount of the  Distribution  Preference,  no further
distributions  may be declared on the Preferred  Shares for the subject  quarter
until the total dollar amount of Distributions  declared on the Common Shares as
a class for that quarter equals an amount (the "Matching  Distribution")  as the
Distribution Preference for each Preferred Share for such quarter or period. Any
Distributions  associated  with a  payment  date  that are  declared  after  the
Trustees  have  declared  Distributions  on Common  Shares in the  amount of the
Matching  Distribution (i.e. excess  Distributions)  generally will be allocated
such that the amount of Distributions

                                       14
<PAGE>
per share paid to or declared to the holders of the Preferred  Shares and Common
Shares for the subject quarter are equal.  The  Distribution  Preferences of the
Preferred Shares is not cumulative.

         Distributions  to  stockholders  will  generally be taxable as ordinary
income,  although a portion of such distributions may be designated by the Trust
as capital gain or may constitute a tax-free  return of capital.  the Trust will
annually  furnish  to  each  of  its  stockholders  a  statement  setting  forth
distributions  paid  during the  preceding  year and their  characterization  as
ordinary income, capital gains or return of capital.



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]


                                       15

<PAGE>
--------------------------------------------------------------------------------
                                     PART II
--------------------------------------------------------------------------------

ITEM 6.  SELECTED FINANCIAL DATA

         The following table presents selected historical  financial data of the
Trust  and its  Predecessors.  The  combined  information  gives  effect  to the
combination of Capital Alliance Income Trust I and Capital Alliance Income Trust
II  (collectively,  the  "Predecessors")  with the Trust due to common boards of
directors and management.  The selected  historical  combined financial data set
forth below for the Trust for each of the years in the period ended December 31,
1995 and the four  months  ended  April 30,  1996 are  derived  from the audited
financial  statements of the Predecessors.  The selected  financial data for the
eight months ended  December 31, 1996 and for the years ended December 31, 1997,
December  31, 1998,  and  December  31, 1999 are derived from audited  financial
statements of the Trust.

         Novogradac  &  Company,   LLP  audited  the  aforementioned   financial
statements.  The historical  combined  financial  information is not necessarily
indicative of future  operations  and should not be so  construed.  The selected
financial data should be read in conjunction with  "MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>

Five Year                   Combined (Predecessors)        Combined (Predecessors)           Successor
Financial Summary           -----------------------        -----------------------           ---------
                                   Year Ended                  Four Months Ended         Eight Months Ended
                               December 31, 1995               April 30, 1996            December 31, 1996
<S>                          <C>                           <C>                               <C>
Operations:

Revenue                             $489,363                     $273,709                       $490,300

Net income                           414,414                      226,643                        373,132

Per Share Data:

Net Income

     Basic                               ---                          ---                             ---

     Diluted                             ---                          ---                             ---

Balance Sheet Data:

Mortgage notes receivable         $4,790,070                   $4,757,895                      $4,696,238

Total assets                       6,254,052                    6,267,251                       6,702,261

Total liabilities                    164,022                      263,316                         756,073

Shareholder's equity               6,090,030                    6,003,935                       5,946,188

</TABLE>

                       [continued on the following page]

                                       16

<PAGE>
<TABLE>
<CAPTION>
Five Year                          Successor                     Successor                   Successor
Financial Summary                  ---------                     ---------                   ---------
                                   Year Ended                    Year Ended                  Year Ended
                               December 31, 1997             December 31, 1998           December 31, 1999
<S>                            <C>                           <C>                         <C>
Operations:

Revenue                               $776,405                    $1,677,233                 1,243,866

Net income                             535,789                    $1,003,706                   450,605

Per Share Data:

Net Income

     Basic                                 ---                          .351                       ---

     Diluted                               ---                          .341                       ---

Balance Sheet Data:

Mortgage notes receivable           $4,915,186                    $8,986,645                10,807,644

Total assets                        10,132,419                    16,804,983                17,006,696

Total liabilities                      311,096                       757,532                 1,579,862

Shareholder's equity                 9,821,323                    16,047,451                15,426,834

</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The  preparation of Trust's  financial  statements  were based upon the
operating results of the Trust and the combined historical operations of Capital
Alliance  Income Trust I ("CAIT I") and Capital  Alliance Income Trust II ("CAIT
II") (CAIT I and CAIT II are  collectively  referred to as the  "Predecessors").
The  operations  of the  Predecessors  have been  combined  due to their  common
management and directors.

         GENERAL

         Predecessors.  The Trust resulted from the  consolidation of CAIT I and
CAIT II (the  "Combination")  on April 30,  1996  when the  Trust  ("Successor")
exchanged shares of preferred stock for all of the outstanding  shares of CAIT I
and CAIT II. All assets and  liabilities of CAIT I and CAIT II were  transferred
to and  assumed  by the  Trust.  CAIT I and  CAIT  II were  both  privately-held
residential  mortgage  investment  trusts and were formed and managed by Capital
Alliance Advisors, Inc. ("CAAI").

         Organization.   The  Trust   registered  its  common  shares  with  the
Securities  and  Exchange  Commission  under  the  Securities  Act of  1933 , as
amended,  in May of 1997 in an offering of 1,500,000  common shares at $8.00 per
share.  The shares are listed on the American  Stock  Exchange with the exchange
symbol of "CAA".

                                       17
<PAGE>
         On April 15, 1997 the Trust formed its non-qualified REIT subsidiary to
conduct a mortgage  conduit  business and holds a 99% economic  interest in CAFC
through  ownership of all of its Series "A" Preferred Stock. The Trust's Manager
holds all of the Common Shares of CAFC and a 1% economic interest in CAFC.

         On September 30, 1998, the initial public offering of Common Shares was
terminated. As of December 31, 1998, 1,484,740 Common Shares were outstanding.

         Operating  Strategy.  The Trust invests as a portfolio lender primarily
in  non-conforming  mortgage loans on one-to-four  unit  residential  properties
secured  by first and  second  deeds of  trust.  Management  believes  that this
segment of the mortgage market is inadequately  served and that there is a large
demand for  non-conforming  mortgage  loans with a complete  spectrum  of credit
grades.

         CAFC's  operating  strategy  is to  originate,  through  mortgage  loan
brokers and a correspondent  network,  conforming and non-conforming home equity
loans to be sold in the secondary  mortgage market for cash.  Although the loans
currently made are  concentrated in California,  CAFC plans to originate  and/or
purchase  loans on both an  individual  and bulk basis  throughout  the  western
United States.  Loans will then be sold into the secondary  market for a premium
or to the Trust at fair market  value,  when they meet the Trust's  underwriting
standards (which include a combined loan-to-value ratio that does not exceed 75%
of the underlying collateral).

         Loan Origination and Loan Servicing. Mortgage loan origination consists
of  establishing  a  relationship  with a borrower or his broker,  obtaining and
reviewing documentation concerning the credit rating and net worth of borrowers,
inspecting and appraising  properties  that are proposed as the collateral for a
home equity loan,  processing such  information and underwriting and funding the
mortgage  loan.  Mortgage loan  servicing  consists of collecting  payments from
borrowers, accounting for interest payments, holding borrowed proceeds in escrow
until  fulfillment  of  mortgage  loan   requirements,   contacting   delinquent
borrowers,  foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing are provided
to the Trust by CAAI, its Manager.

         Contingencies and Commitments.
         -----------------------------

         As of December 31, 1999, the Trust's real estate  investments  included
four  properties  held for sale at a  capitalized  cost of  $644,326  and a loan
portfolio of  $10,807,664  consisting of 82 loans,  of which nine loans totaling
$1,294,982 or 11.98% of the portfolio were delinquent.

         As of December 31, 1998, the Trust's real estate  investments  included
one  property  held  for  sale  at a  capitalized  cost of  $149,663  and a loan
portfolio  of  $8,986,645  consisting  of 72 loans of which six  loans  totaling
$717,453 or 7.98% of the portfolio were delinquent.

         In assessing  the  collectibility  of the real estate held for sale and
the  delinquent  mortgage  loans,  management  estimates  a  net  gain  will  be
recognized upon sale of the real estate and the properties securing these loans,
if it is necessary to foreclose the mortgage  loans due the Trust.  Management's
estimate is based on an anticipated  sales price of the property that includes a
discount  from  the  latest  appraised  value of the  property,  less the sum of
pre-existing  liens,  costs of sale,  the face amount of the  mortgage  loan and
accrued interest receivable.

         The Trust generally issues loan commitments only on a conditional basis
and  generally  funds  such  loans  promptly  upon  removal  of all  conditions.
Accordingly, the Trust did not have any commitments to fund loans as of December
31, 1999 and December 31, 1998.

                                       18
<PAGE>
         RESULTS OF OPERATIONS

         The  results  of  operation  for the years  ended  December  31,  1997,
December 31, 1998,  and December 31, 1999 follows.  The  historical  information
presented herein is not necessarily indicative of future operations.

         YEAR ENDED DECEMBER 31, 1999
         COMPARED TO YEAR ENDED DECEMBER 31, 1998

         The Trust's  operating  revenues (after  adjusting for CAFC's operating
loss,  which is reported as part of the Trust's  gross  revenues)  increased  to
$1,975,882  as compared to  $1,689,082  for 1998,  primarily  from the increased
interest income of a larger mortgage portfolio.  Other income for the year ended
December 31, 1999  decreased on account of lower rental  income from real estate
held for sale.

         At year ended December 31, 1999 the mortgage notes  receivable  balance
was  $1,821,019  greater than the year ended  December 31, 1998  mortgage  notes
receivable balance. At year ended December 31, 1999, the lines of credit balance
was  $1,967,781  less than the year  ended  December  31,  1998  lines of credit
balance.  At year ended  December 31, 1999 the real estate held for sale balance
was $494,663  greater than the year ended December 31, 1998 real estate held for
sale balance.

         Expenses for the year ended  December 31, 1999 increased to $781,136 as
compared to $676,708 for the  previous  year.  The increase in 1999  compared to
1998 is primarily due to higher interest expense of $65,431, higher compensation
of $138,853 to the Manager,  and lower  general and  administrative  expenses of
$47,082.  The 1999 and 1998 sale of real estate held were reported as a separate
line item and did not reduce  either year's  expenses or increase  either year's
revenues.

         Net income for the year  ended  December  31,  1999 was  $450,605.  Net
Income for the year ended December 31, 1998 was $1,003,706.

         YEAR ENDED DECEMBER 31, 1998
         COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Revenues for the year ended  December 31, 1998  increased to $1,677,233
as compared to $776,405 for 1997,  primarily from the increased  interest income
of a larger mortgage  portfolio and larger warehouse lines of credit outstanding
during  1998.  Other income for the year ended  December  31, 1998  decreased on
account  of  lower  rental  income  from  real  estate  held  for  sale  and the
elimination of portfolio loan sales.

         At year ended December 31, 1998 the mortgage notes  receivable  balance
was  $4,071,459  greater than the year ended  December 31, 1997  mortgage  notes
receivable  balance.  At year ended  December  31, 1998 the  warehouse  lines of
credit  balance was  $2,971,141  greater  than the year ended  December 31, 1997
warehouse lines of credit.  At year ended December 31, 1998 the real estate held
for sale  balance was $172,887  less than the year ended  December 31, 1997 real
estate held for sale balance.

         Expenses for the year ended  December 31, 1998 increased to $686,708 as
compared to $259,611 for the  previous  year.  The increase in 1998  compared to
1997 is primarily due to a $205,855 provision for loan losses and loss reserves,
from higher  compensation  of  $124,978  to the  Manager and higher  general and
administrative expenses of operating a larger enterprise. The 1998 and 1997 gain
from sale of real estate held were  reported as a separate line item and did not
reduce either year's expenses or increase either year's revenues.

                                       19
<PAGE>
         Net income for the year ended  December  31, 1998 was  $1,003,706.  Net
Income for the year ended December 31, 1996 was $535,789.

         INFLATION

         The  financial  statements of the Trust,  prepared in  accordance  with
generally accepted accounting principles,  report the Trust's financial position
and operating  results in terms of historical  dollars and does not consider the
impact of inflation.  Inflation affects the Trust's operation  primarily through
the effect on interest  rates,  since interest rates  normally  increase  during
periods of high inflation and decrease  during  periods of low  inflation.  When
interest rate increase,  the demand for mortgage loans and a borrower's  ability
to qualify for mortgage financing may be adversely affected.

         LIQUIDITY AND CAPITAL RESOURCES

         Management believes that cash flow from operations,  the mortgage loans
that are paid off, the  disposition of real estate owned, a $2,000,000 bank loan
plus the  extension of a $4,000,000  warehouse  lines of credit for the Mortgage
Conduit  Business will be sufficient to meet the liquidity  needs of the Trust's
businesses for the next twelve months.

         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1999

         As of  January  1,  1999,  the  Trust  had  $570,710  of cash  and cash
equivalents.  After taking into effect the various transactions discussed below,
cash and cash  equivalents  at December  31, 1999 were  $41,939.  The  following
summarizes  the changes in net cash provided by operating  activities,  net cash
used for investing activities and net cash provided by financing activities.

         The  principal  source  of  the  Trust's  reduced   liquidity  was  the
$1,821,019  increase in mortgage  notes  receivables.  Offsetting  the increased
mortgage  notes  receivable  balance was a  $1,967,781  reduction in the line of
credit to related parties.

         Net cash  provided by the  activities  during the twelve  months  ended
December  31,  1999 was  $809,770.  Net  income  of  $450,605  and the  non-cash
accounting loss of $732,016 in CAFC were was the primary  suppliers of cash. The
largest user of cash from  operating  activities  was the $534,190  reduction in
affiliate borrowings.

         Net cash used in financing  activities  during the twelve  months ended
December 31, 1999 was $186,472.  The principal generators of cash from financing
activities was $904,750 provided from a bank loan.  Dividends paid of $1,071,222
were the users of cash from financing activities.

         LIQUIDITY AND CAPITAL RESOURCES
         FOR THE YEAR ENDED DECEMBER 31, 1998

         As of  January  1,  1998,  the  Trust had  $1,748,485  of cash and cash
equivalents.  After taking into effect the various transactions discussed below,
cash and cash  equivalents  at December 31, 1998 were  $570,710.  The  following
summarizes  the changes in net cash provided by operating  activities,  net cash
used for investing activities and net cash provided by financing activities.

         The principal source of the Trust's enhanced liquidity are the proceeds
from the issuance of common  stock.  From January 1, 1998 through  September 30,
1998, the Trust  received net common stock proceeds of $6,638,256.  Management's
strategy is to invest the common stock proceeds primarily in the

                                       20
<PAGE>
Trust's Mortgage Investment  Business.  In the interim, the Trust's has used the
net proceeds of its current public  offering to provide  funding for the Trust's
recently  established  Warehouse  Lending Business and to invest in subordinated
debt of a strategic partner mortgage banking firm which yields 15% per annum. At
December 31, 1998 the Trust had $2,414,435 of warehouse  facilities  outstanding
to CAFC, $820,100 to SCA, $1,472,564 to Equity 1-2-3, and $450,000 to CMT.

         Net cash provided by the operating  activities during the twelve months
ended December 31, 1998 was $1,099,341. Net income of $1,003,706 was the primary
supplier of cash and the largest user of cash from operating  activities was the
$114,119 increase in receivables from affiliates.

         Net cash used in investing  activities  during the twelve  months ended
December  31,  1998  was  $7,603,400.  The  principal  generators  of cash  from
investment  activities were $6,270,811  provided from the repayments of mortgage
notes  receivable.   Investments  in  new  mortgage  notes  receivable  utilized
$10,342,300 and the previously  described  warehouse lines of credit extended to
CAFC, SCA, Equity 1-2-3, and CMT utilized $2,971,141.

         Net cash  provided by  financing  activities  during the twelve  months
ended  December  31,  1998 was  $5,326,324.  The  principal  source of cash from
financing  activities were the gross proceeds of $7,375,840 from the issuance of
common stock.  Dividends of $1,143,018 and  organizational and offering costs of
$747,406 were the leading users of cash from financing activities.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary data listed in Item 14(a)(1)
are incorporated herein by reference and filed as part of this report.

         Selected Quarterly Financial Data required by Item 302(a) of Regulation
S-K is set forth in the financial  statements filed as part of Registrant's Form
10-Qs for the quarters  ended March 31, 1999,  June 30, 1999 and  September  30,
1999 are incorporated herein by reference and filed as part of this report.

         The  unaudited  1998 and 1999 fourth  quarter  operating  statement  is
presented  below  with  the  accompanying  notes  to  the  operating   statement
incorporated  herein by reference to the Financial  Statements with  Independent
Auditor's Report for the three year period ended December 31, 1999.



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]


                                       21
<PAGE>
<TABLE>
<CAPTION>
                            STATEMENTS OF OPERATIONS
                                   (unaudited)

                                                            Three Months Ended
                                                                December 31
                                                          1998            1999
                                                          ----            ----
<S>                                                    <C>            <C>
REVENUES
     Interest income .............................     $ 528,359      $ 483,999
     Investment income from affiliates ...........        (6,146)      (132,281)
     Other income ................................         2,950         14,832
                                                       ---------      ---------

        Total revenues ...........................       525,163        366,550

EXPENSES
     Loan servicing and origination
        fees to related party ....................        28,901         82,526
     Interest expense ............................        17,596         12,614
     Provisions for loan losses ..................       170,000         70,000
     Operating expenses of real estate owned .....         6,061         (8,150)
     General and Administrative ..................        46,339         (7,691)
                                                       ---------      ---------

        Total expenses ...........................       268,897        149,299

NET INCOME BEFORE GAIN
     ON REAL ESTATE OWNED ........................       256,266        217,251
GAIN ON REAL ESTATE OWNED ........................         3,181         (1,779)
CHANGE IN ACCOUNTING PRINCIPLE ...................             0        (10,346)
                                                       ---------      ---------

NET INCOME .......................................     $ 259,447        205,126

PREFERRED SHARE DIVIDENDS ........................     $ 145,026      $ 147,543

BASIC EARNINGS PER
     COMMON SHARE ................................          .077           .039

DILUTED EARNINGS PER
     COMMON SHARE ................................          .067           .032

</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         None.

                                       22
<PAGE>
--------------------------------------------------------------------------------
                                    PART III
--------------------------------------------------------------------------------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         DIRECTORS

         Thomas B. Swartz, 68; Chairman and Chief Executive Officer(1)

         Class I Director since 1995; current term expires in 2000; Chairman and
Chief  Executive  Officer,  Capital  Alliance  Advisors,  Inc.  (1989 to  date);
Chairman,  Capital  Alliance Income Trust I (1991 to 1996) and Capital  Alliance
Income Trust II (1994 to 1996);  Chairman,  Sierra Capital  Acceptance  (1995 to
date);  Chairman and Chief Executive Officer of Sierra Capital Companies and its
Affiliates (1980 to date); Founder Chairman, Chief Executive Officer and Trustee
of seven equity real estate  investment  trusts (1980-  1991);  Attorney at Law,
Thomas Byrne Swartz, Inc. (1980 to date), and Bronson,  Bronson, & McKinnon, San
Francisco,  California  (Partner  1960-1980);  Past  President  (1989-1990)  and
Member,  Board of Governors (1983 to 1993),  National Association of Real Estate
Investment Trusts; Director (representing Federal Deposit Insurance Corporation)
of two subsidiaries of American  Diversified Savings Bank (in liquidation) (1990
to 1992) Member,  Real Estate Advisory  Committee to California  Commissioner of
Corporations  (1972-1973);  University of California at Berkeley Boalt School of
Law, L.L.B. 1959; Lieutenant, U.S.N.R. 1954-1956 (active) and to 1967 (reserve);
Yale University, A.B. 1954.

Dennis R. Konczal, 49; President, Director and Chief Operating Officer(1)(2)

         Class II Director since 1995;  current term expires in 2001;  President
(1996 to date) and Executive Vice President  (1989 to 1996) and Chief  Operating
Officer, Capital Alliance Advisors, Inc.; Executive Vice-President,  Trustee and
Chief Operating Officer of Capital Alliance Income Trust I (1991 to 1996) and of
Capital Alliance Income Trust II (1994 to 1996); President and Director,  Sierra
Capital  Acceptance  (1995 to date);  President,  Director  and Chief  Operating
Officer  of Sierra  Capital  Companies  (1984 to date) and of  Capital  Alliance
Investments   Incorporated  (a  NASD  broker-dealer  and  Registered  Investment
Advisor)  (1984 to  1999);  Director,  President  and Chief  Operating  Officer,
Granada   Management   Corporation  and  Granada   Financial   Services,   Inc.,
agribusiness concerns (1981-1984); Licensed Principal, NASD (1981 to date); B.S.
Agricultural Economics, Michigan State University (1972).

Richard J. Wrensen,  44;  Senior  Vice-President,  Director and Chief  Financial
Officer(1)

         Class III  Director  since 2000;  current  term  expires  2002;  Senior
Vice-President and Chief Financial Officer,  Capital Alliance Advisors, Inc. and
its  Affiliates  (including  Capital  Alliance  Income  Trust Ltd. and of Sierra
Capital Companies and its affiliates) (1997 to date); Senior  Vice-President and
Chief Financial  Officer,  SNK Realty Group (Japanese  merchant builder) (1997);
Vice-President  Finance,  Mattison and Shidler (national real estate investment)
(1987 to 1997); Associate, Marakon Associates (1985 to 1987); Vice-President and
Controller, Ring Brothers Corp. (real estate syndication and management (1981 to
1983);  Division  Controller,  Great Southwest Corp.  (1979 to 1981);  Certified
Public Accountant  (1979);  Coopers & Lybrand (1978 to 1979);  B.S.  Accounting,
University  of Florida  (1978);  MBA,  Haas School of  Business  Administration,
University of California, Berkeley (1985).

Stanley C. Brooks, 50; Director(2)

         Class II Director since 1996; current term expires 2001;  President and
Chairman,   Brookstreet   Securities   Corporation  (1990  to  date);  Executive
Vice-President,  Toluca Pacific  Securities  Corporation (1987 to 1989);  Senior
Vice-President,   First   Affiliated   Securities   (1983   to   1986);   Senior
Vice-President,

                                       23
<PAGE>
Private Ledger  Financial  Services  (1976 to 1983);  Member,  National  Futures
Association (1991 to date);  Member,  Securities  Industry  Association (1995 to
date); Member,  Regional Investment Bankers Association (1990 to date); Licensed
Principal,  NASD (1970 to date);  California State Polytechnic  Institute,  B.S.
Business  Administration  1970. Mr. Brooks was elected to the Board of Directors
pursuant  to the  Underwriting  Agreement  between  the  Trust  and  Brookstreet
Securities  Corporation  as the Managing  Broker-Dealer  of the Trust's  current
public offering of its Common Stock.

Harvey Blomberg, 59; Director(1)(2)

         Class I Director  since 1996;  current term expires  2000;  Founder and
principal  MRHB Real Estate (real  estate  management  company)  (1988 to date);
Regional Director, Connecticut Small Business Development Center (1996 to date);
Partner and Chief Financial Officer, Bay Purveyors, Inc. (1976 to 1995); General
Manager,  Deerfield  Communications  (1987  to  1990);  Consultant  to  numerous
companies (financial  restructuring,  refinancing and marketing) (1989 to date).
Renessler  Polytechnic  Institute,  M.S.  Management,  1995; Hofstra University,
M.B.A. 1985; B.S. Engineering, 1966.

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

(1)      Also is a member of the Executive Committee.

(2)      Also is a member of the Audit Committee.

         EXECUTIVE OFFICERS

         The  following  persons  currently  serve as executive  officers of the
Trust. They hold office at the discretion of the Directors.

              Name                     Age           Position

              Thomas B. Swartz         68         Chairman and Chief
                                                  Executive Officer

              Dennis R. Konczal        49         President and Chief
                                                  Operating Officer

              Richard J. Wrensen       44         Senior Vice President
                                                  and Chief Financial Officer

              Linda St. John           44         Operations Officer
                                                  and Secretary

         The principal occupations of the Executive officers of the Trust during
the last five years or more are set forth below.

         Thomas B. Swartz, 68; Chairman and Chief Executive Officer

         Class I Director since 1995; current term expires in 2000; Chairman and
Chief  Executive  Officer,  Capital  Alliance  Advisors,  Inc.  (1989 to  date);
Chairman,  Capital  Alliance Income Trust I (1991 to 1996) and Capital  Alliance
Income Trust II (1994 to 1996);  Chairman,  Sierra Capital  Acceptance  (1995 to
date);  Chairman and Chief Executive Officer of Sierra Capital Companies and its
Affiliates (1980 to date); Founder Chairman, Chief Executive Officer and Trustee
of seven equity real estate  investment  trusts (1980-

                                       24
<PAGE>
1991);  Attorney at Law, Thomas Byrne Swartz,  Inc. (1980 to date), and Bronson,
Bronson,  &  McKinnon,  San  Francisco,  California  (Partner  1960-1980);  Past
President  (1989-1990) and Member,  Board of Governors (1983 to 1993),  National
Association of Real Estate Investment  Trusts;  Director  (representing  Federal
Deposit  Insurance  Corporation)  of two  subsidiaries  of American  Diversified
Savings  Bank (in  liquidation)  (1990 to 1992)  Member,  Real  Estate  Advisory
Committee to California Commissioner of Corporations (1972-1973);  University of
California at Berkeley Boalt School of Law, L.L.B.  1959;  Lieutenant,  U.S.N.R.
1954-1956 (active) and to 1967 (reserve); Yale University, A.B. 1954.

Dennis R. Konczal, 49; President, Director and Chief Operating Officer

         Class II Director since 1995;  current term expires in 1998;  President
(1996 to date) and Executive Vice President  (1989 to 1996) and Chief  Operating
Officer, Capital Alliance Advisors, Inc.; Executive Vice-President,  Trustee and
Chief Operating Officer of Capital Alliance Income Trust I (1991 to 1996) and of
Capital Alliance Income Trust II (1994 to 1996); President and Director,  Sierra
Capital  Acceptance  (1995 to date);  President,  Director  and Chief  Operating
Officer  of Sierra  Capital  Companies  (1984 to date) and of  Capital  Alliance
Investments   Incorporated  (a  NASD  broker-dealer  and  Registered  Investment
Advisor)  (1984 to  1999);  Director,  President  and Chief  Operating  Officer,
Granada   Management   Corporation  and  Granada   Financial   Services,   Inc.,
agribusiness concerns (1981-1984); Licensed Principal, NASD (1981 to date); B.S.
Agricultural Economics, Michigan State University (1972).

Richard J. Wrensen,  44,  Senior  Vice-President,  Director and Chief  Financial
Officer

         Senior  Vice-President  and Chief Financial  Officer,  Capital Alliance
Advisors,  Inc. and its Affiliates (including Capital Alliance Income Trust Ltd.
and of Sierra  Capital  Companies  and its  affiliates)  (1997 to date);  Senior
Vice-President and Chief Financial Officer,  SNK Realty Group (Japanese merchant
builder) (1997);  Vice-President  Finance,  Mattison and Shidler  (national real
estate investment) (1987 to 1997); Associate, Marakon Associates (1985 to 1987);
Vice-President and Controller,  Ring Brothers Corp. (real estate syndication and
management (1981 to 1983);  Division Controller,  Great Southwest Corp. (1979 to
1981);  Certified Public  Accountant  (1979);  Coopers & Lybrand (1978 to 1979);
B.S.  Accounting,  University  of Florida  (1978);  MBA, Haas School of Business
Administration, University of California, Berkeley (1985).

Linda St. John, 44, Operations Officer and Secretary

         Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995
to date);  Secretary,  Sierra Capital  Companies and Affiliates  (1995 to date).
Operations Manager,  Gruen Gruen & Associates (1994- 1995); MIS Manager,  Hannum
Associates   (1991-1993);    Rochester   Business   Institute,   A.A.   Business
Administration (1984).

ITEM 11.  EXECUTIVE COMPENSATION

         COMPENSATION OF OFFICERS

         The Trust has no full time employees and is managed by Capital Alliance
Advisors,  Inc.  as  Manager of the Trust  under a  Management  Agreement  which
requires CAAI to pay the employment expenses of its personnel.  Accordingly,  no
compensation was paid by the Trust to any of the named executives.


                                       25
<PAGE>
         COMPENSATION OF DIRECTORS

         Director Fees.  The Trust pays each unaffiliated Director an annual fee
of  $5,000.  In 1999  Messrs.  Brooks and  Blomberg  each  received  $5,000 as a
Director's fee.

         Committee and Other Meeting Fees. The Directors are also entitled to be
paid $500 for each director's or committee  meeting  attended in person and $300
if attended by telephonic  means.  During 1998 Messrs.  Brooks and Blomberg each
received $1,700 in committee and meeting fees.

         Reimbursements.  All Directors are reimbursed for reasonable travel and
other out of pocket expenses incurred in attending board and committee meetings.

         Such compensation and  reimbursement  arrangements for Directors may be
changed by the Board of Directors  pursuant to authority  granted by the Trust's
Bylaws.

ITEM 12.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain  information  known to the Trust
with respect to  beneficial  ownership of the Trust's  Common Shares as of April
14, 2000,  and as adjusted to reflect the sale of Common  Shares  being  offered
hereby, by (1) each person known to the Trust to beneficially own more than five
percent  of the  Trust's  Common  Shares,  (2) each  Director,  (3) the  Trust's
executive  officers,  and (4) all Directors  and executive  officers as a group.
Unless otherwise  indicated in the footnotes to the table, the beneficial owners
name have, to the knowledge of the Trust,  sole voting and investment power with
respect to the shares  beneficially  owned,  subject to community  property laws
where applicable.
<TABLE>
<CAPTION>
                                                                                          Percentage of
                                                                                       Shares Beneficially
                                                      Number of                               Owned
                                                        Shares                        -----------------------
                                                     Beneficially                      Before        After
                                                        Owned                          Offering      Offering
                                                        -----                          --------      --------
Name of Beneficial Owner
------------------------
<S>                                                  <C>                                 <C>          <C>
Thomas B. Swartz (1)(5)....................             3,086*                              0            0
Dennis R. Konczal (5)......................             8,000*                              0            0
Richard J. Wrensen (3)(5)..................            14,800*                              0            0
Stanley C. Brooks (2)......................                 0                               0            0
Harvey Blomberg............................                 0                               0            0
All directors and executive officers as a
  group (5 persons)........................                 0                               0            0
Thomas Morford (4).........................                 0                               0            0

* Represents less than 1% of outstanding Common Shares.
--------------------
<FN>
(1)      Mr. Swartz owns beneficially  4,004 shares of Series A Preferred Shares
         as of April 14,  2000,  representing  less  than 1% of the  outstanding
         Series A Preferred Shares.

(2)      Mr.  Brooks is the  President  of the  Managing  Dealer of the Trust's
         initial public offering of its Common Stock.

                                       26
<PAGE>
(3)      Mr. Wrensen owns  beneficially  718 shares of Series A Preferred Shares
         as of April 14,  2000,  representing  less  than 1% of the  outstanding
         Series A Preferred  Shares.  Mr.  Wrensen's  wife owns 3,900  Shares of
         Common  Stock as of April  14,  2000,  in which Mr.  Wrensen  claims no
         beneficial  interest.  Such  holdings  represent  less  than  1% of the
         outstanding Common Shares.

(4)      Mr.  Morford  owns  beneficially  49,000  shares of Series A  Preferred
         Shares  as of April  14,  2000,  representing  7.7% of the  outstanding
         Series A Preferred Shares.

(5)      Capital   Alliance   Advisors,   Inc.,  the  Trust's   Manager,   owns
         beneficially 6,500 Shares of Common Stock and 6,437 shares of Series A
         Preferred  Shares  as of  April  14,  2000,  representing  1%  of  the
         outstanding  Series  A  Preferred  Shares  and  less  than  1% of  the
         outstanding  Common Shares.  Messrs.  Swartz,  Konczal and Wrensen are
         officers and directors of the Manager and  collectively own a majority
         of the outstanding Common Shares of the Manager.
</FN>
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

         Arrangements  and  Transactions  with CAAI.  CAAI is the Manager of the
Trust  and  provides  (a)  management  and  advisory  services  to the  Trust in
accordance with the Management  Agreement and (b) mortgage  origination and loan
servicing services to the Trust in accordance with the Mortgage  Origination and
Servicing  Agreement.  As  previously  described,  the Trust  will  utilize  the
mortgage  banking  experience,  management  expertise  and  resources of CAAI in
conducting  its  Mortgage  Investment  and its  Mortgage  Conduit  Business.  In
addition,  a majority of the  Directors and the officers of the Trust also serve
as Directors and/or officers of CAAI. However, Unaffiliated Directors constitute
a majority of the Audit  Committee of the Board of Directors of the Trust.  CAAI
owns all of the voting  common  stock and a 1% economic  interest  in CAFC,  the
Trust's  Mortgage  Conduit  Subsidiary.  The  Trust  owns all of the  non-voting
preferred stock  representing 99% of the economic interest in CAFC. CAAI has the
power to elect all of the  directors  of CAFC and the  ability  to  control  the
outcome of all matters for which the consent of the holders of the common  stock
of such  subsidiary is required.  CAAI and/or the officers and directors of CAFC
who may be officers and directors of the Trust,  will be separately  compensated
for their  management  services to the subsidiary and will provide  origination,
financing  and  administrative  services  to  the  subsidiary  through  separate
agreements  and an  intercompany  allocation of the cost of such  services.  The
Trustees, the Manager and their affiliates have fiduciary duties and obligations
which will require them to resolve any conflicts of interest by  exercising  the
utmost  good faith and  integrity.  Additionally,  the Bylaws  provide  that the
Manager must upon request by the Directors  disclose any  investments  which are
within the purview of the Trust's investment policies.

         CAAI through its  affiliation  with Sierra  Capital  Companies  and its
affiliates,  also has  interests  that may  conflict  with those of the Trust in
fulfilling certain duties. In addition, Messrs. Swartz, Wrensen and Konczal, the
Officers and Directors of CAAI are also officers and Directors of the Trust. The
Officers and Directors of CAAI are also involved in other  businesses  which may
generate  profits  or other  compensation.  The  Trust  will  not  share in such
compensation.

         It is the  intention  of the  Trust and CAAI  that any  agreements  and
transactions,  taken as a whole, between the Trust, on the one hand, and CAAI or
its affiliates,  on the other hand, are fair to both parties. However, there can
be no assurance that each of such agreements or transactions will be on terms at
least as favorable to the Trust as could have been  obtained  from  unaffiliated
third parties.

         Investment in Related Mortgage Banking Firms. The Trust, as a result of
strategic investments totaling $200,000 by its predecessors, CAIT I and CAIT II,
holds 20,000 Class "B" Preferred Shares of Sierra Capital Acceptance, a division
of Sierra Capital Funding, LLC, a Delaware limited liability company

                                       27
<PAGE>
("SCF/LLC").  SCF/LLC in 1997 merged with Sierra Capital Acceptance,  a Delaware
business trust ("SCA"), in which the predecessors originally invested.).  SCA is
a  wholesale   mortgage  banking  firm  specializing  in  A-,  B/C  credit-rated
non-conforming  residential  mortgages.  The SCF/LLC-SCA  investment held by the
Trust has a 15%  distribution  preference  (which has been paid quarterly) and a
liquidation  preference.  SCA contracts with the Manager to provide origination,
underwriting,   processing,  funding  and  sale  of  A-  and  B/C  credit  rated
non-conforming  residential  mortgages to CAFC and the Trust. Messrs. Swartz and
Konczal are principals, directors and officers of the SCA division of SCF/LLC as
well as of the Trust and its Manager.

         The Trust has also committed and made a strategic  investment  totaling
$225,000  of  subordinated  debt in  Equity  1-2-3,  located  in  Laguna  Hills,
California.  The investment was written off in 1999. SCSI Corporation,  which is
controlled by Messrs.  Swartz and Konczal, is the Managing Member of SCF/LLC and
has invested $75,000 in the Common Shares of Equity 1-2-3,  which investment was
written off in 1999.

         Sale and Purchase of Loans.  To provide a source of mortgage  loans for
the Trust's Mortgage Investment Business, CAFC, the Mortgage Conduit Subsidiary,
offers to the Trust for purchase  all non-  conforming  mortgage  loans and Home
Equity Loans meeting the Trust's investment  criteria and policies.  Commitments
to  acquire  loans  will  obligate  the Trust to  purchase  such  loans from the
Mortgage Conduit Subsidiary upon the closing and funding of the loans,  pursuant
to the terms and conditions specified in the commitment.

         The Trust accounts for the purchase of loans from CAFC on a fair market
value  basis.  When the Trust  computes  the equity and  earnings or loss of the
Mortgage Conduit Subsidiary, it will eliminate any intercompany profit.

         Other  Business  Activities.  The Bylaws provide that the Directors and
the Trust's  agents,  officers  and  employees  may engage with or for others in
business  activities of the types  conducted by the Trust and that they will not
have any obligation to present to the Trust any investment  opportunities  which
come to them other than in their  capacities as Directors  regardless of whether
those opportunities are within the Trust's investment policies. Each Director is
required to disclose any  interest he has, and any interest  known to him of any
person of which he is an Affiliate,  in any investment  opportunity presented to
the Trust.



                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]



                                       28
<PAGE>
--------------------------------------------------------------------------------
                                     PART IV
--------------------------------------------------------------------------------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1)

         Financial  Statements.  The following Company financial statements are
         filed as part of this report:


         Independent Auditors' Report...................................F-1
         Balance Sheets.................................................F-2
         Statements of Operation........................................F-3
         Statements of Changes in Stockholders' Equity..................F-4
         Statements of Cash Flows.......................................F-5
         Notes to Financial Statements..................................F-6

(a)(2) Financial Statement Schedules are listed in Part II - Item 8.

(a)(3)   Exhibits.
         --------

         Exhibit No.
     3.1      Charter Certificate of Incorporation and Amendment No. 1(1)
     3.2      Bylaws of the Registrant(1)
     3.3      Certificate of Amendment of Certificate of Incorporation(6)
     4.1      Form of Stock Certificate of Common Shares of the Registrant(2)
     4.2      Form of Shareholder's Warrant Agreement(4)
     4.4      Form of Common Warrant Certificate(4)
     5.1      Opinion of Ashby & Geddes(4)
     8.1      Opinion of Landels Ripley & Diamond, LLP(4)
    10.1      Form of Management Agreement between the Registrant and Capital
              Alliance Advisors, Inc.(1)
    10.2      Form of Indemnity Agreement between the Registrant and its
              Directors and Officers(1)
    10.3      Form of Loan Origination and Loan Servicing Agreement between the
              Registrant and Capital Alliance Advisors, Inc.(1)
    23.1      Consent of Landels Ripley & Diamond, LLP(4)
    23.2      Consent of Novogradac & Company LLP(4)
    23.3      Consent of Ashby & Geddes(4)
    23.4      Consent of Landels Ripley & Diamond, LLP(5)
    23.5      Consent of Novogradac & Company LLP(5)
    24.1      Power of Attorney of Thomas B. Swartz(1)
    24.2      Power of Attorney of Dennis R. Konczal(1)
    24.3      Power of Attorney of Douglas A. Thompson(1)
    24.4      Power of Attorney of Stanley C. Brooks(1)
    24.5      Power of Attorney of Harvey Blomberg(1)
    24.6      Power of Attorney of Jeannette Hagey(1)
    24.7      Power of Attorney of Richard J. Wrensen(7)
    27.3      Revised Financial Data Schedule-Capital Alliance Income Trust,
              A Real Estate Investment Trust(3)
    28.1      Impound and Escrow Agreement(4)
    28.2      Impound and Escrow Agreement, as amended October 23, 1997(5)
----------

                                       29
<PAGE>
(1)      These exhibits were previously  contained in Registrant's  Registration
         Statement  filed on Form S-11 with the Commission on September 9, 1996,
         and are incorporated by reference herein.

(2)      These  exhibits  were  previously  contained in Amendment  No. 1 to the
         Registrant's  Registration  Statement  filed  on  Form  S-11  with  the
         Commission  on January 15,  1997,  and are  incorporated  by  reference
         herein.

(3)      This  exhibit  was  previously  contained  in  Amendment  No. 2 to  the
         Registrant's  Registration  Statement  filed  on  Form  S-11  with  the
         Commission  on  February  6,  1997 and  is  incorporated  by  reference
         herein.

(4)      These exhibits were previously  contained in  Post-Effective  Amendment
         No. 2 to the  Registrant's  Registration  Statement  filed on Form S-11
         with  the  Commission  on  April  21,  1997,  and are  incorporated  by
         reference herein.

(5)      These exhibits were previously  contained in  Post-Effective  Amendment
         No. 3 to the  Registrant's  Registration  Statement  filed on Form S-11
         with the  Commission  on December 10,  1997,  and are  incorporated  by
         reference herein.

(6)      These  exhibits were  previously  contained in Form 10-Q for the period
         ending June 30, 1997 filed with the  Commission on August 14, 1997, and
         are incorporated by reference herein.

(7)      This  exhibit  was  previously  contained  in Form 10-K for the  period
         ending  December 31, 1998 filed with the  Commission on April 10, 1999,
         and are incorporated by reference herein.

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

         None.

(c)      See a(3) above.

(d)      Financial Statement Schedules.
         -----------------------------

         None.
                                       30
<PAGE>
                                   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 to be signed on
its behalf by the undersigned, hereunto duly authorized.

                                    Capital Alliance Income Trust, Ltd.
Dated:  April 10, 2000              A Real Estate Investment Trust

                                    By:    s/s Thomas B. Swartz
                                           --------------------
                                           Thomas B. Swartz
                                           Chairman and Chief
                                           Executive Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.


/s/ Thomas B. Swartz                               Dated:   April 10, 2000
--------------------------------------------
Thomas B. Swartz
Chairman and Chief Executive Officer
(Principal Executive Officer)


s/s Richard J. Wrensen                             Dated:   April 10, 2000
--------------------------------------------
Richard J. Wrensen
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)


/s/ Dennis R. Konczal                              Dated:   April 10, 2000
--------------------------------------------
Dennis R. Konczal
President and Director



/s/ Stanley C. Brooks                              Dated:   April 10, 2000
--------------------------------------------
Stanley C. Brooks
Director


/s/ Harvey Blomberg                                Dated:   April 10, 2000
--------------------------------------------
Harvey Blomberg
Director

                                       31

<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                              FINANCIAL STATEMENTS
                                      with
                          Independent Auditors' Report

                For the three-year period ended December 31, 1999












<PAGE>
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
     Capital Alliance Income Trust Ltd., A Real Estate Investment Trust:

We have audited the accompanying balance sheets of Capital Alliance Income Trust
Ltd., A Real Estate  Investment  Trust as of December 31, 1999 and 1998, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1999.  These
financial  statements  are the  responsibility  of the Trust's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

As discussed in Note 2 to the financial statements, the Trust changed its method
of accounting for organization costs in 1999.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Capital Alliance Income Trust
Ltd., A Real Estate  Investment  Trust as of December 31, 1999 and 1998, and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted  accounting
principles.




NOVOGRADAC & COMPANY LLP
San Francisco, California
April 7, 2000


                                      F-1
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                                 Balance Sheets
                                                                                        December 31,
                                                                             ---------------------------
                                                                                   1998             1999
                                                                                   ----             ----
<S>                                                                          <C>             <C>
ASSETS
       Cash and cash equivalents .........................................   $    570,710    $     41,939
       Restricted cash ...................................................        594,693         487,174
       Accounts receivable ...............................................        193,241         233,017
       Due from affiliates ...............................................        103,301         637,491
       Notes receivable:
             Note receivable from related party ..........................        225,000            --
             Lines of credit to related parties ..........................      5,157,098       3,189,317
             Mortgage notes receivable ...................................      8,986,645      10,807,664
             Allowance for loan losses ...................................       (170,000)        (85,000)
                                                                             ------------    ------------
                  Net receivable .........................................     14,198,743      13,911,981
       Real estate owned .................................................        149,663         644,326
       Security deposits .................................................         32,133            --
       Investments in affiliates .........................................        831,936         870,466
       Origination costs .................................................        120,217         163,635
       Loan fee ..........................................................           --            16,667
       Organization costs ................................................         10,346            --
                                                                             ------------    ------------

       Total assets ......................................................   $ 16,804,983    $ 17,006,696
                                                                             ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

       Liabilities
             Mortgage note holdbacks .....................................   $    594,693    $    487,174
             Loan Payable ................................................           --           904,750
             Other liabilities ...........................................        162,839         187,938
                                                                                             ------------
                                                                             ------------    ------------
       Total liabilities .................................................        757,532       1,579,862
                                                                             ------------    ------------

       Stockholders' Equity
             Preferred stock, $.01 par value (liquidation value $9.50
             per share), 675,000 shares authorized; 641,283 shares issued;
             631,757 shares outstanding at December 31, 1999 and 1998 ....          6,413           6,413
             Additional paid in capital-preferred stock ..................      5,868,711       5,752,907
             Less:  treasury stock, 9,526 shares at cost .................        (86,944)        (86,944)

             Common stock, $.01 par value, 5,000,000 shares authorized;
             1,484,740 shares issued and outstanding at December 31, .....         14,847          14,847
             1999 and 1998
             Additional paid in capital-common stock .....................     10,244,424       9,739,611
                                                                             ------------    ------------
       Total stockholders' equity ........................................     16,047,451      15,426,834
                                                                             ------------    ------------

       Total liabilities and stockholders' equity ........................   $ 16,804,983    $ 17,006,696
                                                                             ============    ============
</TABLE>
                             See accompanying notes.

                                       F-2


<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                            Statements of Operations

                                                     Year Ended   Year Ended     Year Ended
                                                    December 31, December 31,   December 31,
                                                        1997         1998           1999
                                                        ----         ----           ----
<S>                                               <C>           <C>            <C>
REVENUES
        Interest income .......................   $   655,225   $ 1,243,495    $ 1,611,363
        Interest income from affiliates .......        45,624       409,278        342,367
        Equity in income (loss) of affiliates .          --         (11,849)      (732,016)
        Other income (loss) ...................        75,556        36,309         22,152
              Total revenues ..................       776,405     1,677,233      1,243,866

EXPENSES
        Loan servicing fees to related party ..       102,027       131,864        251,655
        Management fees to related party ......        48,343       143,484        162,546
        Interest expense ......................        46,060        34,607        100,038
        Provision for loan loss ...............          --         205,855        162,500
        Operating expenses of real estate owned        31,821        10,466          5,427
        Taxes .................................         6,629        26,920         22,540
        General and administrative ............        24,731       123,512         76,430
              Total expenses ..................       259,611       676,708        781,136

INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE OWNED ..................................       516,794     1,000,525        462,730
        Gain (loss) on real estate owned ......        18,995         3,181         (1,779)

INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ..............       535,789     1,003,706        460,951
        Cumulative effect on prior years of
        accounting change .....................          --            --          (10,346)

NET INCOME ....................................   $   535,789   $ 1,003,706    $   450,605

NET INCOME PER PREFERRED SHARE ................   $     0.835   $     0.945    $     0.713

WEIGHTED AVERAGE PREFERRED
        SHARES OUTSTANDING ....................       641,283       626,873        631,757

BASIC EARNINGS PER COMMON SHARE ...............   $      --     $     0.351    $      --

DILUTED EARNINGS PER COMMON SHARE .............   $      --     $     0.341    $      --

WEIGHTED AVERAGE COMMON SHARES
        OUTSTANDING - BASIC EARNINGS
        PER SHARE .............................        45,219     1,171,733      1,484,740

WEIGHTED AVERAGE COMMON SHARES
        OUTSTANDING - DILUTED EARNINGS ........        45,219     1,206,886      1,825,854
        PER SHARE

</TABLE>
                             See accompanying notes.

                                       F-3
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                  Statements of Changes in Stockholders' Equity



                                                                       (Common)                                    (Preferred)
                                                                      Additional                                    Additional
                                           Common        Common         Paid in        Preferred       Preferred      Paid in
                                           Shares         Stock         Capital          Shares          Stock        Capital
                                           ------         -----         -------          ------          -----        -------
<S>                                   <C>              <C>            <C>            <C>            <C>            <C>
BALANCE AS OF JANUARY 1, 1997                  --     $       --     $       --           641,283   $      6,413   $  5,939,775
Issuance of common shares                   562,760          5,628      4,496,459            --             --             --
Offering costs                                 --             --         (555,888)           --             --             --
Net income                                     --             --             --              --             --             --
Dividends                                      --             --             --              --             --          (71,064)
                                       ------------   ------------   ------------    ------------   ------------   ------------


BALANCE AS OF DECEMBER 31, 1997             562,760          5,628      3,940,571         641,283          6,413      5,868,711
Issuance of common shares                   921,980          9,219      6,628,689            --             --             --
Purchase of 9,526 shares of treasury           --
         Stock                                 --             --             --              --             --             --
Offering costs                                 --             --         (185,524)           --             --             --
Net income                                     --             --             --              --             --             --
Dividends                                      --             --         (139,312)           --             --             --
                                       ------------   ------------   ------------    ------------   ------------   ------------


BALANCE AS OF DECEMBER 31, 1998           1,484,740         14,847     10,244,424         641,283          6,413      5,868,711
Net income                                     --             --             --              --             --             --
Dividends                                      --             --         (504,813)           --             --         (115,804)
                                       ------------   ------------   ------------    ------------   ------------   ------------


BALANCE AS OF DECEMBER 31, 1999           1,484,740   $     14,847   $  9,739,611         641,283   $      6,413   $  5,752,907
                                       ============   ============   ============    ============   ============   ============


                                         Retained         Treasury
                                         Earnings          Stock            Total
<S>                                    <C>             <C>             <C>
BALANCE AS OF JANUARY 1, 1997          $       --      $       --      $  5,946,188
Issuance of common shares                      --              --         4,502,087
Offering costs                                 --              --          (555,888)
Net income                                  535,789            --           535,789
Dividends                                  (535,789)           --          (606,853)
                                       ------------    ------------    ------------


BALANCE AS OF DECEMBER 31, 1997                --              --         9,821,323
Issuance of common shares                      --              --         6,637,908
Purchase of 9,526 shares of treasury
         Stock                                 --           (86,944)        (86,944)
Offering costs                                 --              --          (185,524)
Net income                                1,003,706            --         1,003,706
Dividends                                (1,003,706)           --        (1,143,018)
                                       ------------    ------------    ------------


BALANCE AS OF DECEMBER 31, 1998                --           (86,944)     16,047,451
Net income                                  450,605            --           450,605
Dividends                                  (450,605)           --        (1,071,222)
                                       ------------    ------------    ------------


BALANCE AS OF DECEMBER 31, 1999        $       --      $    (86,944)   $ 15,426,834
                                       ============    ============    ============

</TABLE>

                             See accompanying notes.
                                       F-4

<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST
<TABLE>
<CAPTION>
                            Statements of Cash Flows

                                                                               Year Ended            Year Ended       Year Ended
                                                                               December 31,         December 31,     December 31,
                                                                                  1997                  1998             1999
                                                                                  ----                  ----             ----
<S>                                                                       <C>                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                           $       535,789     $      1,003,706     $       450,605
     Adjustments to reconcile net income to net cash
     provided by operating activities:
         Amortization                                                               4,335                4,404               3,333
         (Gain) loss on real estate owned                                         (18,995)              (3,181)              1,779
         Equity in income (loss) of affiliates                                          -                    -             732,016
         (Increase) decrease in interest receivable                                14,799              (98,034)            (39,776)
         Accrued interest capitalized to real estate owned                        (24,513)              (6,950)            (34,075)
         Provision for loan loss                                                        -              205,855             162,500
         (Increase) decrease in organization costs                                      -                 (272)             10,346
         Increase in security deposits                                                  -              (32,133)             32,133
         Increase (decrease) in due to /from affiliates                           (10,476)            (114,119)           (534,190)
         Increase (decrease) in other liabilities                                 (68,619)             140,065              25,099
                Net cash provided by operating activities                         432,320            1,099,341             809,770

CASH FLOWS FROM INVESTING ACTIVITIES
     (Increase) decrease in restricted cash                                      (140,247)            (389,337)            107,519
     Increase (decrease) in mortgage note holdbacks                               140,365              389,337            (107,519)
     Increase in origination costs                                                      -             (120,217)            (43,418)
     Increase in warehouse lines of credit                                     (2,185,957)          (2,971,141)          1,967,781
     Increase in investments in affiliates                                              -             (286,848)           (100,000)
     (Increase) decrease in related party note receivable                               -             (225,000)            (22,500)
     Return of capital on related party investment                                 19,965                    -                   -
     Investments in mortgage notes receivable                                  (3,254,256)         (10,342,300)         (7,452,006)
     Repayments of mortgage notes receivable                                    2,625,113            6,270,841           4,395,441
     Net proceeds from sale of real estate owned                                  791,416               77,181             147,884
     Capital costs of real estate owned                                           (23,956)              (5,956)            (45,251)
         Net cash provided by (used in) investing activities                   (2,027,557)          (7,603,440)         (1,152,069)

CASH FLOWS FROM FINANCING ACTIVITIES
     Loan payable to bank                                                               -                    -             904,750
     Increase in loan fee                                                               -                    -             (20,000)
     Note payable to related party                                                 72,148              (72,148)                  -
     Payment of mortgage notes payable                                           (191,297)                   -                   -
     Purchase of treasury stock                                                         -              (86,944)                  -
     Proceeds from issuance of shares                                           4,502,087            7,375,840                   -
     Organizational and offering costs                                           (499,161)            (747,406)                  -
     Common dividends paid                                                              -             (550,484)           (504,813)
     Preferred dividends paid                                                    (606,853)            (592,534)           (566,409)
         Net cash provided by (used in) financing activities                    3,276,924            5,326,324            (186,472)

NET INCREASE (DECREASE) IN CASH                                                 1,681,687           (1,177,775)           (528,771)
CASH AT BEGINNING OF PERIOD                                                        66,798            1,748,485             570,710

CASH AT END OF PERIOD                                                     $     1,748,485     $        570,710     $        41,939

SUPPLEMENTAL CASH FLOW INFORMATION:
     Interest expense paid                                                $        43,604     $         28,224     $       100,038
     Taxes paid                                                           $           800     $         15,238     $           800

NON-CASH INVESTING AND FINANCING ACTIVITY (See Note 2, 9 and 10):
     Deferred offering costs offset against proceeds of offering          $       555,888     $        185,524     $             -
     Transfer of real estate owned to CAFC                                $       971,941     $        678,405     $             -
     Transfer of mortgage loans to CAFC                                   $             -     $              -     $       670,546

</TABLE>
                             See accompanying notes.

                                      F-5
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

1.   Organization
     ------------

     Capital  Alliance  Income Trust Ltd., A Real Estate  Investment  Trust (the
     "Trust"),  a Delaware  corporation,  primarily  invests in  mortgage  loans
     secured  by real  estate.  The  Trust was  formed  December  12,  1995 as a
     mortgage investment trust which invests primarily in loans secured by deeds
     of trust on one-to-four unit residential properties.  The Manager,  Capital
     Alliance Advisors, Inc. (the "Manager") originates,  services and sells the
     Trust's loans.

     On September 30, 1998, the Trust  completed its initial public  offering of
     up to 1,500,000  common  shares at $8.00 per share and warrants to purchase
     an additional 150,000 common shares at $5.60 per share.

2.   Summary of significant accounting policies & nature of operations
     -----------------------------------------------------------------

     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 amounts reported in the financial
     statements and accompanying  notes.  Actual results could differ from those
     estimates.

     Cash and cash  equivalents.  Cash and  cash  equivalents  include  cash and
     liquid  investments with an original  maturity of three months or less. The
     Trust  deposits  cash in  financial  institutions  insured  by the  Federal
     Deposit Insurance  Corporation.  At times, the Trust's account balances may
     exceed the insured limits.

     Fair value of financial  instruments.  For cash and cash  equivalents,  the
     carrying amount is a reasonable  estimate of fair value. For mortgage notes
     receivable,  fair value is estimated by  discounting  the future cash flows
     using the current  interest  rates at which  similar loans would be made to
     borrowers   with  similar   credit  ratings  and  for  the  same  remaining
     maturities.  It was  determined  that the  difference  between the carrying
     amount and the fair value of the mortgage notes receivable is immaterial.

     Concentration  of credit  risk.  The Trust holds  numerous  mortgage  notes
     receivable.  These  notes  are  secured  by deeds  of trust on  residential
     properties located primarily in California which results in a concentration
     of credit risk.  The value of the loan portfolio may be affected by changes
     in the economy or other conditions of the  geographical  area. A portion of
     the loan portfolio is secured by second trust deeds on real estate.

     Loan loss reserve.  Management reviews its loan loss provision periodically
     and the Trust  maintains an allowance for losses on notes  receivable at an
     amount that management  believes is sufficient to protect against losses in
     the loan portfolio.  Accounts  receivable deemed  uncollectible are written
     off or  reserved.  The Trust does not accrue  interest  income on  impaired
     loans (Note 7).

                                      F-6
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999
2.   Summary  of  significant   accounting   policies  &  nature  of  operations
     (continued)
     ---------------------------------------------------------------------------
     Real estate owned.  Real estate owned results from foreclosure of loans and
     at time of foreclosure is recorded at the lower of carrying  amount or fair
     value  of the  property  minus  estimated  costs  to  sell.  Subsequent  to
     foreclosure,  the foreclosed  asset value is  periodically  reviewed and is
     adjusted to fair value.  No depreciation is taken on the real estate owned.
     Income and  expenses  related to real estate owned are recorded as interest
     income,  interest  expense and general and  administrative  expenses on the
     Statements of Operations.

     Investments.  The Trust holds an  investment in Sierra  Capital  Acceptance
     ("SCA"),  a division of Sierra  Capital  Funding,  LLC ("SCF"),  a Delaware
     limited liability  company which originates and sells residential  mortgage
     loans.  SCA operates as a separate  operating  division of SCF. The Trust's
     investment in SCA receives a 15%  preferential  interest  distribution  per
     annum.  Sierra Capital  Services,  Inc., a related  party,  owns 99% of the
     common shares of the Sierra Division of SCF and maintains voting control.

     Origination costs.  Origination costs relating to mortgage notes receivable
     are deferred and  recognized as an adjustment of yield over the term of the
     notes.

     Deferred  offering  costs.  Deferred  offering  costs  relate to an initial
     public  offering of common stock of the Trust  during 1997 and 1998.  Until
     the initial  public  offering of common stock broke  impound on December 4,
     1997,  these costs were  deferred.  While the offering was underway,  these
     costs were offset pro-rata against the proceeds from the issuance of common
     stock and as a reduction of stockholders' equity. Through December 31, 1997
     stockholders'  equity was reduced by $555,888 for deferred  offering costs.
     The remaining  deferred costs of $176,050 was offset against  proceeds from
     the offering during 1998.

     Cumulative effect of change in accounting principle. Effective for the year
     ended  December 31, 1999,  the Trust  adopted SOP 98-5,  "Reporting  on the
     Costs of Start-Up  Activities".  As a result of this  change,  the Trust is
     required to expense organization costs as they are incurred. The cumulative
     effect of this accounting change was a reduction of income of $10,346.

     Revenue  recognition.  Interest  income is recorded on the accrual basis of
     accounting in accordance  with the terms of the loans.  When the payment of
     principal or interest is 90 or more days past due,  management  reviews the
     likelihood  that the loan  will be  repaid.  For  these  delinquent  loans,
     management  continues to record interest income and establishes a loan loss
     reserve  as  necessary  to  protect  against  losses in the loan  portfolio
     including accrued interest.

     State  taxes.  During  1999 the  state  of  Delaware  imposed  a tax on the
     increased  capitalization of the Trust. The Trust did not make any payments
     until 2000. The Trust paid $800 in franchise tax to the state of California
     in 1999.


<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

2.   Summary  of  significant   accounting   policies  &  nature  of  operations
     (continued)
     ---------------------------------------------------------------------------

     Income  taxes.  The Trust  intends at all times to qualify as a real estate
     investment  trust ("REIT") for federal income tax purposes,  under Sections
     856  through  860 of the  Internal  Revenue  Code of 1986,  as amended  and
     applicable Treasury Regulations. Therefore, the Trust generally will not be
     subject to federal corporate income taxes if the Trust distributes at least
     95% of its taxable  income to its  stockholders.  To qualify as a REIT, the
     Trust  must  elect to be so  treated  and must meet on a  continuing  basis
     certain  requirements  relating  to the  Trust's  organization,  sources of
     income,  nature of assets, and distribution of income to stockholders.  The
     Trust must maintain  certain records and request certain  information  from
     its  stockholders  designed to disclose  actual  ownership of its stock. In
     addition the Trust must satisfy certain gross income requirements  annually
     and certain asset tests at the close of each quarter of its taxable year.

     If the Trust fails to qualify for  taxation as a REIT in any taxable  year,
     and the relief provisions do not apply, the Trust will be subject to tax on
     its  taxable  income  at  regular   corporate   rates.   Distributions   to
     stockholders  in any year in which the Trust  fails to qualify  will not be
     deductible  by the  Trust  nor will  they be  required  to be made.  Unless
     entitled to relief under specific statutory provisions, the Trust will also
     be  disqualified  from  taxation  as a REIT  for  the  four  taxable  years
     following the year during which qualification was lost.

     Based on the Trust's belief that it has operated in a manner so as to allow
     it to be taxed as a REIT since  inception,  no provision for federal income
     taxes has been made in the financial statements.

     For the year ended December 31, 1997, the distributions per Preferred Share
     are allocated 87.673% as ordinary income and 12.327% as a return of capital
     for tax purposes.  For the year ended December 31, 1998, the  distributions
     per Preferred Share are allocated 100% as ordinary income for tax purposes.
     The  distributions  per Common Share are allocated 100% as ordinary  income
     for tax purposes.  For the year ended December 31, 1999, the  distributions
     per Preferred Share are allocated 100% as ordinary income for tax purposes.
     The  distributions  per Common Share are allocated 100% as ordinary  income
     for tax purposes.

     Reclassifications.  Certain 1998 amounts have been  reclassified to conform
     with 1999 classifications. Such reclassifications had no effect on reported
     net income.

3.   Restricted cash and mortgage note holdbacks
     -------------------------------------------

     Pursuant to mortgage loan agreements between the Trust and its borrowers, a
     portion of the loan proceeds are held by the Trust in  segregated  accounts
     to be disbursed to borrowers upon completion of improvements on the secured
     property.  As of December 31, 1999 and 1998,  mortgage note  holdbacks from
     the  consummation of mortgage loans made amounted to $487,174 and $594,693,
     respectively.

4.   Accounts receivable
------------------------

     Accounts receivable consist primarily of accrued interest on mortgage notes
     receivable  and other amounts due from  borrowers.  As of December 31, 1999
     and 1998,  accrued  interest  from  borrowers  were  $215,425 and $168,645,
     respectively.

                                      F-8
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

5.   Lines of credit to related parties
     ----------------------------------

     The Trust entered into a loan  purchase  agreement on November 1, 1997 with
     Sierra Capital Acceptance LLC ("SCA"), a division of Sierra Capital Funding
     LLC, a related party. Under the terms of the agreement,  the Trust advances
     funds to SCA to acquire  mortgage  loans secured by real estate.  The Trust
     then  acquires  all of SCA's right,  title and interest in such loans.  SCA
     must  reacquire the loans from the Trust at a preset price.  As of December
     31,  1999 and 1998,  the  Trust  advanced  to SCA  $428,250  and  $820,100,
     respectively.  Annual  interest on this line of credit is at prime plus one
     half of one percent for the first 60 days and prime plus four percent after
     60 days.  Interest is payable  monthly.  The Trust  earned  interest in the
     amount of $100,325  during  1999,  of which  $4,610 was  outstanding  as of
     December 31, 1999.

     The Trust entered into a loan purchase  agreement on December 12, 1997 with
     Capital  Alliance  Funding  Corporation  ("CAFC").  Under  the terms of the
     agreement,  the Trust  advances  funds to CAFC to  acquire  mortgage  loans
     secured by real estate.  The Trust then acquires all of CAFC's right, title
     and interest in such loans. CAFC must reacquire the loans from the Trust at
     a preset  price.  As of December 31, 1999 and 1998,  the Trust  advanced to
     CAFC $2,140,360 and $2,414,435,  respectively. Annual interest on this line
     of credit is equal to the interest  rate of the mortgage  loans pledged and
     is payable  monthly.  The Trust  earned  interest in the amount of $180,345
     during 1999, of which $18,348 was outstanding as of December 31, 1999.

     The Trust entered into a loan  purchase  agreement on February 1, 1998 with
     Equity 1-2-3,  a division of Sierra  Capital  Funding LLC, a related party.
     Under the terms of the agreement,  the Trust advances funds to Equity 1-2-3
     to acquire  mortgage loans secured by real estate.  The Trust then acquires
     all of Equity1-2-3's right, title and interest in such loans. Some of these
     loan balances exceed the fair market value of the properties.  Equity 1-2-3
     must  reacquire the loans from the Trust at a preset price.  As of December
     31,  1999 and  1998,  the  Trust  advanced  to Equity  1-2-3  $620,707  and
     $1,472,563,  respectively.  Annual  interest  on this  line of credit is at
     prime plus one  percent  for the first 60 days and prime plus four  percent
     after 60 days.  Interest is payable monthly.  The Trust curtailed  accruing
     interest on this line of credit in 1999.  However,  by the end of 1999, the
     Trust  accrued  interest  income in the amount of $7,937,  all of which was
     outstanding and the Trust expects to accrue interest in the future.

     The Trust  entered into a loan  purchase  agreement on January 1, 1998 with
     Calliance  Mortgage  Trust ("CMT").  Under the terms of the agreement,  the
     Trust  advances  funds to CMT to  acquire  mortgage  loans  secured by real
     estate.  The Trust then acquires all of CMT's right,  title and interest in
     such loans.  CMT must reacquire the loans from the Trust at a preset price.
     As of  December  31,  1999  and  1998,  the  Trust  advanced  to CMT $0 and
     $450,000, respectively.  Annual interest on this line of credit is equal to
     the interest rate of the mortgage loans pledged and is payable monthly. The
     Trust earned  interest in the amount of $23,760  during 1999,  all of which
     was paid as of December 31, 1999.

                                      F-9
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

6.   Mortgage notes receivable
------------------------------

     Mortgage   notes   receivable   represent  home  equity  loans  secured  by
     residential  real  estate.  At the time of  origination,  all loans  have a
     combined  loan-to-value  equal  to or  less  than  75%  of  the  underlying
     collateral.  The Trust is subject to the risks inherent in finance  lending
     including the risk of borrower default and bankruptcy.

     Mortgage notes receivable are stated at the principal outstanding. Interest
     on the mortgages is due monthly and  principal is due as a balloon  payment
     at loan maturity.

     A reconciliation of mortgage notes receivable is as follows:
<TABLE>
<CAPTION>

                                          December 31,        December 31,      December 31,
                                                1997               1998              1999
                                          ----------------    -------------     ---------
<S>                                      <C>                  <C>               <C>
       Balance, beginning of period      $       4,696,238    $   4,915,186     $     8,986,645
       Additions during period:
          New mortgage loans                     3,254,256       10,342,300           7,452,006
       Deductions during period:
          Collections of principal               2,405,113        5,997,178           4,395,441
          Foreclosures, net of reserve             410,195          273,663             565,000
          Transfer to CAFC                             ---              ---             670,546
          Cost of mortgages sold                   220,000              ---                 ---
                                          ----------------    -------------     ---------------
       Balance, close of period           $      4,915,186    $   8,986,645     $    10,807,664
                                          ================    =============     ===============
</TABLE>

                                      F-10
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

6.   Mortgage notes  receivable (continued)
     --------------------------------------

     The Trust's  mortgage notes receivable all relate to loans secured by deeds
     of trust on single  family  residences.  The  following is a summary of the
     Trust's mortgage notes receivable at December 31, 1999.

<TABLE>
<CAPTION>
                                                                                                                   Principal amount
                                                                                                                     of loans with
                                                                     Monthly                           Carrying        delinquent
                                                        Final        payment  Prior   Face amount of   amount of      principal or
      Principal outstanding         Interest rate   maturity date     terms   liens     mortgage(s)    mortgage(s) interest (Note A)
      ---------------------         -------------   --------------  ----------------   ------------    ----------- ----------------
<S>                               <C>               <C>              <C>       <C>     <C>             <C>             <C>
 Individual loans greater
 than $324,230 (3% of total
 mortgage notes receivable
 of $11,478,210):                      10.00%          02/01/00       $4,896   None    $    500,000    $    500,000    $       ---
                                       12.00%          04/01/00       $4,300   First        430,000         430,000            ---
                                        12.5%          01/01/01       $2,906   None         361,500         375,000            ---
                                       12.50%          10/01/00       $3,400   First        340,000         340,000           ---
 Loans from $300,000-$324,230      7.63% to 13.00%  14 to 56 months                         615,000         615,631         300,750
 Loans from $200,000-$299,999      8.00% to 13.50%  8 to 357 months                       2,316,000       2,413,969         260,028
 Loans from $100,000-$199,999     10.00% to 13.50%  3 to 59 months                        4,419,900       4,240,795         652,717
 Loans from $50,000-$99,999       11.00% to 16.00%  1 to 59 months                        1,357,500       1,231,500            ---
 Loans from $19,380-$49,999       10.75% to 14.00%  1 to 172 months                         730,608         660,770          81,492
                                                                                       ------------     -----------    ------------

  Total Mortgage Notes Receivable at December 31, 1999                                 $ 11,070,508    $ 10,807,664    $  1,294,987
                                                                                       ============    ============    ============

<FN>
     (A)  Delinquent  loans are loans  where the  monthly  interest  payments in
     arrears are 90 or more days  overdue.  As of December 31, 1999,  there were
     three loans  totaling  $428,334 of principal  and $19,401 of interest  that
     were 90 to 180 days  delinquent  on interest  payments.  Six loans with the
     principal  amount of $866,653 and $85,167 of interest have been  delinquent
     for over 180 days.  Management has reviewed all of the delinquent loans and
     believes  that in all except two loans the fair  value  (estimated  selling
     price less cost to dispose) of the  collateral  is equal to or greater than
     the carrying value of the loan including any accrued interest.  Anticipated
     loss from the two loans is included in loan loss reserve.
</FN>
</TABLE>

                                      F-11
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

7.   Loan loss reserve
     -----------------

     The  Trust  measures  impairment  based  on the fair  value of the  related
     collateral  since all loans  subject  to this  measurement  are  collateral
     dependent.  Management believes $85,000 of loan loss reserve is adequate to
     reflect the probable impairment in all receivables as of December 31, 1999.

     Activity in the loan loss reserve was as follows:

<TABLE>
<CAPTION>
                                           December 31,        December 31,       December 31,
                                                1997               1998               1999
                                          ----------------    -------------     ---------------
<S>                                       <C>                 <C>               <C>
       Balance, beginning of period       $            ---    $         ---     $       170,000
       Provision for loan loss                         ---          170,000             162,500
       Write-off of note receivable
 to related party                                      ---              ---           (225,000)
       Write-off of advance
 to related party                                      ---              ---            (22,500)
                                          ----------------    -------------     --------------
       Balance, end of period             $            ---    $     170,000     $        85,000
                                          ================    =============     ===============
</TABLE>

8.   Real estate owned
     -----------------

     During 1997 the Trust foreclosed on three mortgage notes  receivable,  sold
     three  properties and contributed  three  properties to capitalize CAFC. At
     December  31,  1997,  the Trust owned one  property.  During 1998 the Trust
     foreclosed  on three  mortgage  notes  receivable,  sold one  property  and
     contributed  two  properties to capitalize  CAFC. At December 31, 1998, the
     Trust owned one property. During 1999 the Trust foreclosed on four mortgage
     notes  receivable  and sold one property.  At December 31, 1999,  the Trust
     owned four  properties.  The  following  table shows the cash and  non-cash
     activities in the real estate owned account.

     As of  January  1, 1997 the Trust  held  mortgage  notes  payable  totaling
     $578,395.  The notes were secured by residential  properties  with interest
     accruing  at 8.25% to 8.95% per annum.  During 1997 one loan of $91,297 was
     paid in full upon the sale of the real estate  owned and the  remainder  of
     $487,098 was contributed to capitalize CAFC.


                                      F-12
<PAGE>
8.   Real estate owned (continued)
     -----------------------------

     A reconciliation of real estate owned is as follows:
<TABLE>
<CAPTION>
                                                                            1997           1998           1999
                                                                            ----           ----           ----
<S>                                                                     <C>             <C>             <C>
     Real estate owned at beginning of year                             $   1,312,520   $   322,550     $   149,663
     Foreclosed mortgage notes, net of reserve (non-cash)                     410,195       273,663         565,000
     Accrued interest capitalized (non-cash)                                   24,513         6,950          34,075
     Mortgage notes payable (non-cash)                                        195,728       292,949             ---
     Mortgage notes payable (cash paid)                                       100,000           ---             ---
     Capital costs of real estate owned (cash paid)                            23,956         5,956          45,251
     Gain (loss) on sale (non-cash)                                            18,995         3,181          (1,779)
                                                                        -------------   -----------     -----------
                                                                            2,085,907       905,249         792,210
                                                                        -------------   -----------     -----------
     Less: Proceeds from sale of real estate owned (net of closing
     costs of $11,116, $2,819 and $25,871 in 1999, 1998 and 1997,
     respectively)                                                            791,416        77,181         147,884
     Book value of properties transferred to CAFC (non-cash)                  971,941       678,405             ---
                                                                        -------------   -----------     -----------
                                                                            1,763,357       755,586         147,884
                                                                        -------------   -----------     -----------

     Real estate owned at end of year                                   $     322,550   $   149,663     $   644,326
                                                                        =============   ===========     ===========
</TABLE>
9.   Gain (loss) on real estate owned
     --------------------------------

     Three real estate  properties  were sold during 1997 for a combined gain of
     $18,995.  One  real  estate  property  was sold  during  1998 for a gain of
     $3,181. One real estate property was sold during 1999 for a loss of $1,779.

10.  Investment in affiliates
     ------------------------

     On April 11, 1997 the Trust formed a non-qualified REIT subsidiary, Capital
     Alliance  Funding  Corporation  ("CAFC"),  to conduct its planned  mortgage
     conduit  business.  The  Trust  owns  all of  the  outstanding  Series  "A"
     Preferred Stock (2,000 shares of non-voting  stock) which constitutes a 99%
     economic  interest  in CAFC.  The  Trust's  Manager  owns all of the Common
     Shares (1,000 shares) of CAFC,  which  constitutes a 1% economic  interest,
     and has 100% voting  control.  The Trust's  Manager  also  manages CAFC and
     provides  mortgage  origination  and sale  services  for  CAFC.  The  Trust
     accounts for its investment in CAFC under the equity method.

     CAFC  commenced  operations  in the second  quarter of 1997.  To capitalize
     CAFC,  the  Trust  contributed  three  real  estate  properties  with a net
     carrying amount of $289,114 (fair value of $971,941 less the  corresponding
     mortgage  loans of $682,827) in 1997. In 1998,  the Trust  contributed  two
     real estate  properties net of liabilities equal to $385,940 (book value of
     $678,405 less adjustment of $35,855 and the corresponding mortgage loans of
     $256,610).  In 1999, the Trust contributed  $100,000 cash and four mortgage
     loans totaling  $670,546.  The transfer of the mortgage notes receivable is
     non-cash transaction that is not shown on statements of cash flows.


                                      F-13
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

10.  Investment in affiliates (continued)
     ------------------------------------

                      CAPITAL ALLIANCE FUNDING CORPORATION
<TABLE>
<CAPTION>
                                                                            1998            1999
                                                                            ----            ----
<S>                                                                     <C>             <C>
     Total assets                                                       $   5,144,909   $   6,327,942
                                                                        =============   =============

     Total liabilities                                                  $   4,512,973   $   5,664,870

     Total stockholders' equity                                               631,936         663,072
                                                                        -------------   -------------

     Total liabilities and equity                                       $   5,144,909   $   6,327,942
                                                                        =============   =============

     Revenue                                                            $    496,433    $    414,159
     Expenses                                                               (435,924)     (1,153,569)
     Other income and expenses
          Loss on sale of assets                                             (83,663)            ---
                                                                         -----------     -----------
     Net income (loss)                                                   $   (23,154)    $  (739,410)
                                                                         ===========     ===========
</TABLE>
     As  described  in Note 3, the Trust also holds an  investment  in preferred
     shares of Sierra Capital  Acceptance,  a division of Sierra Capital Funding
     LLC,  totaling $200,000 and receives  distribution  equal to 15% return per
     annum.  For each of the years ended  December 31, 1999 and 1998,  the Trust
     earned  $30,000  from  this  investment.   Distributions  are  reported  as
     interest.

11.  Related party transactions
     --------------------------

     The  Manager,  which  is  owned  by  several  of  the  Trustees  and  their
     affiliates,  contracted  with the Trust to provide  management and advisory
     services and receives fees for these  services from the Trust.  The Manager
     is also entitled to reimbursement for clerical and administrative  services
     at cost based on relative  utilization  of facilities  and  personnel.  The
     Manager  bears  all  expenses  of  services  for  which  it  is  separately
     compensated.

     The Manager is entitled to a management fee equal to one-twelfth  (1/12) of
     1% annually of the book value of  mortgages,  mortgage-related  investments
     and real property ("Gross  Mortgage  Assets") of the Trust plus one-twelfth
     (1/12) of  one-half  percent  (1/2%) of the book value of the  non-mortgage
     assets of the Trust  computed at the end of each month.  The Trust paid the
     Manager a  management  fee of  $149,146  and  $143,484  for the year  ended
     December 31, 1999 and 1998, respectively.

     Also, the Manager  receives a loan  origination  and servicing fee equal to
     one-twelfth (1/12) of 2% annually of the Gross Mortgage Assets of the Trust
     computed at the end of each month.  Prior to February 12, 1997, the Manager
     received  a loan  origination  and  servicing  fee  equal to  0.083% of the
     monthly (1% annually)  value of all assets less  liabilities  and reserves.
     For the years  ended  December  31,  1999 and 1998,  the Trust  paid a loan
     servicing  fee of $72,313 and $63,020 to the Manager,  respectively.  As of
     December 31, 1999, the Trust capitalized $163,635 of loan origination fees.


                                      F-14
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

11.  Related party transactions (continued)
     --------------------------------------

     As of  December  31,  1997,  the Trust had a note  payable  of $72,148 to a
     related  party that  accrued  interest at 11.5% per annum.  During the year
     ended  December 31, 1998 the Trust paid $2,456 of interest  related to this
     note. The note was repaid during 1998.

     During 1999,  the Trust  advanced  $22,500 to Equity  1-2-3,  a division of
     Sierra Capital Funding LLC, a related party, and recorded it as an addition
     to the $225,000 note receivable  from Equity 1-2-3.  The note bore interest
     at 15 percent per annum and interest is payable quarterly.  The Trust wrote
     off the note receivable and the advance in 1999.

     On  occasions  the Trust and its  affiliates  had related  receivables  and
     payables arising from ordinary  business  transactions.  As of December 31,
     1999,   the  Trust  had  a  receivable  of  $331,889  from  Sierra  Capital
     Acceptance,   a  receivable  of  $769,184  from  Capital  Alliance  Funding
     Corporation,  a  receivable  of $1,991 from the Manager,  a  receivable  of
     $21,990 from Equity 1-2-3, a payable of $1,248 to holdback  account,  and a
     payable of $486,315 to Calliance  Mortgage  Trust. As of December 31, 1998,
     the Trust had a  receivable  of $7,500 from Sierra  Capital  Acceptance,  a
     payable of $36,756 to Capital  Alliance Funding  Corporation,  a payable of
     $11,018 to the Manager.

     As described in Note 5, the Trust advanced  $5,157,098 of funds under lines
     of credit to  related  parties  and earned  interest  of  $356,778  on such
     financing for the year ended December 31, 1998. For the year ended December
     31, 1999, the Trust advanced  $3,189,317 of funds under  warehouse lines of
     credit  to  related  parties  and  earned  interest  of  $312,367  on  such
     financing.

     Equity 1-2-3 and Sierra  Capital  Acceptance,  divisions of Sierra  Capital
     Funding  LLC,  are  partially  owned by  officers  of the  Trust  and their
     affiliated entities.

12.  Preferred, common and treasury stock
     ------------------------------------

     The Preferred Shareholders are entitled to a distribution  preference in an
     amount equal to an  annualized  return on the net capital  contribution  of
     Preferred  Shares at each dividend record date during such year (or, if the
     Directors do not set a record date, as of the first day of the month) equal
     to the lesser of 10.25% or 150 basis points over the Prime Rate.

     After declaring  dividends for a given month to the Preferred  Shareholders
     in the amount of the distribution preference,  no further distributions may
     be declared on the Preferred  Shares for the month until the  distributions
     declared  on each  Common  Share for that  month  equals  the  distribution
     preference  for  each  Preferred  Share  for  such  month.  Any  additional
     distributions   generally  will  be  allocated  such  that  the  amount  of
     distributions   per  share  to  the  Preferred   Shareholders   and  Common
     Shareholders for the month are equal.  The  distribution  preference of the
     Preferred Shares is not cumulative.

     Preferred   Shareholders   are   entitled   to  receive   all   liquidating
     distributions  until they have received all amount equal to their aggregate
     adjusted net capital  contribution.  Thereafter,  Common  Shareholders  are
     entitled to all liquidation  distributions until the aggregate adjusted net
     capital  contributions  of all Common Shares has been reduced to zero.  Any
     subsequent  liquidating   distributions  will  be  allocated  among  Common
     Shareholders and Preferred Shareholders pro rata.

                                      F-15
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

12.  Preferred, common and treasury stock (continued)
     ------------------------------------------------

     The  Preferred  Shares  are  redeemable  by a  shareholder,  subject to the
     consent  of the  Board of  Directors,  annually  on June 30 for  redemption
     requests  received by May 15 of such year.  The Board of  Directors  may in
     their  sole  discretion  deny,  delay,  postpone  or  consent to any or all
     requests for redemption. The redemption amount to be paid for redemption of
     such Preferred Shares is the adjusted net capital  contribution plus unpaid
     accrued dividends,  divided by the aggregate net capital contributions plus
     accrued  but  unpaid   dividends   attributable  to  all  Preferred  Shares
     outstanding, multiplied by the net asset value of the Trust attributable to
     the  Preferred  Shares  which shall be that  percentage  of the Trust's net
     asset value that the aggregate  adjusted net capital  contributions  of all
     Preferred  Shares bears to the adjusted  net capital  contributions  of all
     Shares outstanding.

     The Trust has the power to redeem or prohibit  the transfer of a sufficient
     number of Common and/or Preferred Shares or the exercise of warrants and to
     prohibit the transfer of shares to persons that would result in a violation
     of the Trust's shareholding  requirements.  In addition, the Bylaws provide
     that no shareholder may own more than 9.8% of the total outstanding  shares
     after the conclusion of the initial public offering of Common Shares.

     One  Shareholder  Warrant was issued for every 10 Common Shares  purchased.
     Each Shareholder  Warrant entitles the holder to purchase one Common Share.
     The  exercise  price for each  Shareholder  Warrant is $5.60,  which may be
     exercised  during the 25th through the 48th month after April 28, 1997.  In
     order to protect the Warrant holders against  dilution,  the exercise price
     of the Warrants  and the number of shares  which may be purchased  upon the
     exercise of the Warrants will be adjusted should certain events occur (i.e.
     stock dividends, split-ups, combinations and reclassifications).  Provision
     is also  made  to  protect  against  dilution  in the  event  of a  merger,
     consolidation  or  disposition of all or  substantially  all of the Trust's
     assets.  Warrant  holders do not have the rights of a shareholder  and they
     are not entitled to participate in a distribution  of the Trust's assets in
     a liquidation,  dissolution or winding up of the Trust, unless the Warrants
     have  been  exercised.  The Trust may  refuse  to allow the  exercise  of a
     Warrant if the effect of such exercise would disqualify the Trust as a REIT
     under the Internal Revenue Code.

     Under  the 1998  Incentive  Stock  Option  Plan,  adopted  by the  board of
     directors and approved by stockholders, options for the purchase of a total
     of 150,000 Common Shares of the Trust were granted effective  September 30,
     1998. Officers and employees of the Manager, and Directors of the board are
     the eligible recipients of the options. The options have a term of 10 years
     with a first exercise date six (6) months after the date of the grant.  The
     initial  options for the purchase of 75,000  Common Shares have an exercise
     price of $8.00 per share.  The options for the purchase of remaining 75,000
     of Common Shares have an exercise price of $4.50 per share.

     During 1998, the Trust purchased 9,526 preferred  shares as treasury stock.
     The purchase  was  recorded at cost and as a reduction to preferred  shares
     and additional paid in capital from preferred shares.


                                      F-16
<PAGE>
                       CAPITAL ALLIANCE INCOME TRUST LTD.,
                         A REAL ESTATE INVESTMENT TRUST

                          Notes to Financial Statements
                For the three-year period ended December 31, 1999

13.  Earnings per share

     The following  table  represents a  reconciliation  of the  numerators  and
     denominators of the basic and diluted earnings per common share.
<TABLE>
<CAPTION>
                                                     Year Ended        Year Ended        Year Ended
                                                    December 31,     December 31,      December 31,
                                                    -------------    -------------     ------------
      Numerator:                                        1997              1998              1999
                                                        ----              ----              ----
<S>                                                  <C>              <C>               <C>
      Net income                                     $     535,789    $   1,003,706     $     432,605
      Preferred dividends attributable
            to income                                      535,789          592,534           432,605
                                                     -------------    -------------     -------------
      Numerator for basic and diluted
           Earnings per share-income
      available to  common stockholders              $         ---    $     411,172     $         ---
                                                     =============    =============     =============
      Denominator:
           Basic weighted average shares                    45,219        1,171,733         1,484,700

           Effect of dilutive warrants                         ---           35,153           341,114
                                                     -------------    -------------     -------------
           Diluted weighted average shares                  45,219        1,206,886         1,825,854
                                                     =============    =============     =============

      Basic earnings per common share                          ---    $       0.351     $         ---
                                                     =============    =============     =============

      Diluted earnings per common share                        ---    $       0.341     $         ---
                                                     =============    =============     =============
</TABLE>

                                      F-17